Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2010-2011-2012-2013
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
INSURANCE CONTRACTS AMENDMENT BILL 2013
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Financial Services and Superannuation, the Hon William Shorten MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Schedules to the Bill .................................................... 11
Chapter 2 Regulation impact statement ....................................... 53
Chapter 3 Statement of Compatibility with Human Rights .......... 103
Index ................................................................................................... 105
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
AIA Acts Interpretation Act 1901
AFSL Australian Financial Services License
ASIC Australian Securities and Investments
Commission
Corporations Act Corporations Act 2001
ETA Electronic Transactions Act 1999
ETR Electronic Transaction Regulations 2000
LIA Life Insurance Act 1995
ICA Insurance Contracts Act 1984
ICR Insurance Contracts Regulations 1985
MI Act Marine Insurance Act 1909 (Cth)
MIA Medical Indemnity (Prudential Supervisions
and Product Standards) Act 2003
The Bill The Insurance Contracts Amendment
Bill 2013
The 2010 Bill The Insurance Contracts Amendment
Bill 2010
1
General outline and financial impact
Outline
The Insurance Contracts Amendment Bill 2013 (the Bill) re-introduces the
measures contained in Insurance Contracts Amendment Bill 2010 (the
2010 Bill) with some minor refinements. The re-introduction of the
measures in the 2010 Bill with the minor refinements gives effect to a
number of recommendations of a Review Panel appointed to review the
Insurance Contracts Act 1984. The changes are largely technical in
nature and respond to market developments and judicial decisions since its
enactment.
The Bill will streamline requirements and address anomalies in the
regulatory framework for the benefit of insurers and consumers. The
measures have been subject to stakeholder consultation, and in some
areas, the Review Panel's recommendations have been modified to take
account of issues raised in consultations.
Major elements
The following is a brief summary of the measures included in the Bill,
outlined under their particular Schedule number.
Schedule 1 -- Scope and application
Schedule 1 to the Bill contains amendments that relate to the scope and
application of the Insurance Contracts Act (1984) (Cth) (ICA). It amends
the ICA so that:
· failure to comply with the duty of utmost good faith is a
breach of the ICA;
· contracts of insurance that are entered into or proposed to be
entered into for the purposes of workers' compensation law
continue to be exempt under the ICA, notwithstanding that
they also include cover against employer liability at common
law to pay damages for employment related personal injury;
and
· contracts of insurance that include elements of cover that are
exempted from the ICA, as well as cover that falls under the
3
Insurance Contracts Amendment Bill 2013
ICA, are treated as exempt from the Act only in respect of
the exempt elements.
Date of effect: On Royal Assent.
Schedule 2 -- Electronic communication
It is proposed that the regulations under the Electronic Transactions
Act 1999 (Cth) (ETA) will be amended so that the ICA will no longer be
exempt from that Act. Schedule 2 to the Bill amends the ICA to make
technical changes to provisions in the ICA regarding the giving of notices,
documents and information, including a note that the ETA will apply to
permit electronic communication of notices or documents required to be
given in writing.
Date of effect: Schedule 2 will take effect on a day to be fixed by
Proclamation. This will permit coordination of the commencement with
the proposed amendment to the Electronic Transactions Regulations.
Schedule 3 -- Powers of ASIC
Schedule 3 to the Bill amends the ICA to give the Australian Securities
and Investments Commission (ASIC) a statutory right to intervene in any
proceeding relating to matters arising under the ICA and under Part 3 of
the Medical Indemnity (Prudential Supervision and Product Standards)
Act 2003 (MIA).
Date of effect: On Royal Assent.
Schedule 4 -- Disclosure and misrepresentations
Schedule 4 to the Bill amends the ICA so that:
· the mixed objective/subjective test in section 21 of the ICA,
which is used to determine if an insured has met their duty of
disclosure, is clarified;
· the requirement to ask proposed insureds specific questions
under section 21A as a condition of enforcing the insured's
duty of disclosure will apply on renewal of an eligible
contract of insurance (proposed new section 21B) as well as
at inception (but not for a variation, a reinstatement or an
extension), and `catch all' questions will no longer be
permitted;
4
General outline and financial impact
· on renewal, insurers may choose to seek updates to answers
previously provided by insureds, rather than asking specific
questions again;
· an insurer must notify the insured, before the contract of
insurance is entered into, that the duty of disclosure
obligations continue until the time the policy is actually
entered into;
· the ICA provides that a form of words may be prescribed by
regulation for use by insurers to inform persons of their duty
of disclosure obligations;
· any person who is not the insured but proposes to become a
life insured under a contract of life insurance is subject to a
duty to disclose, as well as a duty not to misrepresent, and the
insurer must give this person notice of the duty before the
contract is entered into; and
· a failure to disclose by the proposed life insured will be
imputed to the insured.
Date of effect: The amendments generally take effect 30 months after the
date of Royal Assent. Division 1 and Division 2 of Part 2 provide a
transition period to enable a smooth transaction into the new regime for
insurers. Division 2 of Part 2 commences on the date of Royal Assent.
Division 1 of part 2 commences 30 months after the date of Royal Assent.
This delay in commencement is to allow insurers an opportunity to amend
their business practices in response to the new rules regarding the
operation of the duty of disclosure and notification of that duty.
Schedule 5 -- Remedies of insurers: life insurance contracts
Section 29 of the ICA contains provisions that prescribe remedies for life
insurers that may be used where a person who became insured under a
contract of insurance either misrepresented or did not disclose matters that
should have been disclosed prior to entering into the contract.
· In some cases, the remedies in respect of bundled contracts
of life insurance are inappropriate. Schedule 5 to the Bill
amends the ICA so that:
- section 29 has an additional remedy for life insurance
contracts. This additional remedy will enable an insurer
to be put in the position that they would have been in if a
misrepresentation or a failure to comply with the duty of
disclosure had not occurred. However, this remedy will
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Insurance Contracts Amendment Bill 2013
not apply to life insurance contracts that contain a
surrender value or provide cover in respect to death of a
life insured;
- life insurance contracts that combine more than one type
of cover and more than one life insured are to be
`unbundled' for the purpose of applying the relevant
remedies for non-disclosure or misrepresentation;
- insurers are entitled to change the expiration date of a life
insurance contract (all types of life insurance), where that
date has been calculated by reference to the insured's
incorrectly-stated date of birth; and
- the statutory framework in the ICA for cancellation of
general insurance contracts in respect to fraudulent claims
will be extended to life insurance contracts with some
modifications to ensure that the differences between
general insurance and life insurance contracts are
recognised (subject to forfeiture rights for non-payment of
premiums under the Life Insurance Act 1995 (LIA)).
Date of effect: The amendments regarding unbundling of life insurance
contracts and entitlement of insurers to change expiration dates and to
cancel contracts of life insurance take effect on Royal Assent. The
amendments regarding changes to the remedies for particular contracts of
life insurance commence 12 months after the date of Royal Assent. The
delay in commencement is to allow insurers an opportunity to factor into
their affairs the changes to available remedies.
Schedule 6 -- Third parties
Schedule 6 to the Bill amends the ICA so that:
· individuals who have rights under a contract of insurance
(`third party beneficiaries') but who are not the insured, have
access to particular rights and obligations currently held by
insureds;
· 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;
· ASIC will have powers to bring representative actions on
behalf of third party beneficiaries;
6
General outline and financial impact
· remedies for misrepresentation and non-disclosure are
available in relation to contracts of life insurance that are
offered as part of a group scheme that is unrelated to
superannuation; and
· remedies are available in respect of any misrepresentation or
non-disclosure that occurs between the time an insured
became a member of a superannuation or other group scheme
and when the life insurance cover takes effect.
Date of effect: ASIC's powers to bring representative actions commence
on the date of Royal Assent. The remainder of Schedule 6 commences
12 months after the date of Royal Assent. The delay in commencement is
to allow insurers a reasonable opportunity to factor the new rights and
obligations of third party beneficiaries into their business operations.
Schedule 7 -- Subrogation
Schedule 7 to the Bill amends the ICA so that:
· section 67 of the ICA, which deals with the allocation of
moneys recovered when an insurer exercises a right of
subrogation in relation to an insurance claim, is revised to
reflect wording of a draft provision dealing with subrogation
proposed by the Australian Law Reform Commission in its
Review of the Marine Insurance Act 1909 (Cth) (MI Act);
and
· Part VIII of the ICA, which relates to subrogation, applies to
claims made by third party beneficiaries as well as by
insureds.
Date of effect: Schedule 7 commences six months after the date of Royal
Assent. The delay in commencement is to allow insurers an opportunity
to factor the new rules regarding subrogation into their business
operations.
Financial impact: Low. The Bill will have no financial impact on the
Commonwealth.
Human rights implications: This Bill does not raise any human rights
issue. See Statement of Compatibility with Human Rights -- Chapter 3,
paragraphs 3.1 to 3.5.
Compliance cost impact: The measures contained in this Bill are only
expected to have a minimal increase in compliance costs for industry.
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Insurance Contracts Amendment Bill 2013
Summary of regulation impact statement
Regulation impact on business
This Bill merely re-introduces the measures in the 2010 Bill with some
minor refinements to reflect recent public consultation. As such, OPBR
has confirmed that no changes are required to be made to the Regulation
Impact Statement developed in 2010, because the refinements made are
machinery-of-government in nature.
Impact: The elements set out in the regulation impact statement will
benefit both insurers and insureds, without imposing significant ongoing
compliance costs on industry with flow on impacts on premium settings.
Main points:
· Insurers and insureds will benefit from the ability to use
electronic communication for various notice requirements
under the ICA. The use of electronic communications has
the potential to lower costs related to use of hard copy
communications and to increase convenience for both
insurers and insureds.
· Initially some additional administrative costs will be placed
on insurers in relation to the changes the duty of disclosure
for eligible contracts. The measures are intended to strike an
appropriate balance between ensuring insurers have reliable
information to assess and price risk, while at the same time,
avoiding an unfair burden being placed on insureds in
meeting their duty of disclosure.
· Insurers, insureds and regulators would benefit from fewer
and less complex disputes relating to disclosure and ease of
resolution would increase. This could ultimately be reflected
in lowered costs to insurers, with this factored into premium
rates.
· Insurers will benefit from the clarification of the remedies
available to them for non-disclosure by life insureds, who are
not the insured under life policies.
· Holders of life insurance policies will benefit from less harsh
and inflexible remedies being available to insurers with
respect to non-fraudulent (innocent) non-disclosure, with
insureds generally benefiting from fewer cost pressures
placed on premium rates.
8
General outline and financial impact
It is expected that options to benefit third party beneficiaries
by clarifying rights and obligations in a range of areas could
be implemented without any significant cost burden for
insurers or consumers.
9
Chapter 1
Schedules to the Bill
Outline of chapter
1.1 The Schedules to the Insurance Contracts Amendment Bill 2013
(the Bill) contain amendments to the Insurance Contracts Act 1984 (ICA)
to address a number of technical issues in the ICA, to modernise and
streamline the operation of the ICA and, in some cases, to respond to or
clarify judicial interpretation.
Context of amendments
1.2 This Bill arose out of recommendations made by a review of the
ICA. The review was conducted by a Panel comprising Mr Alan
Cameron AM and Ms Nancy Milne (the Review Panel). The Review
Panel's main conclusion was that the ICA was generally working
satisfactorily to the benefit of insurers and insureds. However, the
Review Panel found that some changes would be beneficial, given the
passage of time since the ICA was originally enacted.
1.3 Consequently, the Review Panel made detailed
recommendations for modifications to account for developments in the
insurance market since that time and judicial interpretation of ICA
provisions. This Bill gives effect to a number of the Review Panel's
recommendations. In several areas, the Review Panel's recommendations
were modified to take account of subsequent consultations with
stakeholders on the details of the proposed amendments.
Summary of new law
1.4 The amendments contained in this Bill change and/or clarify the
application and/or scope of the ICA. The amendments will streamline the
operation of the ICA for the benefit of insurers and insureds alike.
11
Insurance Contracts Amendment Bill 2013
Comparison of key features of new law and current law
New law Current law
Communications that are required to Certain communications (those
be made in writing may be made by required to be made in writing) under
electronic means. the ICA are currently exempt from
the operation of the Electronic
Transactions Act 1999 (ETA).
The test for the duty of disclosure The current test for the duty of
provides factors to help in the disclosure imposes an unreasonable
interpretation of the disclosure burden on insureds to know what an
provisions. insurer regards as relevant to its
decision of whether to enter into a
contract of insurance.
The notification of the duty of The notice requirements surrounding
disclosure in relation to eligible an insureds duty of disclosure, when
contracts of insurance covers the time entering into an eligible contract of
a contract is entered into and at the insurance, do not extend to the
time of renewal. renewal of eligible contracts of
insurance.
An insured must be reminded, at the An insured must be advised of their
time the contract is issued, that the duty of disclosure at the time the
duty of disclosure continues until the insured submits an application of
contract is entered into. insurance.
Non-disclosures and Only misrepresentations by a `life
misrepresentations by a `life insured' insured' (that is a person other than
(that is a person other than the the insured whose life is insured
insured whose life is insured under under the contract of life insurance)
the contract of life insurance) are are treated as if they were made by
treated as if they were made by the the insured themselves.
insured themselves. Insurers may, if an insured fails to
Insurers may, if an insured fails to comply with the duty of disclosure or
comply with the duty of disclosure or makes a misrepresentation
makes a misrepresentation fraudulently, avoid the contract.
fraudulently, avoid the contract. Insurers may if an insured innocently
Insurers may if an insured innocently fails to comply with the duty of
fails to comply with the duty of disclosure or makes an innocent
disclosure or makes an innocent misrepresentation within the first
misrepresentation: three years of the contract:
· avoid the contract within the first · avoid the contract if the insurer
three years of the contract being would not have been prepared to
entered into if the insurer would enter into the contract on any
not have been prepared to enter terms; or
into the contract on any terms;
12
Schedules to the Bill
New law Current law
· at any time after the contract was · vary the sum insured under the
entered into, vary the sum insured policy by a factor calculated by a
under the policy by a factor reference to the premiums
calculated by a reference to the changed as a proportion of the
premiums changed as a proportion premiums that would have been
of the premiums that would have changed.
been changed; or
· vary the contract to place them in
the position they would have been
in if the breach of the duty of
disclosure or misrepresentation
had not occurred. Provided the
variation is not inconsistent with
how other reasonable prudent
insurers would have varied similar
contracts of insurance.
Third party beneficiaries: Third party beneficiaries are not
· have access to particular rights generally recognised in the ICA.
and obligations currently held by
insureds; and
· may recover directly against the
insurer, with damages claims
against an insured or third party
beneficiary who has died or
cannot be found.
In addition:
· ASIC has the power to bring
representative actions on behalf of
third party beneficiaries;
· remedies for misrepresentation
and non-disclosure are available
in relation to contracts of life
insurance that are offered as part
of a group scheme that is
unrelated to superannuation; and
· remedies are available in respect
of any misrepresentation or
non-disclosure that occurs
between the time an insured
became a member of a
superannuation or other group
scheme and when the life
insurance cover takes effect.
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Insurance Contracts Amendment Bill 2013
Detailed explanation of new law
Schedule 1 -- Scope and application
Part 1 -- Duty of utmost good faith
Breach of the duty of utmost good faith
1.5 There is implied into all contracts of insurance, pursuant to
section 13 of the ICA, a provision that requires each party to that contract
of insurance to act with the utmost good faith towards the other party in
respect of any matters arising under or in relation to the contract.
1.6 Under the current law, parties to a contract of insurance may
enforce compliance with this implied duty of utmost good faith through
private legal action. However, this may present too great an expense for
some parties and does not provide long-term solutions to systemic
breaches of utmost good faith committed over time.
1.7 A breach of the duty of utmost good faith in Section 13 of the
ICA has been amended so that a breach of the duty of utmost good faith is
a breach of the ICA. [Schedule 1, item 4, subsections 13(2)]
1.8 To avoid any doubt that the remedies which apply in relation to
the duty of utmost good faith are available in respect to claims handling or
settlement of a potential claim, section 14A has been inserted into the ICA
to clarify that the Australian Securities and Investments Commission
(ASIC), may exercise its power under parts of the Corporations Act 2001
(Cth) (Corporations Act) in respect to the failure of an insurer to comply
with the duty of utmost good. [Schedule 1,item 5, subsections 14A(1) and 14(2)]
1.9 Pre-conditions to ASIC undertaking representative action on
behalf of an insured are that the insurer has failed to comply with the duty
of utmost good faith, and as such, there has been a breach of the ICA.
[Schedule 1,item 5, subsection 14A(1)]
1.10 In section 14A a financial services law has the meaning given by
section 761A of the Corporations Act. [Schedule 1,item 5, subsection 14A(3)]
1.11 The amendments to section 13 and section 14 will have the
result that breaches of the duty of utmost good faith (and consequently of
the ICA) by an insurer may enable ASIC to access various remedies under
the Corporations Act in relation to Australian Financial Services Licence
(AFSL) holders.
14
Schedules to the Bill
1.12 This allows ASIC to commence or continue representative
action on behalf of an insured against an insurer, pursuant to section 55A
of the ICA.
1.13 The remedies available to ASIC include the issue of a banning
order under section 920A of the Corporations Act, the suspension or
cancellation of the insurer's financial services licence, the imposition of
conditions on the licence or the acceptance of an enforceable undertaking
not to act in a particular manner.
1.14 Banning orders made by ASIC have the effect of prohibiting the
affected person from providing all financial services, or one or more
specified types of financial service. They may be permanent or last only
for a specified period. An example of the type of conduct leading to a
permanent banning order is a pattern of persistent contraventions that
indicate systemic failures or a general lack of understanding of, and regard
for, compliance. Isolated breaches of the duty would not be expected to
result in ASIC pursuing a banning order.
1.15 A breach of the ICA for failure to comply with the duty of
utmost good faith implied into all contracts of insurance is not an offence
against the ICA, nor does it attract any penalty under the ICA.
Third party beneficiaries
1.16 Third party beneficiaries are not the insured under a contract of
insurance but may be specified or referred to in its terms, either
individually or as part of a class, as persons to whom any benefits
provided by the contract extend. It follows therefore that they should
have access to some of the rights and obligations under the ICA that
extend to insureds.
1.17 Section 11(1) of the ICA has been amended to provide the
following definition of a third party beneficiary.
Third party beneficiary, under a contract of insurance, means a person
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.
[Schedule 1, item 2, subsection 11(1)]
1.18 Third party beneficiaries are not currently parties to the contract
of insurance and as such do not benefit from the duty of utmost good
faith, which is implied by the current section 13.
15
Insurance Contracts Amendment Bill 2013
1.19 New subsections 13(3) and 13(4) address this by extending the
duty of utmost good faith to third party beneficiaries; however, the duty
only commences after the contract is entered into. This is because
applying the duty pre-contractually would be impractical. Further, the
duty of utmost good faith will be of most relevance for third party
beneficiaries where they wish to make a claim under a contract of
insurance, as countenanced by subsection 48(2). [Schedule 1, item 4,
subsections 13(3) and 13(4)]
Part 2 -- `Bundled' workers' compensation contracts
1.20 Actual or proposed contracts of insurance that have been entered
for the purposes of a state or territory law that relate to workers'
compensation or compensation for death or injury to a person arising from
the use of a motor vehicle in accordance with paragraph 9(1)(e) are to be
exempt from the scope of the ICA.
1.21 In practice, some contracts of insurance offer employees cover
of the type described in paragraph 9(1)(e) and another type of cover. A
particular example is contracts of insurance that bundle both cover for
compulsory workers' compensation purposes and cover for liability to
employees at common law arising from employment related personal
injury.
1.22 The question arises as to whether such `bundled' contracts of
insurance are exempt or not from the scope of the ICA. The Review
Panel recommended that, in the case of the example described above, the
most effective solution to overcome uncertainty about application is to
make the entire contract exempt from the scope of the ICA. In other
examples of contracts of insurance that bundle exempt and non-exempt
types of cover, the Review Panel considered it not desirable to rule the
entire contract either in or out of the scope of the ICA. That situation is
dealt with in Part 3 of Schedule 1.
1.23 In order to ensure appropriate outcomes are achieved in respect
to these `bundled' contracts, insurance contracts entered into (or proposed
to be entered into) that bundle compulsory workers' compensation cover
together with cover for an employer's liability at common law for damage
suffered due to employment-related personal injury are exempt from the
operation of the ICA. [Schedule 1, Item 7, Paragraph 9(1)(f)]
Part 3 -- `Bundled' Contracts generally
1.24 A contract of insurance may contain one or more types of cover
to which the ICA would not apply if they were contained in individual
contracts, together with one or more types of cover to which the ICA
would apply if they were contained in individual contracts.
16
Schedules to the Bill
1.25 As was the case for the bundled contracts of insurance dealt with
specifically in Part 2 of Schedule 1 described above, the Review Panel
recommended that the exemption from the scope of the ICA in
subsection 9(1) of the Act be applied to each type of cover in a bundled
insurance policy as if it were a separate contract.
