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Introduction
Renewed efforts are being made to reform the Insurance Contracts Act 1984 (Cth) (the Act) with the introduction into the Australian Parliament of the Insurance Contracts Amendment Bill 2010 (Cth) (the Bill) and the announcement of a consultation process on options to address unfair terms in insurance contracts.
A review of the Act was first announced by the Howard Government in September 2003. The Bill is the culmination of a long consultation process spanning two Federal Governments. It differs in a number of respects from the Exposure Draft Bill released in February 2007, most notably, the omission of any reform of the current operation of s.54 in relation to late notifications of circumstances under 'claims made' policies.
The Minister for Financial Services, Superannuation and Corporate Law has also released an Options paper for addressing unfair terms in insurance contracts as part of the review of Australian consumer law.
Reforms included in the Bill
The reforms in the Bill come within seven broad categories:
Scope and application of the Act
Utmost good faith
The duty of utmost good faith will be extended to third party beneficiaries after the contract of insurance is entered into and a breach of the duty will also constitute a breach of the Act. This will give s.13 a little more teeth as it will feed into ASIC's powers to take enforcement action against an insurer on behalf of insureds or other action available to it under the Corporations Act 2001 (Cth) e.g. orders affecting an insurer’s Australian Financial Services Licence.
Unbundling
The amendments will make it clear that workers compensation policies which include common law extensions are wholly exempt from the Act. In other cases of 'bundled' cover, i.e. where a policy contains both insurance which is governed by the Act and that which is not, the contract of insurance is essentially 'unbundled' so that the Act only applies to cover within the Act.
Electronic communications
The Act is currently excluded from most of the Electronic Transactions Act 1999 (Cth) (ETA), which provides that notices required to be given in writing under a Commonwealth law, may, in certain circumstances, be given via electronic communication.
The Government proposes to amend regulations under the ETA so that the Act is no longer exempt and the Bill makes technical changes to provisions in Act regarding the giving of notices, documents and information, including that the ETA Act will apply to permit electronic communication of notices or documents required to be given in writing.
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ASIC powers
ASIC will be given the right to intervene in any proceeding relating to matters arising under the Act and under Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (Cth)1 .
ASIC will also be given the power to bring representative actions against insurers on behalf of third party beneficiaries as well as insureds.
Disclosure and misrepresentations
Insured's duty of disclosure
Section 21 of the Act requires potential insureds to disclose to the insurer prior to entering into the contract of insurance, matters relevant to the acceptance of the risk that the insured:
a) knows to be relevant (subjective disclosure);or
b) which a reasonable person in the circumstances could
be expected to know was relevant (objective disclosure).
The application of the objective element of s.21 has been problematic, particularly in defining “in the circumstances”. It is proposed to amend s.21(1)(b) to qualify "in the circumstances" by reference to factors "including, but not limited to" the nature and extent of cover under the relevant type of insurance.
Disclosure by life insured
Sometime contracts of life insurance are taken out by a person in respect of the life of another and therefore, a life insured under a contract of insurance is not necessarily the "insured" for the purposes of s.21 and subject to its disclosure obligations. It is proposed to include a new provision, s.31A, in the Act to deal specifically with contracts of life insurance under which a person (other than the insured) would become a life insured. Such persons will become subject to a duty of disclosure similar to that applying to insureds under s.21, save that any non-disclosure by a life insured will be imputed to the insured.
Disclosure under "eligible contracts"
Section 21A, which deals with disclosure of specific matters upon inception of "eligible" contracts of insurance2 , is to be replaced by a new s.21A which will prevent an insurer asking "catch all" questions concerning matters relevant to the acceptance of risk, such as whether there is "any other matter" that should be disclosed. Instead, insurers may only ask specific questions. If the insurer does not ask specific questions or includes a 'catch all' question, they will be deemed to have waived compliance with the duty of disclosure.
The requirement to ask proposed insureds specific questions under section 21A as a condition of enforcing the insured’s duty of disclosure will also apply on renewal of an eligible contract of insurance under a proposed new section 21B (but not in the case of a variation, reinstatement or extension of the contract).
When renewing eligible contracts, insurers may simply provide insureds with details of previous disclosures and ask for updates, rather than asking specific questions again.
Insurer's obligation to inform of duty of disclosure
Currently, s.22 of the Act requires an insurer, prior to the contract being entered into, to inform the insured in writing of the general nature and effect of their duty of disclosure and, if applicable, of the general nature and effect of s.21A.
