Five years after the review of the Insurance Contracts Act by Alan Cameron and Clayton Utz consultant Nancy Milne, and three years after the exposure draft bill was released, the Insurance Contracts Amendment Bill 2010 has been introduced into Parliament. Although most of the Bill is similar to the exposure draft of 2007, there have been some changes as a result of industry consultation which we'll briefly highlight in this Alert.
The main areas of the Insurance Contracts Act being changed
The Bill amends the Insurance Contracts Act in these areas:
- duty of utmost good faith
- bundled contracts and unbundling contracts
- electronic communication
- powers of ASIC, including to take representative actions by ASIC on behalf of third party beneficiaries
- disclosure and misrepresentations, including remedies
- cancellation of contracts
- third parties' rights and obligations
- insurers’ defences in actions by third party beneficiaries
What's changed since the exposure draft Insurance Contracts Amendment Bill
Two new sections have appeared since the exposure draft. There is now a right in section 55A for ASIC to take representative actions on behalf of third party beneficiaries, and a new section 59A deals with the cancellation of life insurance contracts by the insurer.
There have also been some drafting changes to the sections dealing with
- expiration and renewal
- unbundling of life insurance contracts
- the rules for requests by third party beneficiaries for information from insurers.
We look at the more important changes below.
Disclosure requirements - some changes
Section 21A which deals with the duty of disclosure before the original entering into of an "eligible" contract of insurance now precludes open ended requests for disclosure. Insurers must ask specific questions.
A new section 21B deals with the duty of disclosure before an "eligible" contract of insurance is renewed. The key issue here is that insurers must ask the insured before renewal to answer specific questions relevant to the decision to renew and the terms of renewal. However in addition to this insurers can ask the insured to confirm or update previous disclosure. There will be no duty to disclose beyond these two options on renewal.
Claims made and notified policies - changes since the exposure draft
The biggest change is the removal of proposed changes to non-notification and relief under section 54. The exposure draft proposed givinginsureds a 28-day window from the end of the policy period to notify the insurer of known facts that might give rise to a claim. If they did not do so, the insurercould thenrefuse the claim.
Claims against insurer in respect of liability of insured or third party beneficiary
If a person is owed damages by an insured under a contract of liability insurance, that contract provides insurance cover in respect of the liability, and the insured is either dead or cannot be found, that person currently can sue the insurer to recover an amount equal to the insurer’s liability under the contract in respect of the liability of the insured. The exposure draft bill proposed to expand this right to sue an insurer in two ways:
- first, the provision would cover not only insureds who owe damages, but also third party beneficiaries under the contract of insurance; and
- secondly, the person could sue the insurer not only when the insured or third party beneficiary is dead or missing, but also if the person has obtained judgment against the insured or third party beneficiary and they have no money or assets to pay the damages.
This second route has been dropped in the final version of the bill - obtaining judgment against a broke insured or third party beneficiary won't entitle you to sue the insurer.
"A contract" versus "the contract"
Currently an insurer can avoid a life insurance contract where there has been misrepresentation or a failure to comply with the duty of disclosure "if the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made [emphasis added]". This has been interpreted to mean any contract at all. The draft bill would change section 29(3) to refer to "the contract" so that even if an insurer would have entered into a slightly different contract, it can still avoid the contract where there has been misrepresentation or a failure to comply with the duty of disclosure.