1.26 To give effect to the recommendation made by the Review panel
new subsections 9(1A), 9(1B) and 9(1C) have been inserted into
section 9(1). [Schedule 1, Item 9, subsections 9(1A), 9(1B) and 9(1C)]
Example 1.1
Under the new subsections, contracts of insurance that contain more
than one type of cover, one of which is exempted (Cover A) and one of
which is not (Cover B), would contain some terms that relate solely to
Cover A, some that relate solely to Cover B and some that relate to
both Cover A and Cover B.
To create `unbundled' contracts for the purposes of applying the
exemption provisions, two notional contracts would be constructed.
The first notional contract would comprise only those terms of the
initial contract that are relevant to Cover A. The notional contract
would also contain, because of subsection 9(1C), any terms of the
initial contract that are relevant to both Cover A and Cover B.
Similarly, the second notional contract would comprise those terms of
the initial contract that are relevant to Cover B only and the terms that
are relevant to both Cover A and Cover B.
When the contents of the notional contracts are determined, the
exemption provisions in subsection 9(1) are applied to each as if that
contract were a separate contract of insurance or proposed contract of
insurance.
It may be that there are more than two types of cover bundled within a
contract of insurance, in which case more than two notional contracts
of insurance will need to be developed at the first stage. However,
irrespective of whether there are two or more kinds of exempt covers,
or two or more kinds of non-exempt covers, or both, the result of
applying the unbundling process in subsections 9(1A) and 9(1C) is that
only those contractual terms that relate to the exempt cover type(s) are
exempt from the operation of the ICA.
1.27 New subsection 9(1B) applies a different rule for unbundling if
one of the types of cover is a cover that is referred to in new
paragraph 9(1)(f). This different treatment is necessary to ensure that
directors' liability cover would only be exempted from the scope of the
ICA where it was bundled with compulsory workers' compensation cover.
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Insurance Contracts Amendment Bill 2013
Application and transitional provisions
Part 1 -- Duty of utmost good faith
1.28 Item 6 in Schedule 1 provides that the amendments in Part 1
apply as follows:
· to a contract of insurance that was originally entered into
after the commencement of item 6;
· to a contract of general insurance that was originally entered
into before the commencement of item 6 and is renewed after
that commencement; and
· if
- the contract is a contract of life insurance that was
originally entered into before the commencement of this
item and is varied after that commencement to increase a
sum insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 6 and the amendments apply to
the contract to the extent of the variation.
1.29 By operation of clause 2, item 6 in Schedule 1 commences on
the day the Act receives the Royal Assent.
Part 2 -- `Bundled' workers' compensation contracts
1.30 Item 8 in Schedule 1 provides that the amendments in Part 2
apply as follows:
· to a contract of insurance that was originally entered into
after the commencement of item 8; and
· to a contract of general insurance, that was originally entered
into before the commencement of item 8 and is renewed after
that commencement.
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Schedules to the Bill
1.31 By operation of clause 2, item 8 in Schedule 1 commences on
the day the Act receives the Royal Assent.
Part 3 -- `Bundled' Contracts generally
1.32 Item 10 in Schedule 1 provides that the amendments made by
Part 3 apply as follows:
· to a contract of insurance that was originally entered into
after the commencement of item 8;
· to a contract of general insurance that was originally entered
into before the commencement of item 10 and is renewed
after that commencement; and
· if
- the contract is a contract of life insurance that was
originally entered into before the commencement of this
item and is varied after that commencement to increase a
sum insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 6 and the amendments apply to
the contract to the extent of the variation.
1.33 By operation of clause 2, item 10 in Schedule 1 commences on
the day the Act receives the Royal Assent.
Schedule 2 -- Electronic communication
1.34 The Review Panel analysed the increasing use of electronic
communications in the context of the ICA. Currently, the ICA is exempt
from the coverage of most of the operative parts of the Electronic
Transactions Act 1999 (the ETA), which provides that, in general, where a
Commonwealth law requires a notice to be given in writing, then it may
be given by electronic communication if certain conditions are met.
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Insurance Contracts Amendment Bill 2013
1.35 For example, subsection 9(1) of the ETA provides that any
communication required by a Commonwealth Act may only be done
electronically if:
· at the time the information was given, it was reasonable to
expect that the information would be readily accessible so as
to be useable for subsequent reference; and
· the person to whom the information is required to be given
consents to the information being given by way of electronic
communication.
1.36 Section 14 of the ETA contains rules about time and place of
receipt and dispatch of electronic communications.
1.37 The Review Panel expressed support for the notion of updating
the ICA to allow for communication by electronic means. A proposed
amendment to the Electronic Transactions Regulations 2000 (ETR) to
remove the current exemption is required, so that communications under
the ICA are subject to the ETA. Schedule 2 to the Bill amends various
provisions of the ICA to recognise that the ICA will be subject to the
ETA.
1.38 For consistency of terms in sections 70, 71 and 72 of the ICA
dealing with notices, references to `statement' (wherever occurring) have
been removed. The concept of a `statement' is covered by the term
`notice or other document'. [Schedule 2, Items 2 to 6, section 70,
subsections 71(1), 71(2) and 71(3) and paragraph 71(2)(b)]
1.39 The current section 72 of the ICA (which is concerned with
legibility of writing) has been repealed and replaced with an expanded
section 72. The purpose of this expansion is so that the regulation-making
power in section 72 may deal not only with the content and legibility of
the notice or other document itself, but also with material that may
accompany the notice or other document or information. The power is
intended to permit the making of regulations to ensure that the content of
statutory notices under the ICA is able to be digested by the recipient
without interruption or distraction by other material provided with the
notice. [Schedule 2, Item 7, section 72]
1.40 Current section 77 of the ICA applies generally in relation to
notices or other documents or information that are required or permitted to
be given by the ICA. The section sets out the methods that may be used
depending on whether the person to whom the notice or other document is
to be given is a body corporate or a natural person. Subsection 77(2) also
includes a rule regarding the time of receipt of a notice of cancellation of a
contract of insurance.
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Schedules to the Bill
1.41 Current section 77 of the ICA has been repealed and has been
replaced by new section 72A. New section 72A largely replicates the
content of section 77, but removes the rule regarding notice by post of
cancellation. Section 29 of the Acts Interpretation Act 1901 (Cth) (AIA)
deals with that subject. Section 72A is not intended to affect the operation
of subsection 71(1), which covers situations where insurance is arranged
by brokers acting for the insureds. [Schedule 2, items 7 to 8, section 72A]
1.42 The amendments to the electronic communication allow insurers
to deliver notices, other documents and information to customers
electronically, this may be done directly or indirectly, through an
intermediary site such as the insurer's internet banking site.
1.43 A consequential amendment has been made to section 62(1) to
remove the reference to section 77. [Schedule 2, Item 1, subsection 62(1)]
Application and transitional provisions
1.44 Item 9 of Schedule 2 of the Bill provides that the amendments in
Schedule 2 apply to a notice or other document or information given to a
person under the ICA after the commencement of item 9 of Schedule 2.
1.45 By operation of clause 2, item 9 of Schedule 2 commences on a
single day to be fixed by proclamation. However, if any of the provisions
do not commence within the period of 6 months beginning on the day this
act received Royal Assent, they commence on the day after the end of that
period.
Schedule 3 -- Powers of ASIC
1.46 Part IA of the ICA gives ASIC responsibility for the general
administration of the ICA and vests in ASIC a number of specific powers
to support this role, such as the power to obtain documents.
1.47 New section 11F of the ICA gives ASIC additional power to
intervene in matters arising under the ICA. The provision is similar in
form to the existing power that ASIC has to intervene in proceedings
begun by other persons about matters arising under section 1330 of the
Corporations Act. It allows ASIC to be represented in the proceedings by
a staff member, a delegate, a solicitor or counsel. [Schedule 3, item 1,
section 11F]
1.48 By new section 11F, ASIC may also intervene in a matter
arising under Part 3 of the Medical Indemnity (Prudential Supervision and
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Insurance Contracts Amendment Bill 2013
Product Standards) Act 2003. Part 3 of the Medical Indemnity
(Prudential Supervision and Product Standards) Act 2003 (MLA) enables
ASIC (and other parties) to make application to the court to enforce
product standards for medical indemnity insurance. The expanded power
would enable ASIC to intervene in any proceeding relating to matters
arising under Part 3. [Schedule 3,item 1,paragraph 11F(1)(a) and 11F(1)(b)]
Application and transitional provisions
1.49 Item 2 of Schedule 3 of the Bill provides that the amendment
made by Schedule 3 apply to a proceeding that is commenced after the
commencement of item 2 of Schedule 3.
1.50 By operation of clause 2, item 2 of Schedule 3commences on the
day the Act receives the Royal Assent.
Schedule 4 -- Disclosure and misrepresentations
1.51 Schedule 4 amends the manner in which the ICA deals with
particular types of disclosure and misrepresentations. The changes:
· clarify how the duty of disclosure test is applied;
· in relation to eligible contracts of insurance, amend the law
to make the duty of disclosure apply on renewal of a contract
of insurance and remove the option for insurers to ask `catch
all' questions;
· amend the law regarding circumstances in which an insurer
must provide an insured with a reminder as to when their
duty of disclosure obligation applies; and
· in relation to contracts of life insurance, amend the law so
insurers must give a potential life insured, who is not the
insured under the relevant contract of insurance, notice of
their duty of disclosure.
Part 1 -- Insured's duty of disclosure
1.52 Sections 21 and 21A of the ICA are key provisions that govern
the insured's duty of disclosure obligations. Section 21 imposes a
requirement on an insured, before a contract is entered into, to disclose
various matters. What must be disclosed is determined by reference to a
test that contains both subjective elements (what the insured knows to be
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relevant to the insurer's decision) and objective elements (what a
reasonable person in the circumstances could be expected to know would
be relevant to the insurer's decision).
1.53 The mixed subjective/objective test has not been applied
consistently. To help clarify its interpretation, item 1 in Part 1 of
Schedule 4 expands the objective element of the test in paragraph 21(1)(b)
of the ICA to include two additional non-exclusive factors to which the
court may have regard when determining whether a reasonable person in
the circumstances could be expected to know a matter was relevant to the
decision of the insurer whether to enter the contract of insurance. The two
factors to which the court may have regard are:
· the nature and extent of the insurance cover to be provided
under the relevant contract of insurance; and
· the class of persons who would ordinarily be expected to
apply for cover of that type.
[Schedule 4, item 1, paragraph 21(1)(b)]
Part 2 -- Eligible contracts of insurance
1.54 Section 21A of the ICA supplements the general provisions
regarding the duty of disclosure in section 21, but only in relation to
certain `eligible contracts of insurance'. `Eligible contracts of insurance'
are prescribed in the Insurance Contracts Regulations 1985 (ICR). They
include contracts that provide cover commonly sought by individual
consumers, such as motor vehicle, home contents and travel insurance.
1.55 For an insurer to be able to rely on compliance by an insured
with their duty of disclosure, section 21A requires the insurer to ask the
insured specific questions that are relevant to the insurer's decision
whether to accept the risk and, if so, on what terms. However, it is also
currently permissible for the insurer to ask the insured a `catch all'
question, which requires an insured to disclose `exceptional
circumstances':
· that a reasonable person could be expected to know would be
relevant to the insurer's decision whether to accept the risk;
and
· which would be unreasonable for the insurer to ask a specific
question about (subparagraph 21A(4)(b)(iii)).
1.56 The current ability to ask `catch all' questions tends to
undermine the benefits for insureds of the framework for eligible contracts
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Insurance Contracts Amendment Bill 2013
of insurance. Insurers should be in a position to decide what matters are
material to their decision to provide eligible contracts of insurance and
formulate specific questions accordingly. In the event that an insurer is
unable to foresee a matter that is relevant to their decision whether to
accept the risk of a particular contract, then it is difficult to justify
expecting an unsophisticated insured to realise its relevance.
1.57 Section 21A only applies when a contract is first entered into --
it currently has no application to renewals (subsection 21A(1)). However,
for the purposes of other provisions, a renewal is treated as entry into a
new contract (subsection 11(9)). Accordingly, renewal of an eligible
contract of insurance would trigger the general duty of disclosure
provisions under section 21. This can be onerous for insureds in
comparison with, for example, the framework for eligible contracts under
section 21A.
1.58 The provisions in Part 2 of Schedule 4 are designed to:
· remove the ability of insurers to ask `catch all' questions in
relation to eligible contracts; and
· apply enhanced rules for the duty of disclosure on original
inception and renewal of eligible contracts.
1.59 In relation to the original entering into of an eligible contract of
insurance, new section 21A provides that the insurer may ask one or more
specific questions that are relevant to the decision whether to accept risk
and, if so, on what terms. If the insurer does not ask one or more
questions, the insurer is taken to have waived compliance with the duty of
disclosure. [Schedule 4, item 6, subsection 21A(1), 21A(2) and 21A(3)]
1.60 Further, if an insurer makes a request in relation to any other
matter outside the specific questions that would be covered by the duty of
disclosure the insured is taken to have waived compliance with the duty of
disclosure. [Schedule 4, item 6, subsection 21A(4)]
1.61 If an insurer asks one or more specific question and the insured
in response to those questions discloses each matter that is known to the
insured and a reasonable person in the circumstances should be expected
to have disclosed in answer to that question than the insured is taken to
have complied with the duty of disclosure in relation to the contract.
[Schedule 4, item 6, subsection 21A(5)]
· New section 21A is contained in Division 2 of Part 2, which
commences 30 months after the date of Royal Assent.
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Schedules to the Bill
1.62 To ensure that insurers can smoothly transition into the new
regime for renewals of eligible contracts of insurance, a transition period
has been provided. To facilitate the transitional period the amendments to
eligible contracts of insurance have been separated into two divisions.
Division 1 applies to amendments commencing from the date of Royal
Assent and Division 2 applies to amendments that are commencing
30 months after Royal Assent.
1.63 This enables an insurer to rely on new section 21B for the
period of 30 months from the date of Royal Assent provided certain
requirements. However, after the period of 30 months have expired, an
insurer will have to comply with the requirements of the ICA at that time.
1.64 New section 21A, as outlined above, is contained in Division 2
of Part 2, which commences 30 months after the date of Royal Assent.
1.65 New section 21B applies in relation to the renewal of an eligible
contract of insurance and commences on the date of Royal Assent. As
such, during the transition period in order to rely on section 21B an
insurer is required, before the contract is renewed, to have clearly
informed the insured in writing of the general nature and effect of
section 21B. This mirrors the requirement to inform insureds of
section 21B in new section 22 (if they seek to rely on section 21B) which
commences 30 months after Royal Assent in line with the commencement
of Division 2. [Schedule 4, item 4, subsection 21B(1) and 21B(2)]
1.66 New subsections 21B(3) to (6) deal with the position of the
insurer -- in particular in what circumstances they are taken to have
waived compliance with the duty of disclosure. In relation to the renewal
of an eligible contract of insurance, new section 21B(3) requires an
insurer wishing to rely on the insured's duty of disclosure to:
· ask specific questions, just as they may on the original
entering into of a contract; and/or
· provide the insured, prior to renewing the contract, with a
copy of any matters previously disclosed by the insured in
relation to the contract, and request the insured to disclose
any changes to those matters or to indicate if there are no
such changes.
[Schedule 4, Item 4, subsection 21B(1), Paragraph 21B(3)(a) and
Subparagraphs 21B(3)(b)(i) and 21B(3)(b)(ii)]
1.67 If the insurer does neither of those things, new
subsection 21B(3) provides that they are taken to have waived compliance
with the duty of disclosure in relation to the renewed contract (subject to
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Insurance Contracts Amendment Bill 2013
new subsection 21B(11), which deals with the effects of non-disclosures
and misrepresentations that occurred on previous renewals or original
inception). [Schedule 4, item 4, subsection 21B(4)]
1.68 New subsections 21B(5) and 21B(6) deal with `catch all'
questions. Asking `catch all' questions covering other matters in addition
to asking specific questions and/or seeking updates to information
previously disclosed will result in waiver of compliance with the duty of
disclosure with respect to the other matters. [Schedule 4, item 4,
subsections 21B(5) and 21B(6)]
1.69 New subsections 21B(7) to (11) deal with the position of the
insured -- in particular, in what circumstances they are taken to have
complied with the duty of disclosure.
1.70 Subsection 21B(7) deals with an insured who is only asked
specific questions. In that case, an insured is taken to have complied with
the duty of disclosure if they disclose, in response to each specific
question posed by the insurer, matters that are known to them and matters
that a reasonable person in the circumstances would be expected to have
disclosed in answer to the question. [Schedule 4, item 4, subsection 21B(7)]
1.71 Subsection 21B(8) deals with an insured who is only asked to
update matters previously disclosed. In that case, for the insured to be
taken to have complied with the duty of disclosure the insured must
disclose any change to the matter or inform the insurer if there is no
change. [Schedule 4, item 4, subsection 21B(8)]
1.72 Subsection 21B(9) deals with an insured who is both asked
specific questions and asked to update answers previously provided. In
that case, the insured must both disclose responses to the specific
questions (similar to the requirements of subsection 21B(7)) and advise
the insurer of any change/no change to the matters (similar to the
requirements of subsection 21B(8)). [Schedule 4, Item 3, Subsection 21B(9)]
1.73 Subsections 21B(7) to 21B(9) are all subject to new
subsection 21B(12), which provides that compliance by an insured with
the duty of disclosure on a renewal does not mean that a failure to comply
with the duty of disclosure on original inception or a previous renewal is
negated. [Schedule 4, item 4, subsection 21B(12)]
Example 1.2
For example, suppose when originally applying for a home buildings
policy, an insured breaches the duty of disclosure in relation to
providing information on the main construction materials used in the
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home. At a subsequent renewal, the insurer seeks updates to various
matters but does not ask the insured to update the information
previously provided on main construction materials, because they are
unlikely to change between inception and renewal. In such a case,
even though the insured may be taken to comply with the duty of
disclosure in respect of the renewed contract by providing all updates
as requested, the effect of subsection 21B(12) is that compliance with
the duty under the renewed contract does not operate to negate the
earlier failure.
1.74 The intention of new subsection 21B(12) is to permit insurers to
continue to rely on the accuracy, as at the time of inception or the
previous renewal, of matters disclosed on inception and previous
renewals. Otherwise, insurers seeking to rely on any information
previously provided by an insured (such as, for example, what a home is
constructed of) would need to seek updates to every such matter at every
renewal, which would be onerous and time consuming for both insurers
and insureds.
1.75 For clarity, the rule in subsection 21B(12) should not be taken to
imply that an insured who has complied with the duty of disclosure
previously is under a continuing obligation to update matters that have
changed at renewal, unless specifically requested to do so. If an insurer
wishes to ensure that information is updated at renewal, they will need to
either ask the insured a specific question regarding the matter, or ask the
insured to update the information previously provided.
1.76 Some insureds may not respond to a request to update matters
previously provided, but nevertheless pay the renewal premium. If an
insurer seeks an update to a matters previously provided but the insured
provides no response before the contract is renewed, then new
subsection 21B(10) operates so that the insured is taken to have advised
the insurer that there is no change to the matter. [Schedule 4, item 4,
subsection 21B(10)]
1.77 If an insurer gives a copy of any matter previously disclosed by
the insured and makes a request in accordance with new
paragraph 21B(3)(b) and before the contract is renewed, the insured
informs the insurer under new subsections 21B(8) or 21B(9), or is taken to
have informed the insurer under subsection 21B(10), that there is no
change to the matter the provisions of subsections 21(3) and 27 of the ICA
will not apply. [Schedule 4,item 4, subsection 21B(11)]
1.78 As such, the application of part 2 provides that section 21B
commences from the date of Royal Assent. However, for the period of
30 months from commencement (the transitional period) section 21B will
only be able to be relied on by an insurer if the insurer clearly informs the
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Insurance Contracts Amendment Bill 2013
insured of the general nature and application of the duty of disclosure (in
accordance with section 22) and of the effect of the new 21B before the
contracts are renewed.
Saving of regulations
1.79 Regulations made for the purpose of the definition of `eligible
contract of insurance' in current subsection 21A(9), are taken as if they
had been made for the definition of `eligible contract of insurance' (as
inserted in subsection 21A(6)). By operation of item 3 in Part 2 of
Schedule 4, the definition of `eligible contract of insurance' is inserted in
subsection 21A(6) of the ICA. [Schedule 4, Item 5]
Part 3 -- Insurers' duty to inform of duty of disclosure
1.80 The insured has a duty of disclosure until the time at which the
relevant contract of insurance is entered into. In normal circumstances,
this presents no difficulty because the insured provides information to the
insurer a short time before the contract begins. This is not always the
case.
