The Insurance Contracts Amendment Bill has now been passed by both Houses of Parliament. Insurers, insureds and insurance brokers will be affected by the passing of this Bill because, once enacted, it will change and clarify the scope of the Insurance Contracts Act 1984 (Cth) (ICA).

Need to know - General insurance specific changes to the ICA

The ICA will be amended so that:

  • (communication by email) insurers will be able to issue electronic notices and documents to insureds;
  • (rights for third party beneficiaries) various sections of the ICA will now apply to third party beneficiaries (being persons who are not contracting insureds but to whom the insurance contract, upon its terms, extends insurance cover), including the duty of utmost good faith;
  • (duty of disclosure) refined duty of disclosure obligations will apply to insureds in relation to eligible contracts of insurance and there will be changes to insurers’ notice obligations for certain contracts;
  • (subrogation) revised rules with respect to money recovered by subrogated action will apply to insureds, third party beneficiaries and insurers; and
  • (ASIC enforcement powers) the Australian Securities and Investments Commission (ASIC) will have new rights with respect to the enforcement of the ICA.

Much of the Insurance Contracts Amendment Act 2013 (Cth) (Act) will come into effect on the date that it receives Royal Assent and it is anticipated that this will occur shortly. However, other measures introduced by the Act will commence either by Proclamation (eg electronic communication) or after a period of 30, 12, or 6 months from the date of Royal Assent.

Communication by email

After a date to be fixed by Proclamation (or alternatively after the end of the period of 6 months following the receipt of Royal Assent) insurers may issue electronic notices and documents to insureds. It is anticipated that this will decrease insurer compliance costs and greatly improve the way in which insureds are able to review their policy documents.
 
Rights for third party beneficiaries
 
The duty of utmost good faith will be extended so that it is also owed by insurers to third party beneficiaries and, after an insurance contract is entered into, by third party beneficiaries to insurers. The amended regime in relation to subrogation will also be extended to apply to claims made by third party beneficiaries.

Current uncertainty concerning whether a claim made by a third party beneficiary may be adversely affected by pre- or post-contractual vitiating conduct of an insured is removed by amendments to the effect that an insurer may raise defences which concern the conduct of an insured (eg non-disclosure) when defending a claim made by a third party beneficiary.

For contracts of liability insurance, where a third party beneficiary makes a written request to the insurer for confirmation as to whether or not the policy responds to a claim, insurers will have an obligation (similar to that currently owed to insureds) to provide such information to the third party beneficiary. If the policy does respond, insurers must also inform a third party beneficiary what negotiations or legal proceedings the insurer intends to conduct on their behalf. All such notifications by an insurer must be made in writing. If a notification is not made within a reasonable timeframe, an insurer will not be able to refuse payment of the claim and the amount payable in respect of that claim will not be able to be reduced by reason only that the third party beneficiary settled, compromised or made an admission, or made a payment in respect of the claim.

Further, as per the current regime in relation to insureds, where a third party beneficiary to a policy who is liable in damages to another person dies or cannot be found after reasonable enquiry, a claimant upon that third party beneficiary may then proceed directly against the insurer.

Changes to the duty of disclosure

Insurers will no longer be able to ask insureds and intending insureds for eligible contracts of insurance “catch all” questions requiring disclosure of exceptional circumstances that a reasonable person could be expected to know to be relevant to the insurer’s underwriting decision making. Insurers will only be able to ask specific questions that are relevant to their decision whether or not to underwrite the risk and, if so, on what terms, failing which they will be deemed to have waived compliance with the duty of disclosure. This applies to both new eligible contracts of insurance and also any renewals. When renewing eligible contracts of insurance, insurers may also provide an insured with a copy of previously disclosed matters and simply request that the insured provide details of any changes to these matters or confirm that there are no such changes. If an insured does not respond, it will be deemed that there are no notifiable changes.

Insurers will be subject to refined notice requirements in relation to their obligation to inform insureds of the duty of disclosure. Insurers must clearly inform insureds of new and renewing eligible contracts of insurance of the general nature and effect of their duty of disclosure. There will also be an obligation for insurers to inform insureds of the general nature of the duty to disclose and that the duty applies until the proposed contract is entered into. Insurers should notify all such insureds in writing. Where an insurer accepts an offer to enter into a contract of insurance or a counter offer is made, and either of these things are done more than 2 months after the insured’s last disclosure, a reminder must be given to the insured that the duty of disclosure continues to apply until the contract is entered into.

Lastly, where a policy is varied so that it provides a kind of insurance cover that was not provided by the contract immediately before the variation or where the variation is involved in a renewal, extension or reinstatement, the deemed notice exceptions in s 11(10) of the ICA are amended so that the insurer must give notice to the insured as required under section 22 (“Insurer to inform of duty of disclosure”) and 40 (“Certain contracts of liability insurance”) of the ICA (where relevant). However, in certain circumstances the insurer may be taken to have satisfied the s 22 notice requirements in connection with a renewal, extension or reinstatement if the insurer has previously given the information required by the section (ie as amended).

Revised rules in respect of subrogation recoveries

Revised rules with respect to the application of moneys recovered by an insurer under a right of subrogation will apply to insureds, third party beneficiaries and insurers; in overview, the aim is to provide a regime for division of any proceeds from a recovery action whereby the risk of the cost of the proceedings is aligned with reward. However, these revised rules may be contracted out of or modified under an insurance contract.

Other changes

The Act contains various provisions which will amend the way that the ICA regulates contracts for life insurance. For instance, bundled life insurance contracts combining more than one type of cover and/or life insured will able to be unbundled into separate contracts for the purposes of applying remedies for non-disclosure or misrepresentation in situations where contractual provisions can be separated into groups of provisions that could form a single contract of life insurance. For more details please see our previous alert.

ASIC enforcement powers

ASIC will have the power to bring representative actions or to take action under the Corporations Act 2001 (Cth) where insurers breach their duty of utmost good faith under the ICA. ASIC will also have a general power to intervene in proceedings relating to the ICA or to Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (Cth).

Next steps

The following action points highlight just some of the things that stakeholders will have to do in order to comply with the refined regime once it comes into operation.

Insurers will need to advise insureds of their amended disclosure obligations for certain contracts of insurance, ensure that specific questions are asked of insureds, and request that insureds update disclosure details that have been previously given before renewal takes place so that they may be relied upon in the event of a dispute. If they choose to do so, insurers will also be able to issue electronic notices and documents to insureds pursuant to the requirements of the Electronic Transactions Act 1999 (Cth) and any regulations made under that Act.

Insurance brokers will need to be mindful of the re-calibrated rights and duties for their clients created by the amendments. Among other things, brokers should be aware of the new obligations that insurers will owe to insureds and third party beneficiaries under certain contracts of insurance.

New insureds and renewing insureds under eligible contracts of insurance should be aware that their duty of disclosure obligations have been refined. All insureds should be aware that their duty of disclosure extends to telling an insurer before a contract is entered into anything that a reasonable person would be expected to know having regard to factors such as the nature and extent of the insurance cover being sought and the class of persons who would ordinarily apply for such cover.