Insurance claims and coverage

Third-party actions

Can a third party bring a direct action against an insurer for coverage?

At common law, a third party is entitled to bring an action against an insurer:

  • where the insured holds the benefits of the insurance on trust for the third party;
  • where the insured was acting as the agent of the third party when it entered the contract of insurance; or
  • where the third party is specified in the contract of insurance as being insured under it, such that the third party can be treated as a party to that contract.


Further, section 48 of the Insurance Contracts Act 1984 (Cth) allows a third-party beneficiary under a contract of general insurance to recover from the insurer even though the third-party beneficiary is not a party to the contract. Similarly, section 48A provides that money payable under a contract of life insurance is payable to the third party even if they are not party to the contract.

Late notice of claim

Can an insurer deny coverage based on late notice of claim without demonstrating prejudice?

Under section 54 of the Insurance Contracts Act 1984 (Cth), an insurer is prevented from refusing to pay a claim due to an act or omission of the insured that occurs after the contract is entered into, which includes an insured’s failure to comply with a notice provision. However, the insurer’s liability in respect of the claim may be reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of the insured’s act or omission.

Outside the application of the Act, common law principles relating to breach of contract by an insured apply and there is conflicting authority as to whether a failure to give notice would allow an insurer to deny coverage in the absence of prejudice.

Wrongful denial of claim

Is an insurer subject to extra-contractual exposure for wrongful denial of a claim?

Where an insurer breaches the terms of an insurance policy by wrongfully delaying or denying indemnity, an insured will be entitled to claim interest and any consequential losses caused by the unreasonable delay or denial of indemnity. The insured may also be entitled to damages for breach of the insurer’s duty of utmost good faith, which is an implied term into life and general insurance contracts regulated by the Insurance Contracts Act 1984 (Cth).

Defence of claim

What triggers a liability insurer’s duty to defend a claim?

A contract of insurance may include a provision imposing a duty to defend upon the insurer, which may be distinguishable from and arise earlier than the trigger for coverage under the policy. It is, however, common for contracts of insurance to impose a duty to defend on the insured instead.

Indemnity policies

For indemnity policies, what triggers the insurer’s payment obligations?

The insurer’s payment obligation is triggered once the insurer makes a decision based on the facts and circumstances that a claim is covered under the relevant policy.

For general insurers who are signatories to the General Insurance Code of Practice and for life insurers who are subscribers to the Life Insurance Code of Practice, the decision to accept or deny a claim must be made within 10 business days (provided all information reasonably required by the insurer to make their decision has been received).


Is there a period beyond which a life insurer cannot contest coverage based on misrepresentation in the application?

Where an insured makes a fraudulent misrepresentation in the application, section 29(2) of the Insurance Contracts Act 1984 (Cth) allows the life insurer to avoid the contract at any time.

Where an insured makes a misrepresentation in the application that is not fraudulent, section 29(3) allows the life insurer to avoid the policy within three years after the contract was entered into, but only if the insurer would not have been prepared to enter into a contract with the insured on any terms had the relevant misrepresentation not occurred.

Punitive damages

Are punitive damages insurable?

It is exceptionally rare for punitive damages to be awarded by Australian courts (and any awards made are not for significant sums). However, there is, in principle, no bar to the insurability of punitive damages, provided that cover is not expressly excluded under the terms of the policy.

Excess insurer obligations

What is the obligation of an excess insurer to ‘drop down and defend’, and pay a claim, if the primary insurer is insolvent or its coverage is otherwise unavailable without full exhaustion of primary limits?

Unless the insurers contract to the contrary, an excess insurer is not required to pay a claim unless and until the primary insurer’s limit of cover is fully exhausted. It is, however, common practice for excess insurers to agree to drop down in the event of the insolvency of an underlying insurer, particularly where the underlying insurer is also Australian Prudential Regulation Authority (APRA)-regulated.

Self-insurance default

What is an insurer’s obligation if the policy provides that the insured has a self-insured retention or deductible and is insolvent and unable to pay it?

In respect of a deductible, the insured’s obligation to provide indemnity arises from the commencement of a covered claim but the deductible allows the insurer to reduce the amount of its indemnity by the agreed amount. In the absence of clear words to the contrary, the courts will not allow the insurer to avoid the obligation to pay the indemnity on the basis that the insured is insolvent or unable to pay an excess or deductible.

A self-insured retention is generally considered to postpone an insurer's obligation to provide indemnity until the amount of the retention is exhausted. In an insolvency scenario, however, the insurer will typically provide indemnity, subject to the applicable policy limit as though the retention had been exhausted.

Claim priority

What is the order of priority for payment when there are multiple claims under the same policy?

The order of priority for payment will depend on the terms of the policy. Generally, claims will be paid according to their priority in time. Claims that arise from the same cause or circumstance are often required to be aggregated and cover may be limited to a specified amount in respect of all loss.

Allocation of payment

How are payments allocated among multiple policies triggered by the same claim?

Where two or more insurers are liable in respect of the same loss, an insured may claim under either policy, leaving the insurers to seek contribution as between themselves.

Disgorgement or restitution

Are disgorgement or restitution claims insurable losses?

Broadly, disgorgement or restitution claims are considered to be insurable losses. However, some insurance policies may specifically exclude disgorgement or restitution from coverage.

Definition of occurrence

How do courts determine whether a single event resulting in multiple injuries or claims constitutes more than one occurrence under an insurance policy?

Generally, the approach to the aggregation of claims will be determined by the terms of the insurance policy. If, however, reliance on a policy term regarding aggregation would constitute a contravention by the insurer of the duty of utmost good faith, the courts will not allow the insurer to rely on the policy term.

Rescission based on misstatements

Under what circumstances can misstatements in the application be the basis for rescission?

At common law, the insured warrants the truth of their representations contained in the application or proposal form. Where there is a fraudulent or negligent misrepresentation on the part of the insured, the insurer is entitled to rescind the policy with effect from inception.

However, for insurance contracts regulated by the Insurance Contracts Act 1984 (Cth):

  • a life insurance policy can be rescinded in the event of:
    1. a fraudulent misrepresentation or non-disclosure at any time; or
    2. a misrepresentation or non-disclosure that is not fraudulent, but only within three years of the policy being issued and provided the insurer would not have been prepared to issue a policy to the insured on any terms had the relevant misrepresentation or non-disclosure not occurred; and
  • a general insurance policy can be rescinded in the event of fraudulent misrepresentation or non-disclosure, but only in circumstances where the insurer would not have issued the policy on the same terms had the misrepresentation or non-disclosure not occurred. In other words, an insurer cannot rescind a policy, despite the fraudulent misrepresentation or non-disclosure, if the insurer would have been willing to issue the policy on the same terms had the misrepresentation or non-disclosure not been made.