1.81 In some instances, particularly where long term contracts of life
insurance are involved, there may be a significant time lag (sometimes
months) between the time a prospective insured submits information to an
insurer (usually when making an application) and the time the policy is
actually issued. During this period, circumstances may change, or events
may occur, that need to be disclosed to the insurer in order for the insured
to comply with the duty of disclosure.
1.82 If the insured fails to disclose those circumstances or events
before the contract is entered into, then any claim they later make could be
at risk due to their failure to comply with the duty of disclosure. The
Review Panel recommended, in order to minimise the possibility of harsh
outcomes, that prospective insureds should be reminded that the duty of
disclosure extends until the time the relevant policy is entered into.
1.83 Current subsection 22(1) of the ICA requires insurers to notify
insureds about the duty of disclosure any time `before the contract is
entered into'.
1.84 Section 22 of the ICA has been refined to provide that:
· the insurer must clearly inform the insured of the general
nature and effect of the duty of disclosure, and where
relevant, the general nature and effect of sections 21A or
21B.
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Schedules to the Bill
- subsection 22(1) also makes it clear that any notification
given to the insured pursuant to the section should explain
that the duty of disclosure obligation applies until the time
that the proposed contract is entered into.
[Schedule 4, item 12, subsection 22(1)]
· insurers are required to inform proposed life insureds that
they have a duty of disclosure. This includes information on
the effect of proposed new section 31A (see below).
[Schedule 4, item 12, subsection 22(2)]
· where the insurer's acceptance, or counter-offer, in relation
to the proposed contract of insurance, is made more than
two months after the insured's most recent disclosure for the
purposes of complying with their duty of disclosure, then
along with the acceptance or counter-offer, the insurer must
also provide the insured with a reminder that the duty of
disclosure applies until the proposed contract (or, in the case
of a counter-offer, the other contract) is entered into.
- The additional reminder requirement imposed by new
subsection 22(3) is not extended to a life insured, unless
the life insured is also the contracting insured.
- The addition of this reminder requirement in cases where
there is a significant delay between the initial disclosure
and the contract commencing is intended to promote
disclosures being made current as at the contract date, so
that the insurer is fully informed, and there can be an early
renegotiation of the contract if necessary.
[Schedule 4, item 12, subsection 22(3)]
· the form of writing used to inform a person of the matters
referred to in new subsection 22(1), and also for the reminder
notice referred to in new subsection 22(3), may be in
accordance with the prescribed form, where the regulations
prescribe a form of writing to be used for the purposes of
new section 22.
[Schedule 4, item 12, subsection 22(4)]
· an insurer that fails to comply with new subsection 22(1)
and, if applicable, new subsection 22(2) will be precluded
from exercising a right in respect of a failure by the insured
to comply with their duty of disclosure under the contract,
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Insurance Contracts Amendment Bill 2013
unless the particular failure is fraudulent. This is consistent
with the current position in respect of insureds.
[Schedule 4, item 12, subsection 22(5)]
· with an insurer that fails to comply with new
subsection 22(3), which is the provision requiring a reminder
notice in cases of delay between initial disclosure and the
contract commencing. In those circumstances, the insurer is
precluded from exercising a right in respect of a failure to
disclose any `new matter', defined as a matter that the
insured first become aware of after their most recent
disclosure (and which, therefore, may not have been
disclosed as a result of the failure to provide the reminder
notice).
[Schedule 4, item 12, subsections 22(6) and 22(7)]
1.85 Section 22 (in the case of both general and life insurance) and
section 40 (in the case of general insurance) will not require an insurer to
give information to the insured at or before a variation of the relevant
contract of insurance, except where:
· the variation is involved in a renewal, extension or
reinstatement of the contract;
· if the varied contract will provide a kind of insurance cover
that was not provided by the contract immediately before the
variation; or
· in the case of variation of a contract of life insurance if the
variation will, increase a sum insured in respect of the
insured.
provided the variation was not an automatic variation but required express
agreement between the insurer and the insured before the contract was
varied. [Schedule 4, item 11, subsection 11(10)]
1.86 Life insurance contracts may contain some common variations,
such as consumer price index increases, that are normally contained
within the contract, as such these automatic variations would not (in a
practical sense) be considered to be variations to which the legislation
would apply. Therefore to ensure automatic variations are not captured by
section 11(9) of ICA, section 11(10) has been amended and new
section 11(10A) has been inserted to ensure that if agreement between the
insurer and the insured is not required in respect to that variation before a
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contract is entered into, that variation (automatic variation) is not
considered to be a variation for the purposes of the application of the ICA.
· Automatic variations do not affect the application of the
measures in the Bill relating to variations in respect to life
insurance contracts.
1.87 The definition of a `life insured' includes a proposed life
insured. [Schedule 4, item 9, subsection 11(1)]
Part 4 -- Non disclosure by life insured
1.88 Contracts of life insurance are often entered into by one person
to cover the life of another. A life insured under a contract of insurance
may include persons who are not the insured and, therefore, not subject to
duty of disclosure obligations under current law. Although not a
contracting party, the person whose life is proposed to be insured (known
as the `life insured') will usually provide the insurer with information
about matters such as their state of health, in order to assist the insurer to
make a decision about whether, and on what terms, to issue the policy.
1.89 Section 25 of the ICA provides that if, during the negotiations
on a life insurance contract, a prospective life insured makes a
misrepresentation, the ICA takes effect as if the misrepresentation has
been made by the contracting insured. However, the existing wording of
section 25 only extends to misrepresentations.
1.90 Non-disclosure can be similar in result to misrepresentation, in
terms of the potential detrimental impact on an insurer's decision to enter
into the contract.
1.91 Accordingly, new section 31A has been inserted into the ICA.
Section 31A applies in relation to a contract of life insurance under which
a person (other than the insured) would become a life insured. [Schedule 4,
item 14, subsection 31A(1)]
1.92 Section 31A is similar in its effect to section 25, except that it
covers non-disclosures by life insureds rather than misrepresentations
made by them. The life insured's duty of disclosure under new
section 31A is similar to that applying to insureds under section 21, except
any non-disclosure by a life insured is imputed to the insured. [Schedule 4,
item 14, subsection 31A (2)]
1.93 Like the existing duty of disclosure under section 21 for
insureds, there is an exception applied for non-disclosure of matters that
diminish the risk, are common knowledge, that the insurer knows or ought
31
Insurance Contracts Amendment Bill 2013
to know in the ordinary course of its business, or for which compliance
with the duty is waived by the insurer. [Schedule 4, item 14, subsection 31A(3)]
Application and transitional provisions
1.94 The changes made by Schedule 4 will require insurers to adjust
their various business practices. This will take time to implement.
Accordingly, the commencement of Schedule 4 is generally delayed by
30 months from Royal Assent in order to allow insurers time to implement
the necessary changes to their systems and documents as required.
Part 1 -- Insured's duty of disclosure
1.95 Item 2 of Schedule 4 of the Bill provides that the amendment in
Part 1 of Schedule 4 applies as follows:
· to a contract of insurance that was originally entered into
after the commencement of item 2;
· to a contract of general insurance that was originally entered
into before the commencement of item 2 and is renewed after
that commencement; and
· if
- the contract is a contract of life insurance that was
originally entered into before the commencement of this
item and is varied after that commencement to increase a
sum insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
- then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 6 and the amendments apply to
the contract to the extent of the variation.
1.96 By operation of clause 2, item 2 of Schedule 4 commences on
the day after the end of the period of 30 months beginning on the day the
Act receives Royal Assent.
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Schedules to the Bill
Part 2 -- Eligible contracts of insurance
1.97 Item 7 of Schedule 4 as substituted by item 6, applies to an
eligible contract of insurance that is originally entered into after the
commencement of that item.
1.98 By operation of clause 2, Division 1of Part 2 of Schedule 4
commences on the date of Royal Assent. By operation of clause 2,
Division 2 of Part 2 of Schedule 4 commences on the day after the end of
the period of 30 months beginning on the day the Act receives the Royal
Assent.
Part 3 -- Insurers' duty to inform of duty of disclosure
1.99 Item 13 of Schedule 4 of the Bill provides that the amendments
in Part 3 of Schedule apply to a contract of insurance whether entered into
after commencement of item 13, and to a contract of insurance that was
originally entered into before commencement of item 9 that is renewed,
extended, varied or reinstated after that commencement.
1.100 By operation of clause 2, item 13 of Schedule 4 commences on
the day after the end of the period of 30 months beginning on the day the
Act receives the Royal Assent.
Part 4 -- Non-disclosure by life insured
1.101 Item 15 of Schedule 4 provides that the amendment made by
Part 4 of Schedule 4 applies as follows:
· to a contract of life insurance that was originally entered into
after the commencement of item 15; and
· if
- the contract is a contract of life insurance that was
originally entered into before the commencement of this
item and is varied after that commencement to increase a
sum insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
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Insurance Contracts Amendment Bill 2013
commencement of item 6 and the amendments apply to
the contract to the extent of the variation.
1.102 By operation of clause 2, item 15 of Schedule 4 commences on
the day after the end of the period of 30 months beginning on the day the
Act receives the Royal Assent.
Schedule 5 -- Remedies of insurers: life insurance contracts
1.103 Schedule 5 amends the way in which the ICA deals with
remedies for life insurers in cases of misrepresentation or non-disclosure
by insureds prior to entry into the contract of life insurance. The
amendments, which are designed to make the remedies more flexible and
tailored than those that are currently available, apply to:
· contracts of life insurance that provide two or more kinds of
insurance cover, or a single kind of cover that is provided on
different terms (for example, an element that is underwritten
and another element that is not) or cover for two or more life
insureds;
· allow the remedies to be applied to each different element of
a bundled life insurance contract as if each element or aspect
were a separate policy;
· introduce a distinction between the remedies applying to
different forms of life insurance cover, so that the remedies
applicable under section 29 would only apply to `traditional'
life insurance policies (that is, life insurance contracts with a
surrender value or that provide cover in respect of death) and
remedies similar to the remedies applying to general
insurance contracts would apply to all other forms of life
insurance, that is, contracts other than contracts with a
surrender value or providing death cover; and
· expand the range of remedies that are available to a life
insurer in cases where the misrepresentation involves a
misstatement of the date of birth of a life insured under the
contract.
Part 1 -- `Unbundling' of contracts
1.104 Contracts of life insurance often `bundle' different types of
protection against more than one type of insurable event resulting from
death, sickness or accident in the one contract. An application seeking
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cover for each type of insurable event will be `unbundled' for separate
consideration by an insurer in relation to each type of risk, and different
factors will be taken into account as part of the underwriting process.
1.105 For example, an applicant may present with a family medical
history of a condition that is well recognised as a risk factor in the
development of a debilitating disease, but a disease that is unlikely to
result in premature death. In those circumstances, the insurer is likely to
accept a death cover component without a loading or exclusion, but the
income protection cover would be offered with a modification to the
policy terms or with a premium loading, in response to the additional risk
caused by the family history of the condition.
1.106 Any misrepresentation or non-disclosure that affects one aspect
of the insurance cover may not be relevant to the other. However, as
currently drafted, the remedies that are available, such as for avoidance or
variation of the contract, must be applied to the contract as a whole. This
can be to the significant disadvantage of an insured and unnecessarily
restrict the remedial options for an insurer.
1.107 New section 27A, provides that if a contract of life insurance
contains two or more groups of provisions, the remedies in Division 3 of
Part IV for misrepresentation and non-disclosure apply to each group of
provisions, as if the groups of provisions were a separate contract of life
insurance. Therefore, if a contract contains cover in respect of death and
cover in respect of Total and Permanent Disability (`TPD'), the remedies
for misrepresentation or non-disclosure would apply to each type of cover,
separately, as required.
1.108 Further, if a contract of life insurance contains two or more
groups of provisions and the contract also includes other provisions
(related provisions) that affect the operation of those groups of provisions
than the related provisions are taken to be included with each group of
provisions for the purpose of forming one or more separate contract of life
insurance. [Schedule 5, item 1, subsections 27A(1) and 27A(2)]
1.109 This provides that when unbundling insurance contracts under
section 27A common provisions contained in the contract can be taken to
be included with any number of other groups of provisions to constitute
standalone contracts for applying remedies under the ICA.
1.110 Similarly, new section 27A also provides that if a contract of life
insurance provides insurance cover in relation to 2 or more life insureds,
the insurance cover provided in relation to each type of life insured is
taken to be provided by separate contracts of life insurance. [Schedule 5,
item 1, subsection 27A(3)]
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Insurance Contracts Amendment Bill 2013
1.111 Finally, new section 72A also provides that where a life
insurance contract contains an element of cover that is underwritten on
particular terms and another element that is either not underwritten or is
underwritten on different terms, the elements are to be regarded as
separate types of cover for the purposes of unbundling in section 27A.
1.112 The intention of that provision is to permit unbundling under
section 27A in circumstances such as where a person has cover under a
group life scheme that is automatically provided to all members of the
scheme and which is either not underwritten at all, or underwritten by, for
example, a short-form questionnaire, in addition to additional `top up'
cover that is underwritten through, for example, a comprehensive
questionnaire and full medical examination. This allows any remedies in
respect of non-disclosure and misrepresentation in relation to obtaining
the top-up cover to be utilised by a life insurer in relation to the top-up
only, without affecting the person's automatic cover. [Schedule 5, item 1,
subsection 27A(4)]
Part 2 -- Remedies for non-disclosure and misrepresentation
1.113 The current section 29 of the ICA currently contains remedies
that are available to life insurers when an insured has made a
misrepresentation or failed to comply with the duty of disclosure.. Whilst
suitable for `traditional' kinds of life insurance policy (that is, those with a
surrender value or providing death cover), the current remedies are not
well suited to many types of life insurance that are now made available
(for example, short-term cover for income protection or total and
permanent disability). In many cases, misrepresentation or failure to
comply with the duty of disclosure in respect of non-traditional types of
life insurance policy would be better dealt with using remedies akin to
those available for general insurance policies.
1.114 Surrender value refers to the cash amount payable by the life
insurance company to the policy owner in the event a policy is voluntarily
terminated before its maturity or the death of the insured person. They are
common in traditional `whole of life' and `endowment' investment-style
insurance policies. LIA sets the minimum standard for the calculation of
a surrender value.
1.115 To provide appropriate outcomes in respect to non-traditional
life insurance contracts, section 29 has been amended so that an insurer
will continue to be able to avoid a life insurance contract within the first
three years. However, an insurer can at any time vary a life insurance
contract in accordance with the formula contained in the current
subsection 29(4). [Schedule 5, item 8, section 29(4)]
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1.116 In addition, if the insurer does not avoid the contract in the first
three years under subsection 29(3) or vary the contract in accordance with
the formula in subsection 29(4), the insurer may vary the contract to place
them in the position they would have been had the misrepresentation or
failure to comply with the duty of disclosure had not occurred. The ability
to vary the contract in this way is only available if the varied position of
the insurer is not inconsistent with the position in which other reasonable
prudent insurers would have been in respect to similar contracts of
insurance if:
· they had entered into a similar contracts of life insurance to
the relevant contract; and
· there had been no failure to comply with the duty of
disclosure and no misrepresentation, by the insureds under
the similar contracts before they were entered into.
[Schedule 5, item 10, subsections 29(6) and 29(7)]
1.117 A contract of life insurance is similar to another contract of life
insurance if the similar contract provides insurance cover that is the same
as, or similar to, the kind of insurance cover provided by the relevant
contract and the similar contract was entered into at, or close to, the time
the relevant contract was entered into. [Schedule 5, item 10, subsection 29(8)]
1.118 When an insurer is endeavouring to establish whether the
variation is or is not inconsistent with how other reasonable prudent
insurers would have varied a similar contract, an insurer would generally
be required to seek a view from one or more third parties as to what other
reasonable or prudent insurers would have acted. These third parties may
include but would not be limited to underwriters.
· Underwriters normally have a good understanding of the
development of life insurance products in the market place,
this understanding would enable them to make judgements
and decisions based on what a reasonable and prudent insurer
would have been likely to have done at the time the relevant
contract was entered into.
1.119 The current treatment of traditional life insurance contracts is
not affected as a result of the changes in the Bill. Therefore traditional
life contracts will still be able to avoid a contract under subsection 29(2)
and subsection (3) in the first three years or can be varied the by
substituting for the sum insured an amount as worked out under the
formula in section 29(4), provided the insurer provides notice in writing to
the insured before the expiration of three years after the contract was
entered into. [Schedule 5, item 10, subsection 29(10)]
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Insurance Contracts Amendment Bill 2013
Part 3 -- Remedy for misstatement of date of birth
1.120 Section 30 of the ICA contains specific remedies for life insurers
in circumstances where the date of birth of one or more life insureds was
incorrectly stated at the time the contract was entered into. It covers
situations where age was understated or overstated, and allows the insurer,
when the true date of birth is known, to adjust the sum insured or reduce
the premium payable.
1.121 To ensure appropriate outcomes are achieved, for an insurer, in
circumstances addressed by section 30 an insurer may vary a contract of
insurance by changing its expiration date to a date calculated on the basis
of the correct date of birth. This means that neither the amount insured
nor the premium payable needs to be modified. [Schedule 5, item 12,
subsection 30(3A)]
1.122 A variation of the contract as permitted under the new
subsection 30(3A) is taken to have occurred from the time the contract
was entered into. This is in accordance with the rule regarding the
existing remedies in subsection 30(2). [Schedule 5, item 13, subsection 30(4)]
Part 4 -- Cancellation of contracts
1.123 Section 60 of the ICA provides the circumstances in which an
insurer may cancel a contract of general insurance. There is no section 60
equivalent for contracts of life insurance, and no provision in the ICA that
allows a life insurer to cancel a policy of life insurance for any reason.
Cancellation of life insurance contracts for non-payment of premiums
(`forfeiture') is regulated by the LIA. Rights of cancellation for other
reasons (for example, a fraudulent claim) is currently left to the common
law.
1.124 In response to court decisions regarding rights of cancellation
regarding life insurance contracts under the common law, the Bill will
introduce a statutory framework for life insurance cancellation in respect
to fraudulent claims similar to that applying to general insurance.
1.125 As such, an insurer under a contract of life insurance may cancel
the contract if the insured has made a fraudulent claim under the first
contract or another contract with the insurer that provides insurance cover
during any part of the period in which the first contract provides insurance
cover. [Schedule 5, item 15, subsection 59A(1)]
1.126 The ability for an insurer to cancel contracts where a fraudulent
claim has been made under that contract or another contract is provided on
the basis that if a fraudulent claim occurred, the relationship between the
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insurer and the insured could have soured to the point that the insurer no
longer wants to cover the insured under any terms.
1.127 However:
· If an insurer has cancelled a contract of life insurance
because of a fraudulent claim, in any proceedings in relation
to the claim, the court may if it would be harsh or unfair not
to do so, disregard the cancellation and order the insurer to
pay, in relation to the claim, any amount the court considers
just an equitable in the circumstances and order the insurer to
reinstate the contract. [Schedule 5, item 15, subsection 59A(2)]
· If an insurer has cancelled a contract because of a fraudulent
claim by the insured under another contract of insurance, the
court may if it would be harsh or unfair not to do so, order
the insurer to pay, in relation to the claim, any amount the
court considers just an equitable in the circumstances and
order the insurer to reinstate the cancelled contract.
[Schedule 5, item 15, subsection 59A(3)]
· If an insurer has cancelled a contract because of a fraudulent
claim, then, in any proceedings in relation to the cancellation,
the court may if it would be harsh or unfair not to do so,
reinstate the cancelled contract. [Schedule 5, item 15,
subsection 59A(4)]
1.128 The court when exercising these powers must have regard to the
need to deter fraudulent conduct in relation to insurance and may also
have regard to any other matter. [Schedule 5, item 15, subsection 59A(5)]
1.129 Current section 63 prohibits an insurer from cancelling a
contract of general insurance and any purported cancellation in
contravention of section 63 is void.
1.130 Section 63 has been changed to provide for a mirror
contravention in relation to a purported cancellation (contrary to
section 63) of a contract of life insurance. Accordingly, a cancellation of
a life insurance contract (other than under the LIA) will have to be
effected in accordance with the requirements of section 59A. This change
does not affect the notice requirements under existing section 59.
[Schedule 5, item 16, section 63]
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Insurance Contracts Amendment Bill 2013
Application and transitional provisions
Part 1 -- `Unbundling' of contracts
1.131 The amendments made by Part 1 of Schedule 5 apply to a
contract of life insurance whether originally entered into before or after
commencement of item 2. However, the application of item 2 does not
affect any proceedings in progress at the commencement of section 27A
in relation to a contract of insurance, or any appeal in relation to such
proceedings.
1.132 By operation of clause 2, item 3 of Schedule 5 commences on
the day the Act receives the Royal Assent.
Part 2 -- Remedies for non-disclosure and misrepresentation
1.133 The amendments made by Part 2 of Schedule 5 apply as follows:
· to a contract of life insurance that was originally entered into
after the commencement of item 9; and
· to a contract of general insurance that was originally entered
into before the commencement of item 6 and is renewed after
that commencement; and
· if:
- the contract is a contract of life insurance that was
originally entered into before the commencement of this
item and is varied after that commencement to increase a
sum insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 6 and the amendments apply to
the contract to the extent of the variation.
