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Systemic Issues & Serious Misconduct - Update

Make safe provisions
Powers of attorney
Section 22 of the Insurance Contracts Act
Cancellation of general insurance contracts
Policies for dealing with consumers in financial difficulty

This article summarises systemic issues that we identified during the December quarter of 2010 and reported to ASIC.  The article updates information about systemic issues provided in the December Circular, which includes an explanation of our systemic issues process. The December 2010 article can be found here:

“Make safe” provisions in general insurance contracts

FOS considered several general insurance disputes relating to a financial services provider’s (FSP) practice of applying an excess to “make safe” repairs where the claim had been denied by the FSP or withdrawn by the policyholder.  We were concerned that the FSP had sought payment from the applicants of the full expenses incurred, even though the repairers in each case had also undertaken loss assessment functions.


The FSP acknowledged that, for expenses that related solely to investigation or assessment, it would not be appropriate to seek payment from policyholders.  The FSP will investigate whether policyholders other than the applicants in the disputes considered by FOS may have been affected by the FSP’s practice.

Recognition of power of attorney

A number of disputes lodged with FOS related to action taken by a particular FSP.  The FSP had prevented attorneys from performing their roles under powers of attorney to help donors who were customers of the FSP to manage their accounts.  We considered whether:

  • in these cases, the FSP incorrectly refused to recognise powers of attorney by denying access to accounts, and
  • the FSP had taken the same action in other cases.


The FSP said that it was concerned about risks to the donors of the powers of attorney, particularly where the FSP provided credit increases that increased the donors’ liabilities and repayments. 


Our view is that an act of an attorney under a power of attorney is, legally, an act of the donor.  Accordingly, the correct analysis is that anything done by the attorney has the same legal effect as if it were done by the donor.  It is therefore not a matter of commercial decision for the FSP as to whether it accepts the actions of the attorney.  In our view, it must do so, subject to any actual or constructive notice of a misuse of the power by the attorney.  Insofar as the FSP has a discretion as to whether it can accede to a request by a customer, then it can consider that matter as a commercial one in the same way.

Failure to comply with section 22 of the Insurance Contracts Act

FOS considered a dispute about the denial of the applicant’s motor vehicle claim.  We determined the dispute in favour of the applicant.  We found that the information provided by the FSP at the point of sale did not comply with section 22 of the Insurance Contracts Act 1984 because:

  • the information did not clearly inform the applicant of the matters referred to in section 22(1), due to its wording, and
  • the information was not in accordance with Schedule 1 of the Insurance Contracts Regulations 1985, as required by section 22(2). 


The FSP agreed that the information did not comply with section 22.  As this information was provided to consumers other than the applicant, the issue was determined to be systemic.

Cancellation of general insurance contracts

An FSP purported to cancel motor vehicle insurance contracts from inception due to non-disclosure of material facts.  Section 28(2) of the Insurance Contracts Act 1984 (the “ICA”) allows an insurer to avoid a general insurance contract where there is a fraudulent non-disclosure or misrepresentation by the insured.  Avoidance of a contract applies from inception.  Where there is no fraud, the ICA only permits an insurer to cancel a general insurance contract prospectively. 


FOS conducted investigations to ensure that the FSP:

  • has processes and procedures in place that comply with the requirements of the ICA for cancellation and avoidance of contracts, and
  • does not incorrectly cancel or avoid contracts of general insurance. 

Policies for dealing with consumers in financial difficulty

A number of disputes lodged with FOS raised concerns about the way in which an FSP dealt with consumers in financial difficulty.  We reviewed the FSP’s hardship policy and found that it required consumers in financial difficulty to provide a great deal of documentation before they could access the FSP’s hardship arrangements.  We expressed the view that these documentation requirements were excessive, making the policy inadequate.


When investigating and resolving systemic issues, we work with FSPs as identifying a reasonable and appropriate solution requires an in-depth appreciation of the fine detail of the business processes and resources which support the solution.