Section 22 will undergo a significant upgrade and minor amendments will be made to other sections of the Act so that:
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The insurer must clearly inform the insured and any proposed life insureds of the general nature and effect of the duty of disclosure, and where relevant, the general nature and effect of sections 21A, 21B or 31A. |
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Any such notification must explain that the duty of disclosure applies until the time that the proposed contract is entered into. |
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If an insurer accepts an offer to enter a contract or makes a counter-offer more than two months after the insured’s most recent disclosure, the insurer must remind the insured at the time of acceptance or counter-offer that their disclosure obligations continue until the contract is entered into. This additional reminder does not apply in the case of a life insured, unless the life insured is also the contracting insured. |
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Insurers who fail to comply with their obligation to remind insureds of their disclosure obligations in the case of protracted negotiations, will only be precluded from exercising rights in respect of a failure to disclose any "new matter" i.e. a matter of which the insured became aware after their most recent disclosure. |
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The obligations of an insurer under ss.22 and 40 (to inform an insured under a "claims made and/or notified" policy of certain matters) apply also to a renewal, extension or reinstatement of a contract of insurance. They do not apply to a variation of the contract unless the variation provides a different kind of insurance cover or, in the case of a contract of life insurance, the variation increases the sum insured. |
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As is currently the case, regulations may prescribe a form of words for these written notifications and insurers who fail to comply with their obligations will be prevented from exercising their remedies in respect of non-disclosures unless the non-disclosure was fraudulent. |
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Life insurance remedies
Section 29 of the Act contains remedies for life insurers where an insured breaches their duty of disclosure or misrepresents something to the insurer prior to entering into the contract.
The Bill will amend the Act so that:
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Section 29 will only apply to contracts of life insurance that have a surrender value or provide cover in respect of death. A new s.28(1A) will deal with other types of life insurance e.g. disablement or income protection and will offer similar remedies to the existing s.28 which operates in respect of general insurance. |
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Life insurance contracts that combine more than one type of cover e.g. death and disablement, are "unbundled" for the purpose of applying the relevant remedies for non-disclosure or misrepresentation. |
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An insurer will now be able to avoid a life insurance contract to which s.29 applies on the basis of non-disclosure or misrepresentation if it would not have entered that particular contract on any terms. This is significant as currently, the insurer must show that it would not have entered into any contract of life insurance at all. |
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As well as being able to adjust the sum insured or reduce the premium payable where an incorrect date of birth has been given at inception, life insurers will have the additional option of changing the expiration date of a life insurance contract to take into account the life insured's correct age. |
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The statutory framework for cancellation of general insurance contracts will be extended to life insurance contracts as well. |
Third parties
A number of provisions of the Act currently confer rights or obligations on third party beneficiaries (mainly in the context of life insurance). The Bill extends the application of the Act in a number of other respects to third party beneficiaries as follows:
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Extension of the operation of s.41 to third party beneficiaries to a contract of liability insurance so that they too may require an insurer to advise whether it admits indemnity and if it does, whether it will conduct the defence of the claim made against them. Third party beneficiaries will have the same advantage as an insured should the insurer fail to provide this information within a reasonable time i.e. the insurer will not be able to refuse payment of the claim or reduce its liability by reason only that the third party beneficiary either makes an admission or settles without the insurer's consent. |
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An amendment to s.48 (entitlement of named persons to claim) to make it clear that an insurer under a general contract of insurance can raise the conduct of the insured (whether pre or post contractually) in defence of a claim brought against it by a third party beneficiary. Amendments to s.48AA will make similar provision regarding contracts of life insurance offered in connection with Retirement Savings Accounts. The intent of these amendments is to put a third party beneficiary in no better position, in terms of their ability to claim, than the insured. |
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Extension of the duty of utmost good faith to third party beneficiaries after the contract is entered into. |
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New powers to ASIC to bring representative actions on behalf of third party beneficiaries. |
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Amendments to s.48A of the Act (contracts of life insurance effected on the life of a person for the benefit of another). The amendments allow for circumstances in which the person whose life is insured may be a third party beneficiary and ensure that a third party beneficiary may bring an action against the insurer in respect of the claim without the intervention of the policyholder. A third party beneficiary will also be capable of giving a valid discharge to the insurer in relation to the insurer's obligations under the policy. |
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Amendments to s.51 of the Act so that third parties with damages claims against an insured or third party beneficiary who has died or cannot be found may recover directly against the insurer. Currently s.51 only extends this right to third parties to whom an insured is liable. |
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Amendments to a number of provisions of the Act, most notably s.32, concerning remedies for misrepresentation and non-disclosure in relation to members of group life insurance schemes. The object of the amendments is to ensure that insurers will have remedies for non-disclosures and misrepresentations by members of such schemes which were made not only when the member joined the scheme, but also at some later time when they became a life insured under the scheme. This would cover the situation where a member joined a superannuation scheme upon commencement of employment, but was required to undergo a medical examination or other checks before they became eligible for life insurance under the scheme. The current wording of s.32 means that only non-disclosures or misrepresentations made at the time of joining the scheme give rise to remedies. |
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Section 67 (subrogation) will be extended to third party beneficiaries so that they too may participate in a distribution of the proceeds of a subrogation action. |
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Subrogation
Section 67 of the Act will be replaced with a new provision which, subject to any agreement between insurer and insured, provides that amounts recovered from third parties will be distributed depending upon who conducted the subrogation claim. Third party beneficiaries will also have the right to participate in such distributions.