1.134 By operation of clause 2, item 11 of Schedule 5 commences on
the day after the end of the period of 12 months beginning on the day the
Act receives the Royal Assent.
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Schedules to the Bill
Part 3 -- Remedy for misstatement of date of birth
1.135 By operation of item 14 in Part 3, the amendments made by
Part 3 of Schedule 5apply as follows:
· to a contract of life insurance that was originally entered into
after the commencement of item 12; and
· if:
- the contract is a contract of life insurance that was
originally entered into before the commencement of this
item and is varied after that commencement to increase a
sum insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 6 and the amendments apply to
the contract to the extent of the variation.
By operation of clause 2, item 14 of Schedule 5 commences on the day
the Act receives the Royal Assent.
Part 4 -- Cancellation of contracts
1.136 The amendments made by Part 4 of Schedule 5 apply to a
contract of life insurance that was originally entered into after the
commencement of item 17.
1.137 The amendment to section 63 made by item 16 does not alter the
law applying to general insurance, so that amendment applies to general
insurance contracts entered into before or after the commencement of
item 17.
1.138 By operation of clause 2, item 17 of Schedule 5 commences on
the day the Act receives the Royal Assent.
Schedule 6 -- Third parties
1.139 Third parties may be persons that are specified in a contract of
insurance (whether by name or otherwise) as being persons to whom
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Insurance Contracts Amendment Bill 2013
cover provided by the contract extends (`third party beneficiaries') or they
may be third parties against whose claims an insured or third party
beneficiary has insurance cover. Schedule 6 contains a series of
amendments designed to alter the rights and obligations of third parties
under the ICA.
Part 1 -- Requests by third party beneficiaries to insurers for
information
1.140 Under current section 41 of the ICA, an insured that has made a
claim under a contract of liability insurance may require the insurer to
inform them in writing:
· whether the insurer admits that the contract applies to the
claim; and
· if the insurer so admits, whether the insurer proposes to
conduct, on behalf of the insured, the negotiations and any
legal proceedings in respect of the claim made against the
insured.
1.141 New section 41 is drafted in substantially the same terms as the
current section 41, except that it is extended to give third party
beneficiaries (as claimants) the same rights as insureds under the section.
[Schedule 6, item 1, section 41]
Part 2 -- Insurer's defences in actions by third party beneficiaries
1.142 Section 48 of the ICA deals with, amongst other things, the
defences available to a general insurer against a claim by a third party
beneficiary. Section 48AA makes similar provision regarding contracts of
life insurance offered in connection with Retirement Savings Accounts
(RSAs).
1.143 Subsections 48(1) and 48(2) have been refined so that they use
the term `third party beneficiary', now defined in section 11 (see item 1 in
Part 1 of Schedule 1). There are similar refinements to section 48AA.
[Schedule 6, items 4, 5, 9and 10, subsections 48(1), 48(2) 48AA(1) and 48AA(2)]
1.144 Section 48AA is worded similarly to section 48, except that it
deals with the defences a life insurer has against a claim by third party
beneficiaries in relation to a contract of life insurance taken out by an
RSA provider. To ensure greater consistency in the wording of
sections 48AA and 48 refinements have been made to paragraphs in both
sections. [Schedule 6, items 6 and 11, paragraphs 48(2)(a) and 48AA(2)(a)]
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Schedules to the Bill
1.145 There has been some doubt as to whether subsection 48(3), and
as a consequence subsection 48AA(3), allow for claims by third party
beneficiaries to be tainted by the wrongful conduct of an insured. There is
also doubt as to whether an insurer may raise pre-contractual conduct,
such as a breach of the duty of disclosure, in assessing a claim by a third
party beneficiary.
1.146 The intent of sections 48 and 48AA (as amended) is that third
party beneficiaries should be in no better position, in terms of their ability
to claim, than the insured. An insurer should be entitled to raise defences
relating to the conduct of an insured, including conduct occurring prior to
the time the contract was entered into.
1.147 To make it clear that, in defending an action by a third party
beneficiary:
· an insurer may raise defences relating to the conduct of the
insured; and
· the conduct that may be raised may have occurred either after
the contract was entered into or before (for example,
non-disclosure).
[Schedule 6, Items 7, 12and 13, subsections 48(3) and 48AA(3)]
Part 3 -- Rights and obligations of third party beneficiaries under life
insurance contracts
1.148 Section 48A of the ICA applies to contracts of life insurance that
are effected on the life of one person but expressed to be for the benefit of
another person (a third party beneficiary). As part of its review, the
Review Panel recommended a series of amendments be made to
section 48A in response to recent developments in the insurance industry.
1.149 To acknowledge these developments refinements have been
made to subsections 48A(1) and (2). These refinements:
· allow for circumstances in which a person whose life is
insured under a contract of life insurance may be a third party
beneficiary;
· ensure that a third party beneficiary who has a claim over
money payable under the contract of life insurance may bring
an action against the insurer in respect of the claim without
the intervention of the policyholder; and
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Insurance Contracts Amendment Bill 2013
· ensure that the third party beneficiary is capable of giving a
valid discharge to the insurer in relation to the insurer's
obligations in respect of the claim.
[Schedule 6, item 16, subsections 48A(1) and 48A(2)]
1.150 While a third party beneficiary has the right to recover from an
insurer any money that becomes payable under a contract of insurance, for
life insurance contracts maintained for the purposes of a superannuation or
retirement scheme, the payment of money under the contract or the
scheme is subject to the terms of the contract and the scheme and any
other relevant laws. [Schedule 6, item 16, subsections 48A(1A)]
Part 4 -- Rights of third party to recover against insurers
1.151 Section 51 of the ICA deals with the rights of third parties to
recover directly against an insurer in circumstances where the insured
under a contract of liability insurance is liable in damages to the third
party. The section provides that, where an insured has died or cannot be
found, the third party may bring an action against the insurer directly.
1.152 Section 51 has been expanded so that it not only covers liability
of an insured but also liability of a third party beneficiary. [Schedule 6,
items 19, 20 and 21, subsection 51(1) and 51(3) and paragraph 51(2)(b)]
Part 5 -- Representative actions by ASIC on behalf of third party
beneficiaries
1.153 Section 55A of the ICA permits ASIC, if it considers it to be in
the public's interest, to bring or continue actions against insurers on behalf
of one or more insureds in relation to certain breaches by the insurer of the
ICA.
1.154 Several refinements to section 55A have been made to extend
ASIC's powers to cover bringing or continuing actions against insurers on
behalf of third party beneficiaries as well as insureds. [Schedule 6, Items 23
to 28, subsections 55A(2) and 55A(3), paragraphs 55A(1)(b), 55A(1)(c), 55A(1)(d) and
55A(2)(b)]
Part 6 -- Non-disclosure or misrepresentation by members of group life
insurance schemes
1.155 Insurers normally have a remedy for non-disclosures and
misrepresentations made by insureds only prior to the time the contract
was entered into. However, in the case of group contracts of life
insurance that are taken out by, for example, superannuation trustees for
the benefit of all the scheme members, the contract date will often
pre-date the joining of the scheme by fund members. As a consequence,
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Schedules to the Bill
an insurer would ordinarily have no remedy for non-disclosure and
misrepresentation in relation to members who join a group scheme and
receive cover under the relevant contract of life insurance after the
contract date.
1.156 To deal with this situation, current section 32 of the ICA
provides that non-disclosures or misrepresentations made in respect of
scheme members of superannuation and retirement schemes are treated as
though the contract were an individual contract of life insurance that was
entered into at the time when the proposed member joined the scheme.
1.157 In some circumstances, individuals will join a superannuation
scheme but there will be some delay before life insurance cover they
acquire as part of joining that scheme is commenced. For example, a new
employee may join a superannuation scheme and superannuation
contributions may be made on their behalf, but before the insurer provides
life insurance cover, that employee must undergo a medical examination
and/or answer questions about their health.
1.158 In those circumstances, the existing section 32 would still deny
the insurer a remedy if non-disclosure or misrepresentation occurred
during the interim period, because under current paragraph 32(b), the
contract is taken to be entered into when the member joined the scheme.
1.159 New section 32 addresses this difficulty by providing that,
where there is a delay from the time of joining the scheme until the time
that cover is actually effected, the relevant contract of life insurance is
taken to have commenced (that is, to be `entered into') at the time the
proposed life insured became a life insured under the scheme, in other
words, at the time the life insurance cover under the scheme took effect in
relation to the member concerned. [Schedule 6, item 38, section 32]
1.160 There are, in addition to `blanket' contracts of life insurance
taken out in connection with a superannuation scheme, other
circumstances in which life insurance is taken out for a group of people,
many of whom may become eligible for cover after the contract date. For
example, contracts of life insurance for groups of people linked by a
common factor such as employees of a company, or a scheme unrelated to
employment such as membership of a health insurance scheme that offers
members optional life insurance cover. Those other contracts also present
a difficulty with the availability of insurer remedies for non-disclosure and
misrepresentation.
1.161 A broader term is to be introduced for the purposes of the new
section 32, namely, a `group life contract', which is defined to mean a
contract of life insurance that is maintained for the purpose of a
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Insurance Contracts Amendment Bill 2013
superannuation or retirement scheme, or another scheme (including one
not related to employment). [Schedule 6, item 31, subsection 11(1)]
1.162 The term `blanket superannuation contract' as defined in
subsection 4(2) of the ICA is replaced with the expression
`superannuation contract (other than an individual superannuation
contract)'.
1.163 Further, some consequential changes have been made to
subsection 11(4). [Schedule 6, Items 33 to 35 paragraphs 11(4)(a),11(4)(b) and
11(4)(c)]
1.164 To broaden the scope of operation of the provisions in
paragraph (b) of the definition of `proposal form' in subsection 11(1) and
in paragraphs 23(a) and 26(3)(a) to encompass other types of group life
schemes. The phase `superannuation or retirement scheme' has been
changed to `superannuation, retirement or other group life scheme'.
[Schedule 6, items 32, 36 and 37, subsection 11(1), paragraphs 23(a)and 26(3)(a)]
1.165 To correct a typographical error in section 32A, a comma has
been added to the correct location. [Schedule 6, item 39, section 32A]
Application and transitional provisions
Part 1 Requests by third party beneficiaries to insurers for information
1.166 Item 2 of Schedule 6 provides that the amendment applies to a
contract of liability insurance that was originally entered into after
commencement of item 2. The amendment also applies to a contract of
liability insurance that was originally entered into before the
commencement of item 2 and is renewed after that commencement.
1.167 By operation of clause 2, item 2 of Schedule 6 commences after
the end of the period of 12 months beginning on the day the Act receives
the Royal Assent.
Part 2- Insurers' defences in actions by third party beneficiaries
1.168 The amendments made by items 3 to 7 in Part 2 of Schedule 6
apply to a contract of general insurance originally entered into after the
commencement of sub item 14(1).
1.169 The amendments also apply to a contract of general insurance
that was originally entered into before the commencement of sub
item 14(1) and is renewed after that commencement.
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1.170 The amendments made by items 8 to 13 in Part 2 of Schedule 6
apply as follows:
· to a contract of life insurance that was originally entered into
after the commencement of sub item 14(2).
· if
- the contract is a contract of life insurance that was
originally entered into before commencement of sub
item 14(2) and is varied after that commencement to
increase a sum insured under the contract or provide one
or more additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of sub item 12(2) and the amendments
apply to the contract to the extent of the variation.
1.171 By operation of clause 2, item 14 of Schedule 6 commences at
the end of the period of 12 months beginning on the day the Act receives
the Royal Assent.
Part 3 -- Rights and obligations of third party beneficiaries under life
insurance contracts
1.172 The amendment in Part 3 of Schedule 6 applies as follows:
· to a contract of life insurance that was originally entered into
after the commencement of item 17.
· if
- the contract is a contract of life insurance that was
originally entered into before commencement of item 17
and is varied after that commencement to increase a sum
insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
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Insurance Contracts Amendment Bill 2013
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 17 and the amendments apply to
the contract to the extent of the variation.
1.173 By operation of clause 2, item 17 of Schedule 6 commences at
the end of the period of 12 months beginning on the day the Act receives
the Royal Assent.
Part 4 -- Rights of third party to recover against insurers
1.174 The amendments in Part 4 of Schedule 6 apply to a contract of
liability insurance originally entered into after the commencement of
item 18. The amendments also apply to a contract of liability insurance
that was originally entered into before the commencement of item 18 and
is renewed after that commencement.
1.175 By operation of clause 2, item 22 of Schedule 6 commences on
the day after the end of the period of 12 months beginning on the day the
Act receives the Royal Assent.
Part 5 -- Representative actions by ASIC on behalf of third party
beneficiaries
1.176 The amendments apply to contracts of insurance whether
originally entered into before or after the commencement of item 29.
1.177 By operation of clause 2, item 29 of Schedule 6 commences on
the day the Act receives the Royal Assent.
Part 6 -- Non-disclosure or misrepresentation by member of group life
insurance schemes
1.178 The amendments relating to replacement of the term `blanket
superannuation contract' by items 30, 33, 34, 35 and 39 apply to a
contract of life insurance whether originally entered into prior to, or
subsequent to, the commencement of item 40. The amendments made by
items 31, 32 and 36 to 38 apply as follows:
· to a contract of life insurance that is originally entered into
after the commencement of item40.
· if
- the contract is a contract of life insurance that was
originally entered into before commencement of item 40
and is varied after that commencement to increase a sum
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insured under the contract or provide one or more
additional kinds of cover;
- the variation was not an automatic variation but was
required to be expressly agreed between the insurer and
the insured before the contract was varied; and
then the contract is treated, to the extent of the variation,
as if it had been originally entered into after the
commencement of item 40 and the amendments apply to
the contract to the extent of the variation.
1.179 By operation of clause 2, item 40 of Schedule 6 commences on
the day after the end of the period of 12 months beginning on the day the
Act receives the Royal Assent.
Schedule 7 -- Subrogation
1.180 In the case of indemnity insurance, unless excluded by the terms
of the contract, there is a right for an insurer to bring an action in the name
of the insured (that is, the insurer is subrogated to the rights and remedies
of the insured in respect of the subject matter insured) to pursue any
claims the insured may have against third parties which have contributed
to a loss. So if, for example, an insurer pays a claim to an insured arising
from a motor vehicle collision, the insurer may, in the name of the
insured, pursue actions against the person who caused the collision.
1.181 The amount recovered from the third party is often not equal to
the amount the insurer has paid to the insured in respect of the loss. The
costs of the action, and any difference between the amount of the loss and
the amount insured, must also be considered when deciding to whom any
recovered moneys should be paid.
1.182 Section 67 of the ICA provides rules for how moneys recovered
from a third party by an insurer under a right of subrogation should be
divided between the insurer and the insured. The Review Panel listed a
number of criticisms of section 67 in its review.
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Insurance Contracts Amendment Bill 2013
1.184 To address some of the difficulties experienced, existing
section 67 has been replaced with new section 67. New section 67
contains rules that are intended to provide for the division of any proceeds
from a recovery action. This provision is based on the following
principles:
· First, the party taking the recovery action should be entitled
to reimbursement for the administrative and legal costs of
that action from any moneys recovered. If both parties
contribute, they both should be reimbursed (see new
subsection 67(4)), or share the reimbursement pro rata if
there is insufficient recovered money to reimburse both in
full (see new subsection 67(5)).
· Secondly, there are three possibilities for distribution of
remaining sums depending on who has funded the recovery
action.
- If the insurer funds the recovery action pursuant to its
rights of subrogation, it is entitled to an amount equal to
the amount that it has paid to the insured under the
contract of insurance. The insured is then entitled to any
further amount necessary for it to ultimately recover from
the insurer under the contract of insurance or the third
party in the recovery action, or both in combination, the
full amount of its loss (not just the measure of indemnity
under the policy). This entitlement does not diminish the
insured's right to receive payment under the policy in a
prompt manner in accordance with the terms of the
contract and the insurer's obligation to pay promptly,
subject to any contrary agreement between the parties
(see new subsection 67(2)).
- If the insured funds the recovery action, the order in the
preceding paragraph is reversed. The insured is entitled to
retain an amount so that the total that it receives from the
recovery action and under the policy is equal to its total
loss. The insurer is entitled at this point to an amount
equal to the amount that it has paid to the insured under
the insurance contract (see new subsection 67(3)).
- If the action is funded jointly by both the insurer and
insured, they are both entitled to the same amounts as
referred to in (a) and (b) above pro rata if there are
insufficient funds to reimburse them in full (see new
subsection 67(5)).
50
Schedules to the Bill
· Thirdly, any excess or windfall recovery is then to be
distributed to both parties in the same proportions as they
contributed to the administrative and legal costs of the
recovery action (see new subsection 67(7)). Through this
process, the party (or parties) that bore most of the cost and
risk of the recovery action should receive the benefit of the
windfall. Most commonly this would be the insurer -- but
the insurer only gets the benefit after the insured has received
full recovery for all its losses, because the insured would
have been entitled to these losses as damages from the third
party, whether or not there was any insurance in place.
· Finally, any separate or identifiable component in respect of
interest should be divided fairly between the parties, having
regard to the amounts that each has recovered and the periods
of time for which each party lost the use of their funds.
[Schedule 7, item 2, section 67]
1.185 New subsection 67(9) provides that the rights of the insurer and
insured (or third party beneficiary) under section 67 may be modified by
the terms of the relevant insurance contract.
1.186 The Review Panel had also recommended, for the purposes of
the new section 67, that third party beneficiaries should be treated as
insureds. Accordingly, the same principles of subrogation apply whether
the person being indemnified is the insured party or a third party
beneficiary to whom the indemnity cover extends. [Schedule 7, item 1,
section 64]
Application and transitional provisions
1.187 The amendments made by Schedule 7 apply to a contract of
general insurance that was originally entered into after the commencement
of item 3. Schedule 7 also applies to a contract of general insurance that
was originally entered into before the commencement of item 3 of
Schedule 7, and is renewed after that commencement.
1.188 By operation of clause 2, item 3 of Schedule 7 commences on
the day after the end of the period of 6 months beginning on the day the
Act receives the Royal Assent.
51
Chapter 2
Regulation impact statement
Background
Definition -- Insurance
2.1 Insurance plays a vital role in Australia's economy. Individuals,
groups, businesses and governments are able to participate in social and
economic activities that they otherwise would not be able to engage in by
using insurance as a means to price and transfer risks associated with
those activities.
2.2 Insurance is created by an insurer and an insured entering into a
contract. Under the contract of insurance, a person facing a risk of loss
(the insured) from a possible occurrence pays a contribution known as a
premium to an insurer who, in return, promises to compensate the insured
in proportion to their loss should the occurrence eventuate.
There are four main classes of insurance:
· personal -- provides benefits if the insured person dies or is
disabled by accident or sickness;
· property -- provides against loss of or damage to insured
property such as buildings or their contents, motor vehicles,
ships, cargoes or any other class of property;
· liability -- provides against legal liability to pay
compensation for injury or damage for which the relevant
insured may be sued by some other person; and
· monetary loss -- provides against monetary losses due to, for
example, embezzlement by employees or failure of a debtor
to repay a loan.
2.3 Personal insurance equates to life insurance. The remaining
three classes of insurance are categorised as general insurance.
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Insurance Contracts Amendment Bill 2013
Profile of the Australian insurance market
General insurance
2.4 In the financial years ending in 2008-09, there were 133 private
sector insurers accepting general insurance business (that is insurance
other than life and health insurance). Of these, 116 were direct insurers
and 17 were reinsurers. Private insurers reported gross premium revenue
of $31.0 billion. Direct insurers reported gross premium revenue of
$29.2 billion, making up 94.2 per cent of the total. Reinsurers accounted
for the remaining 5.8 per cent of the total, or $1.8 billion. At
22.8 per cent, the domestic motor vehicle class of business accounted for
the largest percentage of total direct gross premium revenue.
2.5 In the financial years ending in 2008-09, private insurers
reported total assets of $94.2 billion, an increase of $3.1 billion
(3.4 per cent) on the previous year. Of these assets, $84.8 billion
(90 per cent) are held by direct insurers. Industry total liabilities were
$65.6 billion, of which $59.2 billion (89.9 per cent) are held by direct
insurers.
Life insurance
2.6 As at September 2009, there were 32 life insurance companies
operating in Australia. They managed $239.3 billion in assets and
generated $41 billion in net premiums for the twelve months ended
September 2009.
2.7 The life insurance market is split into `superannuation' and
`ordinary', defined by the source of business. In recent years, the
superannuation business has become the main focus of life insurers,
representing 91.1 per cent of premiums relating to Australian
policyholders for the year to 31 March 2008.
2.8 Traditional life insurance products (such as endowment policies,
whole of life policies and level premium insurance policies) have largely
been replaced by more modern products, such as term insurance, as these
products reduce the longevity risk of insurers and provide flexibility for
consumers.
