On 28 June 2013, Parliament passed the Insurance Contracts Amendment Act 2013. This Act substantively reproduced the amendments that were introduced to Parliament in 2010 but lapsed due to the government elections at the time.
Many of the changes are therefore expected. They arose out of the recommendations made by the Cameron-Milne Review Panel in 2004 following its review of the operation of the Insurance Contracts Act 1984 (ICA).
There are a number of changes that will have minimal to no impact on FOS disputes, such as the bundling and unbundling of workers compensation-type policies and the allocation of monies when an insurer exercises a right of subrogation.
The changes that are likely to impact FOS disputes are:
- Duty of utmost good faith – effective from 28 June 2013.
- Electronic communications – effective from date of Proclamation or 28 December 2013, whichever is earlier.
- Duty of Disclosure – mostly effective from 28 December 2015 (insurers can choose to adopt the new section 21B before that date).
- Remedies for non-disclosure with respect to life insurance contracts – mostly effective from 28 June 2014 (changes affecting bundled policies and misstatements of age will apply from 28 June 2013).
- Cancellation of contracts of life insurance – effective from 28 June 2013.
- Insurer’s defences to claims from third party beneficiaries – effective from 28 June 2014.
The effective date applies to any insurance contract governed by the ICA that was incepted after this date. It also applies to general insurance contracts that were renewed, or life insurance contracts that were varied, after this date. With respect to variations of life insurance contracts, the ICA changes only apply to variations that were not automatic, and they only apply to the variation (not the whole policy).
Please note, however, that the changes regarding the unbundling of life insurance contracts (section 27A) apply to any contract in existence.
Duty of utmost good faith
This duty now extends to third party beneficiaries but the duty only applies after the contract is entered into.
The ICA specifically defines a third party beneficiary as:
“a party who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.”
In addition, the consequences of an insurer failing to act with utmost good faith have expanded. Such a failure is now considered a breach of the ICA, and ASIC can exercise powers under Subdivision C of Division 4 of the Corporations Act 2001. These provisions include the power to vary, suspend or cancel an Australian Financial Services License.
Insurers can now take advantage of sending notices or other documents required under the ICA in accordance with the Electronic Transactions Act 1999 and any regulations made under that Act.
In effect, insurers can send such information electronically if:
- at the time they sent the information, it was reasonable to expect the information would be readily accessible and usable for subsequent reference, and
- the person who received the information consents to it being given by way of electronic communication.
Many FOS disputes involve the sending out of notices or documents (eg sections 22, 35 and 59 of the ICA), so we anticipate receiving a fair number of new disputes regarding these amendments. For instance, we anticipate we may receive new disputes about:
- Whether consent was given for the information to be provided electronically.
- Whether the correct email address was used.
- Whether the party could open the attachment or access the hyperlink.
- Whether the FSP received an email bounce back and if so, what process it followed to ensure the relevant information was sent to the party.
Duty of Disclosure
There have been a number of substantive changes surrounding the duty of disclosure. The changes are extensive and many of them will not be in effect for some time, so this is just a brief summary:
- Section 21(b) has slightly amended the duty of disclosure by introducing two non-exhaustive factors associated with the objective aspect of the mixed subjective/objective test.
- Section 21A, which modifies the duty of disclosure with respect to “eligible contracts of insurance”, has been amended to exclude any ability of an insurer to ask a catch-all question (ie section 21A(4)(b)).
- Section 21B has been introduced which requires insurers that renew “eligible contracts of insurance” to either ask specific questions or seek clarification that information sought previously is correct or needs updating (insurers can use a combination of the two if they choose).
- The duty of disclosure is extended to include a person covered by life insurance who is not a policyholder (new section 31A).
With respect to notifying an insured of their duty of disclosure (section 22), this has been amended to include:
- The explanation must include the fact that the duty applies until the proposed contract is entered into.
- The insurer must explain the general nature and effect of the modified duty associated with “eligible contracts of insurance”.
- The required information of the duty of disclosure to be given to any person who will be covered under a life insurance policy, whether or not they are the policyholder.
- If the insurer accepts an application for insurance, or responds with a counter-offer, two months after the insured’s most recent disclosure, then a reminder notice of the duty must be given.
Remedies for non-disclosure and/or misrepresentation with respect to life insurance contracts
Section 27A has been introduced to effectively “unbundle” combined life policies (ie death, total and permanent disability cover) when applying the relevant remedies of non-disclosure and misrepresentation.
In addition, with respect to the remedies available under section 29, the following amendments have been made:
- The insurer can avoid the policy within three years if it establishes it would not have entered into the contract of insurance (as opposed to having to establish it would not have entered into a contract of insurance on any terms).
- It can alter the sum insured at any time (unless the contract has a surrender value or provides a death benefit – in which case it can only do so within three years).
- If an insurer chooses not to avoid the policy or vary the sum insured, it can retrospectively vary the contract in such a way as to place the insurer in the position it would have been in if the non-disclosure or misrepresentation had not occurred. However, the following caveats apply:
- The insurer can only to do so to the extent that any variations are consistent with what other reasonable and prudent insurers would have done in similar circumstances.
- Such variations are not applicable to a contract which has a surrender value or provides a death benefit.
Other changes include:
- Section 30 (misstatements of date of birth) has been amended to enable an insurer to change the contract expiry date to the date that would have applied if the correct date of birth had been disclosed in the first place.
- Section 32 has been amended to clarify that with respect to non-disclosure or misrepresentation by a life insured under a group life contract (eg cover arranged by a superannuation scheme):
- non-disclosure or misrepresentation can occur if the conduct occurred after the proposed life insured became a member of the scheme but before the group policy extended to them.
Cancellation of contracts of life insurance
Life insurers can now only cancel a contract of life insurance in accordance with either section 210 of the Life Insurance Act 1995 (non-payment of premium) or section 59A of the ICA (associated with fraudulent claims).
Insurer’s defences to claims from third party beneficiaries
The amendment resolved a potential ambiguity regarding the defences available to an insurer. Namely, the insurer may raise any defences to a claim that relates to the conduct of the insured, which includes conduct that occurred before the contract was entered into (eg non-disclosure and/or misrepresentation).
The full Insurance Contracts Amendments Act 2013 is available on the Australian Government’s Commonwealth Law website at www.comlaw.gov.au.