If the insurer conducts the recovery against the third party, it is entitled to the amount paid to the insured in respect of the loss plus its administrative and legal expenses in connection with the recovery. Any excess is payable to the insured to the extent of its overall loss. Anything left above this is retained by the insurer.
If the insured or third party beneficiary recovers, the order of distribution is reversed.
If the insurer and insured/third party beneficiary recover jointly, the proceeds of the subrogation claim are distributed on a pro rata basis in proportion to the amounts paid by each.
Interest, if any, is retained by the party who recovered the principal amount and, in the case of joint recovery, is divided "fairly" having regard to the recoveries to which each is entitled and the periods they have been out of pocket.
Proposals concerning unfair terms
Section 15 of the Act provides that contracts of insurance cannot be made the subject of relief, under any other Act, in the form of judicial review on the ground that the contract is "harsh, oppressive, unconscionable, unjust, unfair or inequitable".
The Federal Government recently passed the Trade Practices Amendment (Australian Consumer Law) Bill 20093 which makes sweeping changes to Australian consumer legislation, particularly in relation to "unfair contract provisions" in standard form consumer contracts (Australian Consumer Law). In essence, provisions which meet the definition of "unfair" in standard form consumer contracts are void.
Doubt exists as to whether, in view of s.15 of the Act, the unfair contract provisions apply to standard form contracts of insurance and a Senate Committee has recommended that remedies in relation to unfair contract terms contained in the Australian Consumer Law should also apply to standard form insurance contracts either by providing an equivalent level of protection in the Act or by specifically including such contracts in the Australian Consumer Law.
Amendments to achieve this harmonisation have not been included in the Bill but the Federal Government has sought further submissions from stakeholders4 .
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Comment
Apart from the disclosure and third party provisions, the reforms in the Bill are a somewhat watered down version of those proposed in the Exposure Draft Bill issued in 2007. A notable omission is a reform of the operation of s.54 in relation to "claims made" policies which would have seen failures to notify circumstances carved out of the operation of s.54 in return for an extended notification period after the expiry date of such policies. The omission is surprising since one of the main reasons for review of the Act was the perceived difficulty with s.54. We can only assume that the practical remedy adopted by insurers of deleting "deeming clauses" was considered sufficient to overcome the perceived mischief.
We note that the Government has not seized the opportunity to remedy the acknowledged drafting errors in s.45 of the Act ("other insurance" provisions) which have seen that provision interpreted as only favouring contracting insureds, not third party beneficiaries.
Federal Parliament is set to resume in May however in an election year, progress of the reforms could well fall victim to politics, as they did in 2007.
Further Information
Kate Clark | Special Counsel
+61 3 9269 9315
kclark@landers.com.au
Michael Landvogt | Partner
+61 3 9269 9101
mlandvogt@landers.com.au
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1. Legislation enabling ASIC to make application to the court to enforce product standards for medical indemnity insurance.
2. As prescribed by regulation, such as home & contents, travel and motor vehicle insurance.
3. Awaiting assent as at 28 March 2010.
4. Submissions are due by 30 April 2010.
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