Insurance Contracts Act 1984
2.9 The law governing contracts of insurance has a direct influence
on the effectiveness and efficiency of the insurance market in Australia.
For some time, the law concerning contracts of insurance was derived
from a combination of common law principles and statutes issued by a
variety of parliaments.
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Regulation impact statement
2.10 In 1982, the Australian Law Reform Commission (ALRC)
released Report No 20, Insurance Contracts (ALRC 20), which made a
number of detailed recommendations for reform of the law concerning
contracts of insurance. That report led to the enactment by the Australian
Parliament of the Insurance Contracts Act 1984 (ICA), which came into
operation on 1 July 1986. The ICA provisions were based largely on the
ALRC's recommendations.
Problem identification
2.11 The ALRC identified a series of key principles in ALRC 20 that
it considered should be the foundation of the law concerning contracts of
insurance. Those principles, outlined below, addressed some issues and
deficiencies that had affected the efficiency of the former law.
· Uniformity and modernisation -- The law should, as far as
possible, be uniform throughout Australia. The ALRC noted
the law should remove uncertainties and specify acceptable
rules for the modern relationship of the insurer and insured.
· Assurance of fair competition -- The law should ensure that
freedom of contract and promotion of competition, so far as
compatible with principles of equity and fairness to the
insuring public, are basic goals.
· Promotion of informed choice of insurance -- As far as
practicable, insureds should receive sufficient information
and be otherwise protected by the law so that they may
choose the insurance policy best suited to their needs. The
ALRC noted that a lack of information concerning contracts
of insurance and the different types of cover available was a
serious problem for consumers.
· Principle of utmost good faith -- The principle of utmost
good faith, which has traditionally underlined contracts of
insurance, should remain the touchstone of contracts of
insurance.
· Need to avoid unfair burdens -- The remedies available to
insurers in respect of misrepresentation, non-disclosure and
breach of contract should not place a burden on the insured
that is vastly disproportionate to the loss the insured's actions
caused to the insurer.
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Insurance Contracts Amendment Bill 2013
· Need to avoid catastrophic losses -- As far as practicable,
insureds that might otherwise unintentionally be exposed to
the risk of catastrophic losses should be protected against
losing insurance cover through no fault of their own.
2.12 The ICA was designed to give effect to those principles. Since
its commencement in 1986, the market for insurance in Australia has
evolved, both in terms of the type of insurance on offer and the
participants in the market. Judicial interpretations of the ICA have
highlighted how it applies in a range of situations, some of which may not
have been contemplated when the ICA was designed. Also, subsequent
statutes, such as the Corporations Act 2001 and Electronic Transactions
Act 1999, have brought change to the surrounding regulatory
environment.
2.13 Those developments, and the experience of applying the ICA
since 1986, has led to a widely held view that, although the ICA has
generally operated effectively to the benefit of the insurance market, there
are aspects that would benefit from refinement to prevent inefficiencies
and inappropriate outcomes.
Revision of the ICA: Objectives
2.14 In 2003, the Australian Government commissioned a review
panel (the Review Panel) to review the ICA to ensure it `continues to meet
its original consumer protection objectives and does not discourage
insurers from writing policies in Australia'. The Review Panel was asked
to report on whether provisions of the ICA remained appropriate in the
light of developments in the insurance market and whether any
amendments were necessary to clarify or remove ambiguity.
2.15 The Review Panel found that the ICA was generally operating
satisfactorily. However, some amendments were recommended to address
insurance market developments and judicial interpretation during the
period since its enactment. The Review Panel's recommendations were
developed having regard to the need to preserve an appropriate balance
between the rights and obligations of insurers and insureds.
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Regulation impact statement
Consultation
Review Panel deliberations
Section 54 of the ICA
2.16 Insurers had particular concerns about the operation of
section 54 of the ICA and its impact on the cost and availability of
liability insurance. The Review Panel began its review by releasing an
issues paper that explained the operation of section 54 and its current
judicial interpretation. In response, 32 written submissions were received
from stakeholders, including the insurance industry, consumer
representatives, the regulator, and dispute resolution bodies. The Review
Panel also met with stakeholders.
2.17 The Review Panel recommended legislative reform of
section 54, but only in respect of particular types of insurance policies.
Draft amendments that gave effect to the Review Panel's initial
recommendations were released for public consultation in 2004. An
additional 16 submissions primarily from the insurance industry, the legal
profession and the regulator were received on the draft amendments. The
Review Panel made further recommendations to revise the draft
amendments in response to these submissions and stakeholder
consultations.
Provisions of the ICA other than section 54
2.18 The Review Panel's review of provisions of the ICA other than
section 54 began in November 2003 with a request to stakeholders for
written `submissions at large' on issues that may be affecting the current
operation of the ICA and options to address those issues. This was
followed by a series of stakeholder meetings in February 2004 to identify
key matters for consideration from those issues raised in written
submissions.
2.19 In March 2004, the Review Panel released an issues paper,
which outlined the matters raised by stakeholders that the Review Panel
intended exploring in the second phase of the Review. The Review Panel
noted that it could only address issues that had an adverse impact on the
operation of the ICA and could not analyse some issues that may be of
significance but fell outside the review's terms of reference.
2.20 The Review Panel received around 25 submissions from the
insurance industry, consumer representatives, dispute resolution bodies
and the legal profession in response to the issues paper and used them to
develop a proposals paper, which was released in May 2004. The
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Insurance Contracts Amendment Bill 2013
proposals paper included over 40 proposals to amend the ICA. The
Review Panel sought further comments on the contents of its proposals,
particularly those that had not been raised in the issues paper but were
developed subsequently.
2.21 The proposals paper generated further written submissions from
the insurance industry, dispute resolution bodies, consumer
representatives and the legal profession. Those were taken into account
by the Review Panel in formulating its final recommendations and report,
released in January 2005.
Summary of key stakeholder views on the Review Panel's reports
2.22 Insurance brokers, legal specialists, life insurance industry
representatives and the regulator expressed general support for the
recommendations of the Review Panel, with some reservations on details.
2.23 Consumer representatives indicated that they would have
preferred the Review Panel to propose more regulation concerning claims
handling processes, and they also have some reservations about the detail
of some recommendations. However, generally consumer representatives
were satisfied with the review process and considered that the
recommendations to be well reasoned and balanced.
2.24 The industry body representing general insurers expressed some
dissatisfaction with the time frame of the consultation process and
opposed a number of the Review Panel's recommendations on the basis
that they would impose additional costs for their insurers.
Exposure draft legislative package -- February 2007
2.25 An exposure draft of an amending Bill and accompanying
regulations was prepared so that stakeholders could comment on the detail
of the proposals. The exposure draft legislative package was publicly
released in February 2007. It included a revised version of the section 54
amendments. More than 20 submissions were received on the exposure
draft Bill.
Identification of options
2.26 The options for reform, outlined below, are based on a number
of the recommendations of the Review Panel, developed in the course of
the review in meetings with the Review Panel and in response to issues
raised by stakeholders in written submissions to the Review Panel. These
58
Regulation impact statement
options were subsequently modified in response to stakeholders' concerns
raised in relation to the February 2007 exposure draft Bill.
2.27 The Insurance Contracts Amendment Bill 2009 (the Bill) is
based on a number of the Review Panel's recommendations and contains
some further modifications made to the February 2007 exposure draft Bill
in the light of consultations with stakeholders subsequent to the release of
the Bill, including, in some cases, removal of a measure.
2.28 The proposed regulatory changes in the 2009 Bill, which are not
minor or machinery, relate to the following matters:
1. electronic communication;
2. objective component of the insured's duty of disclosure;
3. disclosure obligations on renewal of an eligible contract of insurance;
4. notification of duty of disclosure;
5. non-disclosure rules and life insureds;
6. life insurance remedies; and
7. third party beneficiaries.
2.29 The groups that will primarily be impacted upon by the
proposals include:
· insurers;
· insureds (especially those that have claims), including
proposed insureds and beneficiaries under policies; and
· government and regulators, including self-regulatory
organisations.
2.30 Most of the proposals affecting insurers or insureds would also
affect insurance brokers, where a broker was involved in the negotiation
and ongoing management of an insurance contract. However, for the sake
of simplicity, insurance brokers have not been identified as a separate
impact group for the purposes of the regulation impact statement. It has
been assumed that the costs and benefits accruing to insurance brokers as
a result of the proposals would ultimately be passed onto insurers and
insureds.
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Insurance Contracts Amendment Bill 2013
2.31 Options for responses to each of these matters are analysed
below.
Identification of options, impact analysis, conclusions and
recommendations
Impact assessment methodology
Impacts can be divided between three impact groups (consumers,
business and government). Typical impacts of an option on consumers
might be changes in access to a market, the level of information and
disclosure provided, or prices of goods or services. Typical impacts of an
option on business would be the changes in the costs of compliance with
a regulatory requirement. Typical impacts on government might be the
costs of administering a regulatory requirement. Some impacts, such as
changes in overall confidence in a market, may impact on more than one
impact group.
The assessment of impacts in this regulation statement is based on a
seven-point scale (-3 to +3). The impacts of each option are compared
with the equivalent impact of the `do nothing' option. If an impact on the
impact group would, relative to doing nothing, be beneficial, the impact
is allocated a positive rating of +1 to +3, depending on the magnitude of
the relative benefit. On the other hand, if the impact imposes an
additional cost on the impact group relative to the status quo, the impact
is allocated a negative rating of -1 to -3, depending on the magnitude of
the relative cost. If the impact is the same as that imposed under the
current situation, a zero score would be given, although usually the
impact would not be listed in such a case.
The magnitude of the rating of a particular impact associated with an
option has been assigned taking into account the overall potential impact
on the impact group. The reference point is always the status quo (or `do
nothing' option). Whether the cost or benefit is one-off or recurring, and
whether it would fall on a small or large proportion of the impact group
(in the case of business and consumers), is factored into the rating. For
example, a cost or benefit, even though large for the persons concerned,
may not result in the maximum rating (+/-3) if it is a one-off event that
only falls on a few individuals. Conversely, a small increase in costs or
benefits might be given a moderate or high rating if it would be likely to
recur or if it falls on a large proportion of the impact group. The rating
scale for individual impacts is explained in the table below.
60
Regulation impact statement
Rating an individual impact
+3 +2 +1 0 -1 -2 -3
Large Moderate Small No Small cost/ Moderate Large cost/
benefit/ benefit/ benefit/ substantial disadvantage cost/ disadvantage
advantage advantage advantage change compared to disadvantage compared to
compared compared compared from `do `do nothing'. compared to `do nothing'.
to `do to `do to `do nothing'. `do nothing'.
nothing'. nothing'. nothing'.
The ratings for the individual impacts compared to the status quo are then
tallied to produce an overall outcome for the option. If it is positive, it
indicates that the option is likely to produce a more favourable
cost/benefit ratio than the status quo. If it is zero there would be no
overall benefit from adopting the option, and if negative the option would
provide overall a less favourable cost/benefit ratio than the `do nothing'
option. Ordinarily, options that have the highest positive score would be
the favoured courses of action.
What is classed as a `large', `moderate' or `small' cost or benefit depends
on the nature of the problem and options being considered. Of course,
the costs and benefits associated with options to address a problem
costing billions of dollars per year are likely to be of a much greater
absolute magnitude than the costs and benefits of options for dealing with
a rather modest issue that affects only a handful of persons. However, as
all the ratings are made relative to the status quo/do nothing option for a
particular problem, the absolute value of `large' or `moderate' or `small'
is not really important. All that matters is that within a problem
assessment, the impacts of each option are given appropriate ratings
relative to the status quo and each other. If that occurs, it will be
sufficient for the methodology to yield an overall rating that assists in
assessing the relative merits of options, from a cost/benefit perspective,
to address the particular problem.
An example of the rating calculation for an option, using the seven-point
scale ratings of impacts, is in the table below. The example is based on a
purely hypothetical scenario that a new type of long-wearing vehicle tyre
is being sold and marketed, but it has become apparent that the new style
of tyres have a higher risk of exploding while in motion than
conventional tyres. The example is designed merely to illustrate how the
rating scale might be used to compare a proposal's costs and benefits
option to the `do nothing' option -- it is not intended to be a
comprehensive or realistic assessment of options to address such a
problem.
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Insurance Contracts Amendment Bill 2013
Illustrative rating for the problem of a long-wearing tyre that may fail
Option A: Do nothing
Benefits Costs
Consumers Access to a cheaper solution for Risk of tyre failure that can result in
vehicle tyres. personal and property damage as a
result of collision. Damage can be
severe but cases are rare.
Industry Some compensation payments to
persons as a result of collisions
caused by the tyre.
Government Advantages for waste
management perspective.
Option B: Ban on sale of the new tyre
Benefits Costs
Consumers No persons will be affected by tyre Lack of access by consumers to
failure and resultant damage (+3). long-wearing vehicle tyres,
increasing the cost of vehicle
maintenance [-2].
Industry No compensation payments for Transitional costs involved with
accident victims [+1]. switching back all
manufacturing/marketing operations
to conventional tyres [-3].
Government Conventional tyres produce more
waste which is costly to deal with
[-1].
Sub-rating +4 -6
Overall rating -2
Option C: Industry-developed quality control standards
Benefits Costs
Consumers Much lower risk of tyre failure and
resultant damage than status quo
[+2].
Industry Significantly less compensation Developing and monitoring
payments for accident victims [+1]. industry-wide quality control
standards [-2].
Government
Sub-rating +3 -2
Overall rating +1
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Regulation impact statement
In the above hypothetical example, Option C appears to have a better
impact for consumers and a better overall cost/benefit rating than
Option B.
Electronic communication
Problem
2.32 Communications under the ICA are currently exempt from the
operation of the Electronic Transactions Act 1989 (ETA). The ETA
provides that if a Commonwealth law requires a notice to be provided in
writing, it may also be given by means of electronic communication if the
relevant recipient consents.
2.33 There are no equivalent facilities in the ICA. Accordingly, the
exemption for the ICA limits the ability of insurers to utilise electronic
communication with insureds. Use of electronic communication for
various requirements under the ICA, including for the dissemination of
notices, documents and other information, has the potential to lower costs
and increase convenience for insurers and insureds.
Objective
2.34 The objective is to ensure that the ICA permits a range of means
of communication between insurers and insureds, including by electronic
means, such as phone, facsimile, and the internet, provided that the risks
for the recipients in the use of electronic means are not unreasonable.
Options
Option A: Do nothing
2.35 Under this option, the ICA would remain exempt from the ETA
and a number of communications under the Act would still need to be
made by traditional writing.
Option B: Make amendments so that electronic communication may be
used for communications between insurers and insureds
2.36 This option would involve removing the exemption of the ICA
from the operation of the ETA and amending the ICA, so that
communications currently required to be `in writing' for the purposes of
the ICA may be made by electronic means. Under this option, insurers
would not be compelled to utilise electronic communication methods to
interface with insureds or potential insureds if they did not choose to do
so.
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Insurance Contracts Amendment Bill 2013
Impact analysis
Impact group identification
2.37 Affected groups:
· insurers; and
· insureds.
Assessment of costs and benefits
Option A: Do nothing
Benefits Costs
Consumers No risk of inadvertent loss of cover Additional costs of hard copy
arising from electronic correspondence passed on through
communication not being received additional charges.
or appropriately recognised.
Insurers Using hard copy correspondence for
all required communications may be
more expensive than electronic
means.
Government/regulators
Option B: Make amendments so that electronic communication may be
used for communications between insurers and insureds
Benefits Costs
Consumers Savings for insurers from use of Possible greater risk in some cases
electronic communications would that cover will be inadvertently lost
be passed to consumers in the as a result of electronic statutory
form of lower prices[+1]. communications not being received
or their importance not recognised
by the insured [-1].
Insurers Administrative savings by use of
electronic means for statutory
communications rather than hard
copy correspondence [+3].
Government/regulators
Sub-rating +4 -1
Overall rating +3
Consultation
2.38 Removal of the current ICA exemption from the scope of the
ETA received wide support. There were no submissions in response to
the Review Panel's reports opposed to allowing for electronic
communications under the ICA. However, there were suggestions from
representatives of consumers and the legal profession that allowing
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Regulation impact statement
electronic communications should be subject to particular safeguards,
including the safeguards proposed by the Review Panel in its final report.
2.39 Representatives of insurers submitted there should be no
requirement to provide notices in hard copy if the relevant insured has
consented to receive information electronically. This was supported by
other submissions. However, an insurance dispute resolution body argued
that no sanction should apply to an insured until they had been sent a hard
copy of the relevant notice or acknowledged receipt of the notice through
electronic means.
2.40 Following the release of the exposure draft bill for consultation,
life insurance industry representatives suggested that the annual review
notice could still be required to be provided in hard copy.
Conclusion and recommended option
2.41 Option A is not preferred because:
· general government policy, as reflected in the Electronic
Transactions Act 1999, is to facilitate electronic transactions;
and
· the potential cost savings in permitting electronic
communication to be used for ICA purposes are significant.
2.42 Option B would allow for electronic communications in
accordance with the requirements of the ETA. However, a number of
submissions argued that insurance contacts warranted additional
safeguards. The main issue of concern was that the failure of a consumer
either to receive or react appropriately to a statutory communication under
the ICA might, in some cases, lead to inadvertent loss of cover and, if the
cover had to be called upon due to a claim arising, they would face major
financial difficulties. For example, it was argued strongly by consumer
representatives and some lawyers that communications required under the
ICA, which are sent electronically, should be capable of being printed and
retained. However, responses to the February 2007 exposure draft Bill
argued that the requirements of the ETA are sufficient to address these
concerns.
2.43 A further counter-argument against additional safeguards is that
electronic communications are more likely to be promptly read and
recognised than hard copies.
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Insurance Contracts Amendment Bill 2013
Objective component of insured's duty of disclosure
Problem
2.44 A number of submissions to the Review Panel, particularly those
from advocates for insureds, argued that the current tests for the duty of
disclosure (particularly those under subsections 21(1) and 21A(4) of the
ICA) impose an unreasonable burden on insureds to know what an insurer
regards as relevant to its decision whether to enter a contract of insurance.
2.45 Section 21, which applies to all contracts of insurance, requires
an insured to disclose every matter that they know, or in the circumstances
could reasonably be expected to know, would be relevant to the insurer's
decision whether to accept the risk and enter the contract.
2.46 Section 21A, which applies in respect of eligible contracts of
insurance,1 precludes an insurer from making open-ended requests for an
insured to disclose `any other matter'. However, the insurer may still seek
disclosure of `exceptional circumstances' that the insured, or a reasonable
person in the circumstances, would be expected to know are relevant to
the insurer's decision whether to accept the risk (subsection 21A(4)).
1
`Eligible contracts of insurance' are defined in regulation 2B of the Insurance Contracts
Regulations 1985.
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Regulation impact statement
2.48 Disclosure is a significant issue in a number of insurance-related
disputes. In a submission responding to the Review Panel's issues paper,
the Consumers' Federation of Australia (CFA) estimated that around
13 per cent of determinations made by the then General Insurance
Inquiries and Complaints Service Ltd (IEC) involved disputes regarding
disclosure.2 More recently, the Financial Ombudsman Service has
advised that in the year ending June 2009, 4 per cent of disputes
determined by the General Insurance Division of the Service related to
`non-disclosure on proposal', and a further 2 per cent related to
`disclosure issues'. In the ended ending June 2009, about 4.5 per cent of
disputes determined by the former Insurance Ombudsman Service related
to `non-disclosure on proposal'.
2.49 The CFA argued that no other consumer contract imposes a
burden on the consumer to know what information the other party requires
when deciding whether to enter the contract. The CFA noted that in the
case of consumer credit, consumers must answer the credit provider's
questions accurately but are not expected to know what other information
the credit provider needs to assess the loan application.
2.50 The CFA also argued that the ICA provisions concerning
disclosure fail to take account of technological advances such as data
processing and the internet, which have placed insurers in an even better
position to assess risk.
2.51 Requiring potential insureds to disclose all information relevant
to an insurer's decision, when those persons are not necessarily in a
2
The Consumer Federation of Australia (CFA) in its submissions to the Review Panel's
March 2004 Issues Paper estimated that between January 1999 and April 2004, the external
dispute resolution body, the IEC Claims Review Panel, had made 642 determinations on
claims that at least, in part, considered disclosure. These determinations were broken down
as follows: Small business (21); Consumer credit (39); Home contents (170); Home
building (71); Marine (7); Motor vehicle (200); Motor vehicle TPPD (1); Personal
accident/sickness (102); Travel (27); Other (4).
The IEC Panel determined 936 claims in 2002-2003. The CFA extrapolated that 642 claims
over a five-year timeframe is about 128 per year. 128/936 (the 2002-2003 figure) being
13.7 per cent - the figure the CFA noted represented the percentage of claims each year that
involved (in part) disclosure issues.
In its 2006-2007 Annual Review (at page 10), the IEC (by then, the Insurance Ombudsman
Service - the IOS) noted that `once again, with 35 per cent of the total, motor vehicle
disputes were the most highly represented at IOS, followed by home building disputes
(21 per cent), travel disputes (18 per cent) and home contents disputes (12 per cent). With
respect to motor vehicle disputes, the main reason for the insurer denying liability was
related to exclusion or condition (45 per cent), with non-disclosure the next most frequently
cited reason for denying liability (15 per cent), followed by fraud (14 per cent). (On
1 July 2008, the IOS was folded into the Financial Ombudsman Service.)
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Insurance Contracts Amendment Bill 2013
position to assess what type of information may be relevant, can result in
unfair outcomes for insureds, for example, where a claim is denied or
reduced as a result of the failure to disclose.3
Objective
2.52 The objective is to ensure that the duty of disclosure
requirements in the ICA strike an appropriate balance between, on one
hand, ensuring insurers have reliable information to assess and price risk
and, on the other hand, the need to avoid placing unfair burdens on
insureds in respect of the remedies available against them for
non-disclosure.
Options
Option A: Do nothing
2.53 No changes would be made to the objective elements of the
insured's duty of disclosure tests in sections 21 and 21A.
Option B: Replace the general duty to disclose in section 21 with a
requirement to answer specific questions honestly and fully
2.54 Under this option, the general duty of disclosure in section 21
would be replaced with a duty on insureds to answer fully and honestly
questions that are put to them by the insurer. If that were to happen,
section 21A, which applies such a framework to eligible contracts of
insurance, would no longer be necessary.
Option C: Clarify the operation of the mixed objective/subjective duty of
disclosure test in section 21
2.55 Under this option, the current mixed objective/subjective duty of
disclosure that applies to insureds under section 21 would be retained.
However, the application of the test would be elucidated by requiring
reference to non-exclusive factors, including the nature of the particular
cover being provided.
3
A majority of the High Court has taken the view that to require an insured to disclose to an
insurer every matter known to (or reasonably knowable by) the insured that was relevant to
the insurer's decision would impose an extraordinarily high burden on an insured, which
few could ever fully discharge. Permanent Trustee Aust Ltd & Anor v FAI General
Insurance Co Ltd (in liq) (2003) 12 ANZ Ins Cas 61-565 at page 76, 650.
68
Regulation impact statement
Option D: Remove that part of section 21A that permits insurers to ask
`catch all' questions in relation to eligible contracts of insurance
2.56 This option would discourage insurers that offer eligible
contracts of insurance from asking general `catch all' questions
concerning `exceptional circumstances'. Insurers would no longer be able
to rely on the duty of disclosure in relation to eligible contracts of
insurance if they ask the insured to disclose `exceptional circumstances' in
circumstances such as described by the current paragraph 21A(4)(b).
Impact analysis
Impact group identification
2.57 Affected groups:
· insurers;
· insureds, including proposed insureds and beneficiaries under
policies; and
· government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
Benefits Costs
Consumers Leaving the current duty of
disclosure test unchanged may
continue to unfairly disadvantage
some insureds if they fail to disclose
a matter they do not realise is
relevant to an insurer's decision
whether to enter the contract of
insurance.
Insurers Insurers sometimes benefit from Courts may continue to have
the objective elements of the different interpretations about the
existing duty of disclosure test to factors to consider in relation to the
deny claims. objective element of the duty of
disclosure, which leads to a lack of
uniformity in application of the ICA.
Government/regulators
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Insurance Contracts Amendment Bill 2013
Option B: Replace the general duty to disclose with a requirement to
answer specific questions honestly and fully
Benefits Costs
Insurers Fewer disputes and legal Applying this option to large
actions by insureds concerning commercial risks, and in respect
their obligation to disclose of some life insurance products,
matters that were considered practicable extremely costly for
relevant by the insurer [1]. insurers, as it would require
them to construct lengthy and
complex specific questions to
ensure all relevant information is
obtained [-3].
Insureds Fewer disputes about an Insurers may require consumers
alleged failure to disclose to respond to more lengthy and
relevant matters [1]. complex sets of questions [-2].
Less availability of insurance and
higher costs for insureds,
especially in non-eligible lines
[-2].
Government/regulators Frequency of disputes
regarding disclosure could
reduce and ease of resolution
could increase [1].
Sub-rating +3 -7
Overall rating -4
Option C: Clarify the operation of the mixed objective/subjective duty of
disclosure test in section 21
Benefits Costs
Insurers Reduction in frequency and This option may lead to some
complexity/cost of disputes [1]. litigation about interpretation of
the new objective factors [-1].
Insureds Reduction in frequency and This option may lead to some
complexity/cost of disputes [1]. litigation about interpretation of
the new objective factors [-1].
Government/regulators Ease of interpretation and
reduction of inconsistencies
between factors that are taken
into account in determining an
insured's duty of disclosure is
likely to result in more efficient
adjudication [2].
Sub-rating +4 -2
Overall rating +2
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Regulation impact statement
Option D: Remove the part of section 21A that permits insurers to ask
`catch all' questions in relation to eligible contracts of insurance
Benefits Costs
Insurers For some insurers under eligible
contracts, being no longer able
to rely on `catch all' questions
may encourage them to
formulate more, or more
complex, specific questions [-1.]
Insureds Insureds under eligible contracts Possibility of having to answer a
will not be disadvantaged by larger number, or more
being required to answer complex, questions [-1].
questions that require a
knowledge of what factors may
be relevant to an insurer's
decision [+2].
Government/regulators Frequency and complexity of
disputes that need to be
adjudicated regarding the duty of
disclosure will be reduced [+1].
Sub-rating +3 -2
Overall rating +1
Consultation
2.58 Option B was supported by stakeholders including
representatives of insurance brokers, and a legal aid commission. It was
argued that insurers should be required to ask insureds specific questions
that reflect their underwriting guidelines. Insurers that offered insurance
over large commercial risks disagreed. They provided examples
suggesting that, in those cases, questions were formulated and asked in the
course of negotiating the relevant contract of insurance. It was not
possible to produce a `pro-forma' list of questions at the outset capable of
dealing with all relevant risk factors that may affect the policy proposal.
2.59 Option C was suggested to the Review Panel by a firm of
commercial solicitors. They noted the existing test in section 21 had been
applied inconsistently by various courts, which runs counter to the policy
intention that the law concerning contracts of insurance should apply
uniformly throughout Australia.
2.60 In respect of eligible contracts of insurance, one general insurer
reported to the Review Panel that it asked potential insureds specific
questions and did not have a `catch all' question (Option D). That insurer
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Insurance Contracts Amendment Bill 2013
argued the `catch all' question was no longer relevant to eligible contracts.
Insurers offering that type of contract had `clear underwriting guidelines
based on comprehensive historical data that effectively define what
information a prospective customer needs to provide to enable a risk to be
accepted'. This view was not shared by other general insurers and their
representative body, which submitted to the Panel that it would not be
possible for many insurers to develop a list of relevant specific questions.
2.61 In response to the exposure draft Bill, few stakeholders
commented on this particular amendment and at least one major insurer
supported the way the Bill gave the Review Panel recommendation effect.
The general insurers' representative body offered no additional
information on how the removal of the `exceptional circumstances'
question would impose costs on insurers.
Conclusion and recommended options
2.62 Option B (replacing the general duty of disclosure with a duty to
answer specific questions) is unlikely to be practicable to apply more
widely than in relation to eligible contracts. In particular, it would not
appear to be practical to apply Option B in the context of large
commercial insurance and some types of individual life insurance.
Accordingly, Option B is rejected.
2.63 Option C, under which the duty of disclosure would be clarified
by setting out some non-exclusive factors in the Act to which regard
should be had in applying the duty test, does not result in greater expenses
for insurers. This option is designed to assist courts in interpreting how
the duty applies in difficult cases and should assist to remove current
inconsistencies in the application of the test between courts and promote
uniform application of the ICA throughout Australia.4
2.64 Option D would address concerns about the duty of disclosure
rules incorporating an objective test that requires insureds to know what
an insurer regards as relevant, at least in respect of personal lines
insurance (eligible contracts). Although some insurers have strongly
opposed Option D on the grounds that it would increase expenses, others
4
Keall DCJ (Western Australian District Court) in Delphin v Lumley General Insurance
Ltd (1989) 5 ANZ Ins Cas 60-941 concluded that the relevant tests required both extrinsic
and intrinsic factors to be taken into account. On the other hand, Brooking J (Victorian
Supreme Court) in Twenty-first Maylux Pty Ltd v Mercantile Mutual Insurance (Aust)
Ltd (1990) VR 919 took the view that `intrinsic' factors (such as imperfect understand of
English or unfamiliarity with business or insurance practice) are not to be taken into
account. Jones J (Queensland Supreme Court) applied the test applied by Brooking J in
Twenty-first Maylux Pty Ltd and took into account extrinsic factors rather than individual
idiosyncrasies: Dew v. Suncorp Life and Superannuation Ltd [2001] QSC 252.
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Regulation impact statement
have noted that in the case of personal lines insurance, insurers generally
have a very strong understanding of what factors are relevant to the risk in
question, and ask specific questions accordingly. The likelihood of any
unforseen factors being relevant to risk is not high, and to the extent that it
exists, there is a cogent argument that it is most appropriately borne by the
insurer rather than the insured.
2.65 Option C is recommended because further guidance in
interpreting provisions in the ICA dealing with disclosure is likely to be of
benefit to insurers, insureds and courts. Further, the costs of applying this
option are not great. Option D (removing the ability to ask for disclosure
of exceptional circumstances) is also recommended, because it largely
addresses concerns from the insureds' perspective regarding the objective
component of the duty of disclosure in respect of eligible contracts,
notwithstanding there are some costs associated with its implementation.
Disclosure obligations on renewal of an eligible contract of insurance
Problem
2.66 The then General Insurance Enquiries and Complaints Service
Ltd (IEC) (a predecessor of the Financial Ombudsman Service), in its first
submission to the Review Panel, raised concerns at the current law
surrounding notice of the duty of disclosure upon renewal of a contract of
insurance. The IEC stated:
`... the experience of (IEC) Review Panel members is that the great
majority of people regard a renewal notice in the same way as they
would a gas bill, that is an account to be paid at or about the due date,
although unlike the gas bill, a reminder notice is usually not issued if
the sum payable is not paid within the prescribed time. In other
words, the general public do not understand the renewal process
creates a new insurance contract, sometimes with new policy terms,
with new disclosure obligations'.
2.67 In its submission, the IEC noted instances of insureds under
motor vehicle policies being denied claims because they failed to update
their driving history as required upon renewal. Apparently this was due to
a lack of awareness of the disclosure requirement, rather than any
deliberate concealment on their part.
2.68 To have circumstances such as these continuing to arise is
undesirable because the detriment to the persons concerned is potentially
great. If insureds do not realise that they are under a new set of disclosure
obligations upon renewal of a contract of insurance, they risk failing to
inform the insurer of matters that have occurred since the relevant contract
73
Insurance Contracts Amendment Bill 2013
was entered into that are relevant to the insurer's decision whether to
accept the risk of the renewed contract. As a consequence, the insured
may be denied the right to recover under the contract, to potentially great
detriment to the insured and any other person with an interest in the
particular insurance contract.
2.69 An examination of statistics published by an external dispute
resolution body is indicative of the extent to which non-disclosure on
renewal leads to disputes between insurers and insureds. For the period
July 2005 to June 2006 in relation to which the former Insurance
Ombudsman Service -- the IOS -- reported on disputes determined by
the scheme during that period with `Non-disclosure on proposal' as a
reason members denied liability, in total, 53 out of 107 disputes relating to
alleged non-disclosure involved renewals.5
Objective
2.70 The objective is to ensure that, as much as possible, insureds
renewing an eligible contract of insurance understand their duty of
disclosure obligations.
Options
Option A: Do nothing
2.71 The requirement on insurers under an eligible contract of
insurance to ask specific questions of the insured -- if they wish to rely on
5
There were no disputes in the 2005-2006 reporting period relating to the IOS category `Non-
disclosure on proposal' for the general insurance lines of Caravan/Campervan; Consumer
Credit, Marine-Pleasure Craft, Motor Vehicle - Third Party [TPPD], Small Business and
Strata Title. The three disputes in the reporting period involving disclosure issues relating
to Travel insurance did not involve renewals (undoubtedly due to the nature of the
insurance). However, for the remaining lines of Motor Vehicle, Home Buildings, Home
Contents, Personal Accident/Sickness and Medical Indemnity, more than half of the
disputes involving disclosure issues were renewals. Three out of four Home Buildings
disputes relating to alleged non-disclosure involved renewals; two out of three Home
Contents disputes relating to alleged non-disclosure involved renewals; three out of four
Personal Accident/Sickness disputes relating to alleged non-disclosure involved renewals
and of four Medical Indemnity disputes, one related to renewal issues.
Most disclosure/renewal issues arose in relation to Motor Vehicle insurance disputes. The
IOS reported that in the financial year 2005-2006, motor vehicle disputes made up
35 per cent of all referrals to IOS - 654 out of 1870 disputes in total (in all, 13 per cent of the
total of 11,235, 690 motor vehicle policies and renewals issued during 2005-2006 led to
claims). Out of 93 Motor Vehicle disputes involving disclosure issues, 44 complaints
resulted where claims had been rejected on renewal for alleged breaches of disclosure
(including alleged misrepresentations).
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Regulation impact statement
the insured's duty of disclosure -- would not apply on renewal of the
particular eligible insurance contract.
Option B: Make the obligation to provide details regarding the duty of
disclosure the same at both inception and renewal of an eligible contract
of insurance
2.72 Under this option, renewal of an eligible contract of insurance
would trigger duty of disclosure obligations for both insurers and insureds
similar to the obligations that applied when the contract was first entered
into.
2.73 For example, under this option, an insurer wishing to rely on an
insured's duty of disclosure at renewal of an eligible contract would need
to ask the insured specific questions or, alternatively, seek an update to the
answers the insured had provided at the inception of the contract.
Impact analysis
Impact group identification
2.74 Affected groups:
· insurers;
· insureds; and
· government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
Benefits Costs
Insurers Minimal administrative burden to
take advantage of duty of
disclosure on renewal of eligible
contracts.
Insureds Disadvantage for some insureds
who are denied claims because
they did not realise their duty of
disclosure obligations on
renewal of eligible contacts.
Government/regulators
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Insurance Contracts Amendment Bill 2013
Option B: Make the obligation to provide details regarding the duty of
disclosure the same at both inception and renewal of an eligible contract
of insurance
Benefits Costs
Insurers Insurers would receive better Changes to administrative
information about the risks procedures for renewals of
associated with renewal of a eligible contracts that could, for
particular eligible contract [1]. some insurers, involve
significant costs [-2].
Insureds Insureds would no longer face Possible increases in premiums
denial of a claim because they passed on by some insurers due
did not realise that the duty of to increased costs [-1].
disclosure applies on renewal of
an insurance contract [3].
Government/regulators Reduction in dispute resolution
regarding the disclosure
requirements on renewal of
eligible contracts [1].
Sub-rating +5 -3
Overall rating +2
Consultation
2.75 In submissions to the Review Panel, a consumer representative
body and a legal aid commission expressed support for the amendment
proposed in Option B. The legal aid commission noted that, in its
experience, many insureds were unaware of their duty of disclosure
obligations on renewal and assumed that it was an automatic process,
subject to payment of the premium. Insurance broker representatives
submitted the ICA should be amended so that insurers must make clear in
any renewals the consequences of non-disclosure.
2.76 General insurer representatives submitted that requiring insurers
to ask specific questions on renewal would result in significant increases
in the costs incurred by insurers.6 The additional costs would ultimately
be passed on to insureds.
Conclusions and recommended options
2.77 Option B would result in the duty of disclosure obligations (such
as the requirement to ask specific questions for eligible contracts)
applying at renewal, as well as inception.
6
An insurance company submitted in relation to the 2007 exposure draft Bill that a renewal
under the proposed changes would result in an average increased cost per policy of $15, a
cost that would ultimately be passed onto customers.
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Regulation impact statement
2.78 If Option B were adopted:
· insurers would be better advised of factors affecting the risk
associated with a particular contract of insurance; and
· insureds would be less likely to be disadvantaged when
making a claim because they failed to disclose adequately on
renewal.
2.79 However, the change would result in costs for insurers because
they would need to ask insureds to update answers provided at inception
of the contract, or on last renewal, rather than relying on the general duty
of disclosure in section 21 of the ICA. Notwithstanding the prospect of
increased administrative costs, Option B is recommended because:
· some general insurers either do not seek to rely on the duty of
disclosure on renewal for lines of eligible contracts, or
already adopt the practice of seeking an update to answers
provided previously, so the potential for increased costs to
insureds involved in changing processes would depend on the
systems processes individual insurers have in place for
handling renewals where practices such as these are not
currently employed; and
· the measure would avoid the possibility of significant
detriment for insureds as a result of a failure to comply with
the general duty of disclosure obligations applying on
renewal, due to ignorance about their existence.
Notification of duty of disclosure
Problem
2.80 Section 22 of the ICA requires insurers to clearly inform
prospective insureds of the general nature and effect of the duty of
disclosure before the insured enters the relevant contract of insurance.
2.81 A legal aid commission noted in a submission to the Review
Panel that, in its experience, many insureds assume they have complied
with their duty of disclosure obligations when they disclose all facts
known to the insured at the time of filling out a proposal form or
answering an insurer's questions during a preliminary telephone
application interview. However, matters that are relevant to the insurer's
decision to accept the risk and enter the contract may arise after the date
of application for the policy and the date it comes into effect, for example,
significant changes in the state of an insured's or a life insured's health. It
is quite common for insureds to fail to disclose such matters because they
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Insurance Contracts Amendment Bill 2013
mistakenly believe they are under no obligation to do so. Ignorance about
the duration and scope of the duty of disclosure was a common
misconception.7
2.82 Thus, many insureds will inadvertently fail to disclose facts that
may come to light after the insured completes the proposal process but
before the contract of insurance comes into effect and, as a consequence,
may be in breach of their duty of disclosure. The result of such ignorance
on the part of some insureds, coupled with prolonged delays between
application and the issuing of the insurance policy (the Review Panel was
made aware that in some circumstances the time between providing the
relevant disclosure and the commencement of the contract of insurance
can be some months), may mean that claims and even entire policies may
be jeopardized to the serious detriment of insureds or their dependants and
beneficiaries. This is particularly important for beneficiaries of insurance
linked to superannuation and dependants receiving or expecting to receive
death benefits from life insurance policies applied for years prior to a
claim being made on the policy.
7
Many, if not most, insureds believe that their duty of disclosure ends when a proposal
application has been completed and accepted by the insurer (that is the proposal - not the
contract). See the Annual Report of the General Insurance Enquiries and Complaints
Scheme [IEC] Annual Report 1996, page 10-11; IEC Annual Report 1997, page 9; IEC
Annual Report, 1998, page 10, cited in Disclosure and concealment in consumer insurance
contracts by Dr Julie-Anne Tarr, Cavendish Publishing Limted, 2002. [The former General
Insurance Enquiries and Complaints Scheme [IEC] is now part of the Financial Ombudsman
Service.]
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Regulation impact statement
2.83 Instances of disputes involving alleged breaches of disclosure
(both innocent and fraudulent) where prolonged delays occurred have
arisen before the life insurance and superannuation external dispute
resolution schemes, in particular, the former Financial Industry
Complaints Service (FICS) -- now part of the Financial Ombudsman
Service) and the Superannuation Complaints Tribunal. Cases have also
arisen before the Australian courts involving ignorance of the extent of the
insured's duty of disclosure where delays have been found to be a factor
in disputes involving alleged breaches of the duty.8
2.84 Delays can be caused by both insurers and insureds. The
problem tends to occur more frequently in certain lines of business, for
example, in life insurance and in directors' and officers' (D&O) liability
insurance, mainly because of the extended nature of the assessment
process in those business lines. Delays may be caused by the insurer
where time-consuming processes are involved, such as, example,
collecting declarations from directors for D&O liability insurance or
collecting medical disclosures in relation to life insurance policies.
Delays may also be caused when negotiations are extended where the
insurer makes a counter-offer.
2.85 Delays may be caused by the insured where, for example, a
written application is posted many weeks after the blank application form
had been provided to the insured, or where the insured has provided
incomplete responses to questions or made mistakes in completing forms
or failed to append their signature to a paper form.
2.86 Some of the determinations of the external dispute resolution
schemes indicate that the policy/proposal wording used by many insurers
is not clear about the scope of the disclosure obligation. The extent to
which this may disadvantage consumers is accentuated when delays
occur. While negative outcomes for consumers may be attenuated by the
proposed reform that would require insurers to clearly inform the insured,
before a contract is entered into, that their duty of disclosure applies until
8
The FICS Panel, for example, dealt with approximately 200 cases over a ten year period
involving alleged non-disclosure by insureds. Two out of some 14 disputes specifically
involving Insurance Contracts Act section 22 over a period of six years involved extended
delays (approximately four months between application and acceptance and issue of the
contract of insurance) have been reported. At least two determinations of the
Superannuation Complaints Tribunal (involving delays of two and three month delays
respectively) were reported in a period of just over one year. In the 21 years since the
Insurance Contracts Act became law, a number of cases have arisen before the courts
involving disclosure issues in the context of extended delays: Goodwin v State Government
Insurance Office (QLD) (1991) 6 ANZ Ins Cas 61-064 [Full Court of the Supreme Court of
Queensland]; Summerton v SGIC Life Ltd (1999) 19 ANZ Ins Cas 90-102; McCabe v Royal
& Sun Alliance (2003) WASCA 162.
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Insurance Contracts Amendment Bill 2013
the proposed contract is entered into, this may not of itself alleviate those
cases where there is a prolonged delay between the time an application is
made and the concluding of the contract, particularly where this is coupled
with lack of understanding or ignorance of the insured's duty of
disclosure.
2.87 If no action is taken, failure to provide requisite disclosures for
events that took place between the date of the initial application and the
time the contract was entered into will continue to be one of the reasons
that the claims of some insureds are jeopardised. The Review Panel noted
that although some insurers ask the insured immediately prior to the
policy coming into effect whether they have anything additional to
disclose since filling out the original proposal form, this is not a universal
practice.
Objective
2.88 The objective is to ensure, so far as is reasonably possible, that
insureds are not disadvantaged when a claim arises because they did not
understand their duty of disclosure obligations where there was a delay
between the date they initially applied for the insurance and the date the
contract was entered into.
Options
Option A: Do nothing
2.89 This option would retain the current rule that insurers must
advise prospective insureds of their duty of disclosure at the time the
insured submits an application for insurance. There is no further
requirement for a reminder at the time the policy is issued.
Option B: Require insurers to issue reminders concerning the duty of
disclosure at the time the relevant contract is issued
2.90 Under this option, insurers would be required to provide to the
insured, at the time the contract of insurance is issued, a reminder that the
duty of disclosure continues until the time that the policy is entered into,
unless the contract is entered a short time after the person initially applied
for insurance.
Option C: Require insurers to use clearer language as to when the duty
applies in the initial notification
2.91 Under this option, there would be no need for an additional
reminder when the policy is issued as proposed by Option B. However,
insurers would need to clearly state when explaining the insured's duty of
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Regulation impact statement
disclosure that it extends until the time the contract of insurance is entered
into.
Impact analysis
Impact group identification
2.92 Affected groups:
· insurers;
· insureds (especially those that have claims), including
proposed insureds and beneficiaries under policies; and
· government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
Benefits Costs
Insurers
Consumers Claims by some insureds will
continue to be jeopardised due
to non-disclosure.
Government/regulators Ongoing need to resolve
disputes about non-disclosure of
events between application and
contract.
Option B: Require an additional reminder at the time the policy is issued
Benefits Costs
Insurers An reminder notification Possible additional
increases the likelihood that administrative costs. Note that
insurers will be properly advised some insurers already issue a
of relevant factors necessary to reminder where delays have
assess risks [1]. occurred after the initial
application [-2].
Insureds Significant reduction in claim
denials due to a failure to
understand that the duty of
disclosure extends until the
policy is entered into [3].
Government/regulators Likely reduced need to resolve
disputes involving a failure to
disclose events between
application and contract [1].
Sub-rating +4 -2
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Insurance Contracts Amendment Bill 2013
Overall rating +2
Option C: Require insurers to use clearer language as to when the duty
applies in the initial notification
Benefits Costs
Insurers Insurers would incur one-off
administrative expenses required
to change reminder wordings [-2].
Insureds Likely reduction in claim denials
due to a failure to understand
that the duty of disclosure
extends until the policy is
entered into [2].
Government/regulator Likely reduced need to resolve
disputes involving a failure to
disclose events between
application and contract [1].
Sub-rating +3 -2
Overall rating +1
Consultation
2.93 General insurance industry representatives argued the benefits of
a change such as proposed by Option B were not significant enough to
justify the costs. Option B would require a change in the compliance
requirements of insurers that was disproportionate to the benefits that may
flow from such an amendment. A submission made in relation to the
February 2007 exposure draft Bill argued that sending a reminder notice
was unnecessary, problematic and administratively costly.9
2.94 However, other submissions, including from legal profession
representatives and a dispute resolution body, supported reform of the
type proposed in Option B. One submission noted that an amendment
such as Option B could be expected to lead to a reduction in the number
of disputes.
2.95 Life insurance industry representatives indicated to the Review
Panel that the majority of life insurers already included advice to
9
The insurer argued that the proposed reminder notice requirement was unnecessary because
the duty of disclosure notice has already clearly informed the insured that the duty continues
to apply until the contract is entered into. It would also require an upgrade to the insurer's
computer systems and increase the administrative burden on the insurer, again at increased
cost. Further the proposed amendment may have an adverse impact on insureds, because
insurers may deal with this issue by refusing to issue policies more than two months in
advance. The insured may instead be asked to call back and obtain a quote closer to the
time of inception of the policy and if they forget to do so, it may result in non-insurance.
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Regulation impact statement
prospective applicants that their duty of disclosure continues until the date
the contract is entered into, such as that proposed in Option C.
Conclusions and recommended options
2.96 Many insureds do not realise that their duty of disclosure
extends until the contract is entered into, so that if the policy is issued
sometime after a proposal form is submitted, the insured may be exposed
to the denial of a claim if they failed to disclose a relevant fact that arose
(or which they became aware of) during the interim period. A failure to
disclose could lead to loss of the insurance cover altogether through
avoidance of the policy by the insurer.
2.97 Option B minimises this risk by requiring insurers to give
insureds a reminder of the duty at the time the contract is issued (unless
the contract is issued within a short time of receiving the proposal). This
option would generate additional administrative expenses for insurers.
2.98 Option C goes some way toward addressing the problem by
having the initial notice of the duty state more clearly that the duty
extends until the time the contract is issued. The additional administrative
expenses associated with Option C would be less than those associated
with Option B, but Option C is likely to be less effective than a reminder
at the time the policy is issued, especially when the contract is entered into
some time after the proposal form is submitted.
2.99 Typically, the insurer would communicate with the insured at
the time the proposal is accepted by the insurer to notify the insured of the
acceptance and to request payment. At this time, the insurer could add an
additional `standard' element to that communication regarding the fact
that the duty of disclosure extended until the relevant contract was entered
into. Therefore, the additional costs of complying with Option B (after a
transitional phase) are not expected to be great.
2.100 On balance, Option B is favoured.
Non-disclosure rules and life insureds
Problem
2.101 Misrepresentations by a `life insured' (that is, a person other
than the insured whose life is insured under the contract of life insurance)
are treated as if they were made by the insured themselves pursuant to
section 25 of the ICA. As a consequence, if a life insured is found to have
made a misrepresentation to an insurer, the insurer has the same remedies
against the insured as if the misrepresentation had been made by the
insured. However, under the current law, there is no remedy against the
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Insurance Contracts Amendment Bill 2013
insured where the life insured fails to disclose some matter that is
relevant to an insurer's decision whether to enter the contract of life
insurance.
2.102 Non-disclosure by a life insured may adversely affect the
reliability of information available to insurers. In that regard,
non-disclosure has a similar result to misrepresentation. Preventing
non-disclosure by life insureds would help ensure that insurers are fully
informed about the relevant risks so they can price them accordingly.
2.103 An expansion of section 25 to include non-disclosure by a life
insured would provide a fairer balance between the interests of the parties.
The reason is that insurers must still satisfy a claim under a contract of life
insurance, notwithstanding that there has been a non-disclosure by the life
insured that, if made by the insured, would have allowed the insurer the
right to avoid the contract or reduce their liability.
2.104 There appears to be no reason why non-disclosure and
misrepresentation on the part of the life insured should be treated
differently and for the current disparity with respect to misrepresentation
and non-disclosure by life insureds to continue.
2.105 If no change is made, then the degree of information asymmetry
as between the parties would not be reduced and the current disparity of
remedies for insurers with respect to misrepresentations and
non-disclosures by life insureds would continue, resulting in unfair and
anomalous outcomes.
Objective
2.106 The objective is to ensure that insurers receive reliable and
adequate information to assess and price risk, without placing an unfair
burden on insureds in respect of the remedies available against them for
non-disclosure.
Options
Option A: Do nothing
2.107 This option would leave section 25 of the ICA unchanged so that
it continued to apply only in respect of misrepresentation by a life insured,
but not in respect of non-disclosure by a life insured. Also, there would
be no obligation on insurers to give the life insured notice of the duty of
disclosure.
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Regulation impact statement
Option B: Expand the duty of disclosure under section 25 to cover
non-disclosure by a life insured
2.108 Under this option, the rule in section 25 of the ICA that imputes
a misrepresentation by a life insured to an insured would also apply to a
non-disclosure by the life insured. Further, the insurer would be required
to give the life insured notice of the duty of disclosure before the relevant
insured entered into the contract of insurance.
2.109 Section 22 of the ICA would be amended to require the insurer
to clearly inform the life insured of their proposed new duty of disclosure.
Impact analysis
Impact group identification
2.110 Affected groups:
· insurers;
· insureds (including life insureds and prospective life
insureds); and
· government/regulators.
Assessment of costs and benefits
Option A: No specification
Benefits Costs
Insurers Insurers would continue to be
disadvantaged in some cases by
non-disclosures by life insureds
that cannot be imputed to the
insured.
Insureds
Government/regulators
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Insurance Contracts Amendment Bill 2013
Option B: Expand the duty of disclosure under section 25 to cover
non-disclosure by a life insured
Benefits Costs
Insurers Insurers would benefit by being The proposed additional
able to rely on non-disclosures by requirement that insureds notify life
life insureds as a defence to insureds of the duty of disclosure
claims, as well as their current right would result in additional
to rely on misrepresentations [3]. compliance costs for insurers [-2].
Insureds The savings to insurers by denying Additional compliance costs for
claims for non-disclosure by insurers may lead to increased
life-insureds could lead to risk premiums for consumers [-1].
premiums for consumers [1].
Sub-rating +4 -3
Overall rating +1
Consultation
2.111 In submissions to the Review Panel, life insurance industry
representatives strongly supported amending the ICA in the manner
proposed by Option B.
2.112 Representatives of the legal profession submitted that further
evidence and consideration were necessary before Option B were
considered. A consumer representative body argued there was no
empirical evidence to suggest the current formulation of section 25 had
caused problems for insurers, and a legal aid commission also opposed
any reform of the type proposed in Option B.
Conclusions and recommended options
2.113 Non-disclosure by a life insured may have a similar result to that
of a misrepresentation by the life insured, in that a non-disclosure may
also adversely affect the reliability of information available to insurers to
price their risk. Reducing information asymmetry between parties to a
contract will achieve a fairer result for the parties and also third party
beneficiaries.
2.114 Option B ensures that non-disclosure by a life insured would
have similar ramifications to a misrepresentation. This will help to ensure
insurers are fully informed about the relevant risks so that they can price
them accordingly. Failure to disclose by a life insured would have the
same impact for insureds as a misrepresentation by a life insured.
Although life insureds would be subject to a duty of disclosure to which
they are not currently subject, the non-disclosure would be imputed to the
insured.
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Regulation impact statement
2.115 If a life insured's non-disclosure or misrepresentation is to be
imputed to an insured, then it follows that the life insured should receive
some notice that this may occur. A key principle underlying the ALRC
recommendations that gave rise to the ICA was that consumers should
receive all the information relevant to their contract of insurance and
therefore the notice requirement in Option B appears appropriate.
Insurers would usually communicate with life insureds about their
disclosure obligations, so it is reasonable that the insurer provide
information about the duty directly as part of that process, rather than
relying on indirect channels through the insured.
2.116 Although Option B does impose some additional costs for life
insurers (in relation to the notification obligation) and life insureds (in
respect of the broader duty), it is preferred over Option A in order to
ensure that non-disclosure by a life insured is dealt with appropriately, and
insurers may deny or reduce claims in appropriate circumstances if
non-disclosure by a life insured occurs.
Life insurance remedies
Problem
2.117 The current provisions in the ICA that deal with the remedies
available to a life insurer are of long standing. The life insurance industry
argues that the remedies are now inadequate and inappropriate for many
life insurance products now on the market.
2.118 Sections 29 and 30 of the ICA provide remedies for life insurers
in relation to misstatements, misrepresentations and non-disclosures. If
there is a misstatement about the date of birth of a life insured, section 30
provides for a remedy for the insurer, based on the principle of
proportionality, to vary the sum insured or adjust/refund premiums. The
remedies in section 29 deal with pre-contractual misrepresentations and
non-disclosure about relevant matters other than age/date of birth. In
summary:
· the only remedy for fraudulent non-disclosure or
misrepresentation is avoidance of the contract;
· the only remedies for innocent non-disclosure or
misrepresentation discovered within three years are either:
- a variation of the sum insured to an amount not less than
by a factor calculated by reference to the premiums
actually charged as a proportion of the premiums that
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Insurance Contracts Amendment Bill 2013
would have been charged if the non-disclosure or
misrepresentation had not occurred; or
- if the insurer would not have been prepared to enter into a
contract of life insurance on any terms it may avoid the
contract;
· there is no remedy for innocent non-disclosure or
misrepresentation discovered after three years.
2.119 The remedies in sections 29 and 30 derive from remedies
formerly available under the Life Insurance Act 1945. They were
designed for the `traditional' life insurance products that were common at
the time the remedies were developed (for example, whole of life and
endowment policies). Traditional products such as these were long term,
provided for cover on death and had a surrender value. A surrender value
is, in effect, an investment (rather than a risk) component that provides for
an amount payable to an insured should their contract be terminated
before the end of its term.
2.120 Arguing that the remedies for non-disclosure are now inadequate
and inappropriate for many life insurance products now on the market, life
insurance industry representatives, in a submission to the Review Panel,
identified the following developments in the life insurance market that had
taken place since the ICA commenced operation:
· the increasing popularity of risk-only products such as
income protection (IP) and total and permanent disablement
(TPD) insurance, as well as trauma/critical illness and term
life insurance:
· the practice by some life insurers of selling multiple types of
cover within one contract (for example, `bundled' contracts);
· the incidence of life insurance products allowing for more
than one life insured;
· the increasing proportion of policies taken out on a short term
basis; and
· developments in underwriting practices to take account of the
changing nature of life insurance products available.
2.121 The submission argued that the prescriptive and inflexible nature
of the remedies in section 29 no longer provides a fair balance between
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Regulation impact statement
the interests of insurers and insureds.10 For example, if different types of
life cover are bundled in the same contract, which often occurs,11 the
section 29 remedies are not sufficiently flexible to allow avoidance of the
contract by the insurer or correction of one cover that is affected by a
non-disclosure or a misrepresentation without affecting the other cover(s)
bundled in the same contract.12
2.122 Life insurance industry representatives also argued that the
relative inflexibility of remedies in section 29 frequently leads to
inequitable results for the insured. For example, if an insured innocently
failed to disclose that they were a smoker and this was discovered by the
insurer within three years, an appropriate remedy could be to continue the
insurance as initially agreed but to set a higher premium rather than
relying on the available section 29 remedy of reducing the sum insured: a
harsher penalty for the insured than may have been needed or appropriate
in the circumstances.
Objective
2.123 The objective is to ensure that remedies in respect of
pre-contractual misrepresentation and non-disclosure by insureds provide
adequate redress for life insurers but do not result in penalties for insureds
that are disproportionate to the loss suffered by the insurer.
Options
Option A: Do nothing
2.124 Under this option, the specialised life insurance remedies in
section 29 would continue to apply to all types of life insurance.
10
The courts (Hoare v Mercantile Mutual Life Insurance Co unreported, Rolfe J, Supreme
Court of New South Wales,7 November 2000; Herbohn v NZI Life Limited (1998) 10 ANZ
Ins Cas 61-410) and the external resolution bodies (FICS and the Banking and Financial
Services Ombudsman Limited - now merged into the FOS) have acknowledged there are
limitations placed on insurers by the inflexibility of section 29.
11
Life insurers often offer `package' policies that have a number of different component
covers - such as death, TPD, trauma and IP cover. The client does not have to buy the
whole package; rather, they can select the different options they want. The combination
they choose may or may not include death cover.
12
The discovery of non-disclosure or misrepresentation may impact the sum insured or
premium levied on certain products, but not others. Similarly, with knowledge of the
additional facts, an insurer may want to avoid certain aspects of the policy, but not others
(for example, avoid an IP policy but keep the term cover on foot). If bundled contracts
cannot be severed, an insurer may be forced to cancel all cover from inception, to the
detriment of both the insured and the insurer.
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Insurance Contracts Amendment Bill 2013
Option B: Make remedies for breach of the duty of disclosure for life
insurance mirror the counterpart remedies for general insurance
2.125 Under this option, the remedies for non-disclosure or
misrepresentation under a contract of life insurance would be similar to
remedies for non-disclosure and misrepresentation under a contract of
general insurance, providing an avenue whereby a policy could be
continued, albeit on terms that reflected the position had non-disclosure or
misrepresentation not occurred. In the case of fraud, the insurer could
avoid the contract.
2.126 In the absence of fraud, the insurer could, for example, impose
an exclusion so as to put the life insurer and the insured in the same
position they would have been in if the non-disclosure or
misrepresentation had not occurred, or could reduce its liability to an
amount that would restore the insurer to its original position had no breach
of the duty of disclosure occurred.13 This is a much more flexible remedy
than the proportionate reduction of the sum insured currently provided for
in section 29.
2.127 If the remedy currently available to general insurers under
subsection 28(3) were applied, this would put the life insurer and the
insured in the same position they would have been if the
non-disclosure/misrepresentation not occurred in the first place, providing
protection for other policyholders in respect of the cross subsidisation of
spiralling claims costs by paying increased premiums.
2.128 The three-year time limit for insurers to seek a remedy on the
basis of innocent non-disclosure or misrepresentation would be
removed.14
13
In many cases, this allows the insurer to reduce the claim to nil.
14
Life insurance representatives indicated in a submission to the Review Panel pointed out
that in so far as a distinction exists between the remedies available for the life insurer in
section 29 and the general insurer under section 28, historically, traditional life insurance
policies (whole of life and endowment policies) offered a bundled mix of `risk' insurance
and participating or non-participating investment/savings. However, public policy may be
been seen to be served by limiting the insurer's right to void a long term life insurance
bundled policy for innocent misrepresentation to three years. It may have been determined
that it would be inequitable for an insurer to have the right to void a long term bundled
investment/risk policy for innocent misrepresentation. On the other hand, the submission
suggested that the three year period is consistent with the period referred to in the `non-
forfeiture' provisions of both the Life Insurance Act 1945 (sections 95 to 102) and the Life
Insurance Act 1995 (section 210), restricting the right of the life insure to avoid a policy for
non-payment of contract premiums after three years premiums had been paid. According to
the submission, these non-forfeiture provisions did not apply to term life insurance where
the policy did not provide for a `surrender value', but represented pure risk.
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Regulation impact statement
2.129 There would continue to be a distinct remedy in respect of fraud
or non-disclosure concerning age as currently applies under section 30.
Option C: As per Option B, but retain specialised life insurance remedies
for policies that have a surrender value or provide death cover
2.130 This option is like Option B, but the current remedies for life
insurance in section 29 would be retained for policies that have a
surrender value or provide death cover.15
2.131 If the policy has an aspect of cover with a surrender value and/or
death cover, and some other type of insurance cover as well, the policy
would be `unbundled' for the purposes of considering the application of
remedies for breach of the duty of disclosure.
2.132 In addition, contracts could be `unbundled' so that a
misrepresentation or a non-disclosure that was relevant to the risk for one
type of cover, for example, a misrepresentation about assets relevant to
income protection insurance, would not necessarily apply to a different
type of cover, provided as part of the bundled policy, in relation to which
the misrepresentation was of no consequence or relevance.
2.133 Like Option B, section 30 would still apply to misstatements
regarding age. The three year limitation on remedies would apply only to
policies, or types of cover under a bundled contract, which included a
surrender value or death cover.
Impact analysis
Impact group identification
2.134 Affected groups:
· life insurers;
· insureds, including life insureds; and
· government and regulators, including self-regulatory
organisations.
15
In a submission to the Review Panel, life insurance representatives indicated that whereas in
1972 whole of life and endowment insurance represented 95.3 per cent of sales that year, by
1996, whole of life and endowment products represented 6.1 per cent of sales, while
investment account and investment-linked products represented 12.6 per cent of sales - these
types of policies typically have surrender values. On the other hand, term life insurance
provided for an insurance benefit payable only on death without the investment/savings
component. In 1977, the proportion of new business constituted by Term Insurance was less
than 15 per cent. By 2004, the proportion of new long term life insurance represented by
Term Insurance (including Rider Benefits and Disability Insurance, Crisis, etc) is 94 per cent.
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Insurance Contracts Amendment Bill 2013
Assessment of costs and benefits
Option A: Do nothing
Benefits Costs
Insurers No scope for use of less costly
remedies for life insurers.
Lack of flexibility of remedy can
force insurers to allege fraud, with
resultant costly litigation placing
pressure on premium rates.
Insureds The claims of insureds under The lack of flexibility in remedies for
traditional policies and risk only life insurance can result in detriment
term life insurance policies will to insureds who are subjected to a
continue to enjoy the protections sanction more onerous than
offered under the present necessary.
remedies framework.
The price and availability of life
insurance may continue to be
adversely affected through lack of
access to more appropriate
remedies.
Government/regulators
Option B: Make remedies for breach of the duty of disclosure for life
insurance mirror the counterpart remedies for general insurance
Benefits Costs
Insurers This option would allow more There will be transitional
flexibility in determining administrative costs for insurers
remedies for breach of duty of associated with adopting a new
disclosure allowing the use of remedies framework [-1].
less costly remedies [+3].
Insureds Increased flexibility of remedy Removal of the specialised
may benefit insureds overall remedies and the protection
through use of less costly and offered by the `three year rule' in
less onerous remedies, and section 29 could produce
possible decrease in premiums inappropriate outcomes in some
[+1]. cases (particularly `traditional'
life insurance policies, including
those with death
cover/surrender value) to the
significant detriment of some
insureds and their beneficiaries
[-3].
Government/regulators Increased flexibility of remedy
may lead to less complex
dispute resolution processes
[+1].
Sub-rating +5 -4
Overall rating +1
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Regulation impact statement
Option C: As per Option B, but retain specialised life insurance remedies
for policies that have a surrender value or provide death cover
Benefits Costs
Insurers This option would allow more Dividing different types of life
flexibility in determining insurance cover into categories,
remedies for breach of duty of including for the purposes of
disclosure allowing less costly `unbundling', increases
remedies [+3]. complexity and administration of
the legislation [-1].
Insureds Increased flexibility of remedy The claims of some insureds,
may benefit insureds overall including those with
through use of less costly and beneficiaries, may be
less onerous remedies, and detrimentally affected by loss of
possible decrease in premiums protections offered under the
[+1]. present remedies framework,
though if surrender value/death
policies retain the prior
remedies, this would occur
rarely [-1].
Government/regulators Increased flexibility of remedy
may lead to less complex
dispute resolution processes
[+1].
Sub-rating +5 -2
Overall rating +3
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Insurance Contracts Amendment Bill 2013
Consultation
2.135 There has been no clear consensus regarding the need to reform
the current remedies available to life insurers in respect of non-disclosure
and misrepresentation. The life insurance industry strongly argues that
there are significant deficiencies in the current remedy arrangements
given the range and type of life insurance products currently on the
market. In a submission to the Review Panel, one life insurer noted that
difficulties with the current life insurance remedies may be affecting the
cost and availability of insurance (with consequent negative effects for
insureds).16 Life insurance representatives argued that if the remedy
currently available to general insurers under subsection 28(3) of the ICA
were applied, this would put the life insurer and the insured in the same
position they would have been if the non-disclosure/misrepresentation not
occurred in the first place, providing protection for other policyholders in
respect of the cross subsidisation of spiralling claims costs by paying
increased premiums.
2.136 However, consumer representatives opposed any change of the
type proposed by Options B or C. A consumer representative body
submitted that the distinction between remedies in respect of life
insurance and general insurance had historical foundations in that it was
an acknowledgement that the Life Insurance Act 1945 already regulated
life insurer conduct. Consumer representatives questioned whether the
current remedies are as restrictive as claimed by members of the life
insurance industry and expressed concern about the impact of changes to
the protections currently available to insureds.
2.137 It was argued that life insurance, even the types of life insurance
that are akin to `pure risk'; involve more complex disclosures than an
16
One industry submission to the Review Panel provided an example of the overall impact on
the cost of insurance arising from the inflexibility of the remedies available to life insurers
under section 29. With income protection insurance, a frequently occurring event is the
overstatement of income, resulting in an insured benefit exceeding the level of appropriate
cover. In the event that no remedy can be applied (that is reduction in insured benefit) when
a claim is made, an insured will often receive more income by remaining on claim than if
they returned to work. The overall effect is extended claim periods and increased claim
costs, which are ultimately passed on to other policyholders in the form of premium
increases. As to the availability of insurance, another industry submission pointed out that in
some cases, section 29 works to penalise insureds by forcing insurers to allege fraud in order
to avoid a contract where they may in fact have been prepared to offer alternative terms, if
such a remedy were available. The stigma of a fraud allegation made against an insured by
an insurer will result in the insured having difficulties in obtaining cover in the future. For
insurers, establishing fraud is costly and complex, leading to protracted litigation with legal
costs for individual cases often exceeding $100,000. Ultimately, these legal costs place
pressure on premium rates.
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Regulation impact statement
ordinary general insurance product. Therefore, life insureds require
greater protections than general insureds in relation to remedies for
breaches of the duty of disclosure and, in particular, the protection offered
by the `three year rule' should be retained for all life insurance.
Conclusions and recommended options
2.138 The problem is that the remedies available to life insurers under
the ICA for non-disclosure or misrepresentation do not adequately take
into account the changed nature of life insurance products and, as a result,
unnecessarily limit the availability of life insurance or increase its cost.
2.139 Option A would involve no change to the current remedies and,
as a consequence, the concerns regarding the inflexible nature of life
insurance remedies would remain. Option B would involve removing the
current distinction between remedies for a breach of the duty of disclosure
in life insurance and general insurance so that the remedies are the same.
Option C is similar to Option B, although Option C would leave the
existing life insurance remedies available for particular types of cover
(namely, life policies with a surrender value and those with a death cover
component).
2.140 It is accepted that the current remedies for breaches of the duty
of disclosure in life insurance (not related to age) unnecessarily restrict the
remedies available to insurers in the context of some types of cover.
However, the restricted and specialised remedies offered in relation to life
insurance policies with a surrender value and/or death cover remain
appropriate and provide useful protections to insureds. The benefits of
freeing up the remedies in other cases outweigh the costs of moving to a
bifurcated system, with the added complexity of `unbundling' the
components of policies. The risks of unfairly disadvantaging insureds by
removing the protections currently provided is not considered great in
respect of policies that do not have a surrender value.
Third party beneficiaries
Problem
2.141 Third party beneficiaries are not parties to a contract of
insurance. Rather, they are specified in the contract as being persons to
whom insurance cover provided by the contract extends. They may be,
for example, employees who are covered by a personal accident policy
taken out by their employer or members of a superannuation fund who
receive life insurance cover under a policy taken out by the trustee of the
fund.
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Insurance Contracts Amendment Bill 2013
2.142 Although the ICA deals with the entitlement of such persons to
make a claim, notwithstanding that they are not parties to the contract (see
section 48 as one example), there are few other references to third party
beneficiaries in the ICA. It has been suggested that their status as the
primary object of insurance cover in many instances may mean that third
party beneficiaries should have essentially the same rights and obligations
as insureds.
2.143 For example, it is arguable that an insurer should have a duty to
act in good faith towards a specified third party beneficiary, and
vice-versa, at least after the contract has been entered into.
2.144 As a result of the ICA dealing with specified third party
beneficiaries to a limited extent, there is uncertainty about aspects of the
legal rights and obligations among the insurer, the insured and the third
party. Uncertainty leads to expensive litigation and, although the
precedents set by earlier litigation provides guidance for later cases, there
is often still room to argue how a particular case should be resolved.
Uncertainty of outcomes ultimately leads to higher risk premiums being
charged in relation to the affected policies and also results in outcomes
that may be anomalous or inconsistent.
2.145 Inclusion of suitable contractual provisions to deal with third
party beneficiaries may provide a partial solution to the limited
application of the ICA. However, as third party beneficiaries are not
parties to the contract, there are limitations to the scope of contractual
solutions.
Objective
2.146 The objective is to ensure that, to the extent reasonably practical,
third party beneficiaries under an insurance contract have rights and
obligations that are predictable and in keeping with the context and
intention of their relationships with both the insurer and the insured.
Options
Option A: Do nothing
2.147 This option would retain the current position under which
specified third party beneficiaries are generally not covered by the ICA.
Option B: Extend all rights and obligations of insureds under the ICA to
specified third party beneficiaries
2.148 Under this option, specified third party beneficiaries would have
the same rights and obligations under the ICA as if they were the insured.
The insurer would need to notify all third party beneficiaries of their duty
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Regulation impact statement
of disclosure before the relevant contract is entered into. Further, in
relation to eligible contracts of insurance, all third party beneficiaries
would need to be notified of unusual terms in the contract.
Option C: Extend only certain rights and obligations under the ICA to
specified third party beneficiaries
2.149 This option would treat specified third party beneficiaries as
insureds under the ICA only for the purposes of:
· subrogation, in that the insurer would be able to substitute for
the third party beneficiary in an action against a third party
who is liable for a loss that has been paid by the insurer;
· the duty of utmost good faith (but not pre-contractually); and
· circumstances where the ICA allows an insured to request the
insurer provide them with particular information by way of
written notice.
Impact analysis
Impact group identification
2.150 Affected groups:
· insurers;
· insureds (including specified third party beneficiaries and
insureds); and
· government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: No specification
Benefits Costs
Insurers Risk of unanticipated outcomes,
which may require litigation to
resolve.
Insureds Risk of unanticipated outcomes,
which may require litigation to
resolve.
Some increased risk premium
passed on to insureds as a result of
uncertainty.
Government/regulators
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Insurance Contracts Amendment Bill 2013
Option B: Extend all rights and obligations of insureds under the ICA to
specified third party beneficiaries
Benefits Costs
Insurers Decreased risk of unanticipated Greater administrative expenses
outcomes regarding claims by in treating third parties as
third party beneficiaries [2]. beneficiaries, for example, due
to the requirements to give
notices pre- and post-
contractually, which may be
impractical to apply [-3].
Consumers Reduced uncertainty act can Higher administrative costs are
reduce litigation costs and likely to be passed on to
expenses and risk premiums [1]. customers [-2].
Insurers may cease to offer
some products involving multiple
third party beneficiaries,
reducing the opportunity for
insureds to manage risk [-2].
Government/regulators Increased certainty may lead to
less complex dispute resolution
processes [+1].
Sub-rating +4 -7
Overall rating -3
Option C: Extend only certain rights and obligations under the ICA to
specified third party beneficiaries
Benefits Costs
Insurers Decreased risk of unanticipated There would be some
outcomes regarding claims by third administrative costs arising from
party beneficiaries [+2]. the requirement to provide third
party beneficiaries with notices in
limited circumstances [-1].
Insureds Reduced uncertainty about the Some additional administrative
status of third party beneficiaries costs could be passed on to
may reduce litigation costs and insureds [-1].
premiums [+2].
Government/regulators Increased certainty may lead to
less complex dispute resolution
processes [+1].
Sub-rating +5 -2
Overall rating +3
Consultation
2.151 There was support from consumer and insurance industry
representatives for extending the duty of utmost good faith to third party
beneficiaries. However, concerns were expressed about the practicalities
of extending all rights and obligations of an insured to third party
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Regulation impact statement
beneficiaries. NIBA noted it would be impractical to extend the duty of
utmost good faith to pre-contractual matters such as the duty of disclosure.
Conclusions and recommended options
2.152 The problem is that the current limited application of the ICA to
third party beneficiaries has resulted in anomalies and inconsistencies, and
legal uncertainty.
2.153 The proposal in Option B would extend all rights and
responsibilities conferred on insureds under the ICA to third party
beneficiaries. Although this would resolve the uncertainty, it would have
significant practical difficulties because the identity of many third party
beneficiaries will not be known until after the contract is entered into.
Option C avoids those difficulties by only conferring on third party
beneficiaries a limited range of rights and obligations which do not
involve significant expense. Option A involves no change to the current
situation.
2.154 The preferred option is Option C. Concerns raised during the
initial consultation period regarding the expense and practical difficulties
of bestowing third party beneficiaries with all of the rights and obligations
held by insureds are justified. Option C clarifies rights and obligations in
a range of areas but could be implemented without any significant cost
burden for insurers or consumers.
Summary of impacts
2.155 Elements of the proposals set out in the Bill will benefit both
insurers and insureds, without imposing significant ongoing compliance
costs on industry with flow-on impacts on premium settings.
2.156 The key measures in the bill relate to
1. electronic communication;
2. objective component of insured's duty of disclosure;
3. disclosure obligations on renewal of an eligible contract of insurance;
4. notification of duty of disclosure;
5. non-disclosure rules and life insureds;
6. life insurance remedies; and
7. third party beneficiaries.
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Insurance Contracts Amendment Bill 2013
2.157 Both insurers and insureds will benefit from the ability to use
electronic communication for various notice requirements under the ICA.
Use of electronic communications has the potential to lower costs related
to use of hard copy communications and to increase convenience for both
insurers and insureds.
2.158 The Bill will clarify the insured's duty of disclosure, remove the
insurer's option to ask `catch-all' questions and effectively require
specific questions to be asked on renewal. Insurers will be required to
remind insureds of their duty of disclosure where there is a significant
elapse of time between application and contract.
2.159 Initially, some additional administrative costs will be placed on
insurers in terms of altering established processes for renewing policies,
which could flow through to increased premiums charged. However,
these measures are intended to strike an appropriate balance between
ensuring insurers have reliable information to assess and price risk, while
at the same time, avoiding an unfair burden being placed on insureds in
meeting their duty of disclosure, with potential detrimental outcomes with
respect to claims.
2.160 Insurers, insureds and regulators would benefit from fewer and
less complex disputes relating to disclosure and ease of resolution would
increase. This could ultimately be reflected in lowered costs to insurers,
with this factored into premium rates.
2.161 Insurers will benefit from clarification of the remedies available
to them for non-disclosure by life insureds, who are not the insured under
life policies. More generally, insurers will benefit from simplification of
remedies for non-disclosure, with unbundling of remedies allowing for
greater flexibility and alignment of life remedies with those available to
general insurers more realistically reflecting market realities, namely,
bundling of mortality and morbidity life insurance policies, and the almost
total contraction of the market for traditional life policies with surrender
values being replaced by short term, pure risk policies.
2.162 Holders of life insurance policies will benefit from less harsh
and inflexible remedies being available to insurers with respect to
non-fraudulent (innocent) non-disclosure, with insureds generally
benefiting from fewer cost pressures placed on premiums rates (these are
ultimately impacted by pursuit of expensive litigation for alleged
fraudulent non-disclosure necessitated by the current rigid remedy
regime).
2.163 It is expected that options to benefit third party beneficiaries by
clarifying rights and obligations in a range of areas could be implemented
without any significant cost burden for insurers or consumers.
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Regulation impact statement
2.164 While some proposals in the Bill may result in an increase in
compliance costs, these are expected to be low when taken into account in
the broader context where the overall impact of the changes is likely to
lead to greater balance between insurers and insureds and produce fairer
outcomes for all parties to the insurance contract and those affected by it.
Implementation and review
2.165 The recommended actions all require legislative amendments to
the ICA.
2.166 No formal review has been scheduled. The operation of the ICA
will be under continuous monitoring and adjustments or refinements to the
proposed amendments will be made as required.
101
Chapter 3
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Insurance Contracts Amendment Bill 2013
3.1 This Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
3.2 The Insurance Contracts Amendment Bill 2013 (the Bill)
re-introduces the measures contained in Insurance Contracts Amendment
Bill 2010 (the 2010 Bill) with some minor refinements. The
re-introduction of the measures in the 2010 Bill with the minor
refinements gives effect to a number of recommendations of a Review
Panel appointed to review the Insurance Contracts Act 1984. The
changes are largely technical in nature and respond to market
developments and judicial decisions since its enactment.
3.3 The Bill will streamline requirements and address anomalies in
the regulatory framework for the benefit of insurers and consumers. The
measures have been subject to stakeholder consultation and in some areas
the Review Panel's recommendations have been modified to take account
of issues raised in consultations.
Human rights implications
3.4 This Bill does not engage any of the applicable rights or
freedoms.
Conclusion
3.5 This Bill is compatible with human rights as it does not raise any
human rights issues.
The Minister for Financial Services and Superannuation the
Hon William Shorten MP
103
Index
Schedule 1: Scope and application
Bill reference Paragraph number
Item 2, subsection 11(1) 1.17
Item 4, subsections 13(2) 1.7
Item 4, subsections 13(3) and 13(4) 1.19
Item 5, subsection 14A(3) 1.10
Item 5, subsections 14A(1) and 14(2) 1.8
Item 5, subsection 14A(1) 1.9
Item 7, Paragraph 9(1)(f) 1.23
Item 9, subsections 9(1A), 9(1B) and 9(1C) 1.26
Schedule 2: Electronic communication
Bill reference Paragraph number
Item 1, subsection 62(1) 1.43
Items 2 to 6, section 70, subsections 71(1), 71(2) and 71(3) and 1.38
paragraph 71(2)(b)
Items 7 to 8, section 72A 1.41
Item 7, section 72 1.39
Schedule 3: Powers of ASIC
Bill reference Paragraph number
Item 1, section 11F 1.47
Item 1,paragraph 11F(1)(a) and 11F(1)(b) 1.48
Schedule 4: Disclosure and misrepresentations
Bill reference Paragraph number
Item 1, paragraph 21(1)(b) 1.53
Item 3, Subsection 21B(9) 1.72
105
Insurance Contracts Amendment Bill 2013
Bill reference Paragraph number
Item 4, subsection 21B(1), Paragraph 21B(3)(a) and Subparagraphs 1.66
21B(3)(b)(i) and 21B(3)(b)(ii)
Item 4, subsection 21B(4) 1.67
Item 4, subsections 21B(5) and 21B(6) 1.68
Item 4, subsection 21B(7) 1.70
Item 4, subsection 21B(8) 1.71
Item 4, subsection 21B(1) and 21B(2) 1.65
Item 4, subsection 21B(12) 1.73
Item 4, subsection 21B(10) 1.76
Item 4, subsection 21B(11) 1.77
Item 5 1.79
Item 6, subsection 21A(5) 1.61
Item 6, subsection 21A(1), 21A(2) and 21A(3) 1.59
Item 6, subsection 21A(4) 1.60
Item 9, subsection 11(1) 1.87
Item 11, subsection 11(10) 1.85
Item 12, subsection 22(3) 1.84
Item 12, subsection 22(4) 1.84
Item 12, subsection 22(5) 1.84
Item 12, subsections 22(6) and 22(7) 1.84
Item 12, subsection 22(1) 1.84
Item 12, subsection 22(2) 1.84
Item 14, subsection 31A(1) 1.91
Item 14, subsection 31A (2) 1.92
Item 14, subsection 31A(3) 1.93
Schedule 5: Remedies of insurers: life insurance contracts
Bill reference Paragraph number
Item 1, subsections 27A(1) and 27A(2) 1.108
Item 1, subsection 27A(3) 1.110
Item 1, subsection 27A(4) 1.112
Item 8, section 29(4) 1.115
Item 10, subsections 29(6) and 29(7) 1.116
Item 10, subsection 29(8) 1.117
106
Index
Bill reference Paragraph number
Item 10, subsection 29(10) 1.119
Item 12, subsection 30(3A) 1.121
Item 13, subsection 30(4) 1.122
Item 15, subsection 59A(1) 1.125
Item 15, subsection 59A(2) 1.127
Item 15, subsection 59A(3) 1.127
Item 15, subsection 59A(4) 1.127
Item 15, subsection 59A(5) 1.128
Item 16, section 63 1.130
Schedule 6: Third parties
Bill reference Paragraph number
Item 1, section 41 1.141
Items 4, 5, 9and 10, subsections 48(1), 48(2) 48AA(1) and 48AA(2) 1.143
Items 6 and 11, paragraphs 48(2)(a) and 48AA(2)(a) 1.144
Items 7, 12and 13, subsections 48(3) and 48AA(3) 1.147
Item 16, subsections 48A(1) and 48A(2) 1.149
Item 16, subsections 48A(1A) 1.150
Items 19, 20 and 21, subsection 51(1) and 51(3) and paragraph 1.152
51(2)(b)
Items 23 to 28, subsections 55A(2) and 55A(3), paragraphs 1.154
55A(1)(b), 55A(1)(c), 55A(1)(d) and 55A(2)(b)
Item 31, subsection 11(1) 1.161
Items 32, 36 and 37, subsection 11(1), paragraphs 23(a)and 26(3)(a) 1.164
Items 33 to 35 paragraphs 11(4)(a),11(4)(b) and 11(4)(c) 1.163
Item 38, section 32 1.159
Item 39, section 32A 1.165
Schedule 7: Subrogation
Bill reference Paragraph number
Item 1, section 64 1.186
Item 2, section 67 1.184
107