On 28 November 2012, Treasury released an exposure draft of the Insurance Contracts Amendment Bill 2013 (Cth) (2013 Bill) for public consultation. The 2013 Bill is intended to implement a number of key changes to the Insurance Contracts Act 1984 (Cth) (ICA), which were recommended by the 2003 Cameron/Milne review into the operation of the ICA.
A number of these recommendations were intended to be passed in 2010 in the Insurance Contracts Amendment Bill 2010 (Cth) (2010 Bill). The 2010 Bill lapsed as Parliament was dissolved for the 2010 Federal election. Our alert on the 2010 Bill can be found here.
In February 2012, Treasury conducted roundtable discussions with a number of interested stakeholders regarding the potential re-introduction of the 2010 Bill. As a result of those discussions, the 2013 Bill amends the 2010 Bill in four key areas:
- the insured’s duty of disclosure;
- the application of the amendments to the duty of disclosure;
- the insurer’s remedies in relation to life insurance contracts; and
- bundled life insurance contracts.
The insured’s duty of disclosure
The 2013 Bill adds an additional non-exclusive factor 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. Accordingly, the 2013 Bill now includes two relevant factors:
- the nature and extent of the insurance cover to be provided under the relevant contract of insurance (which was included in the 2010 Bill); and
- the class of persons who would ordinarily be expected to apply for insurance cover of that kind.
The second factor outlined above was omitted from the 2010 Bill after public consultation. The Explanatory Material indicates that the inclusion of this additional factor is believed to provide appropriate outcomes for both insurers and insureds.
Application of the amendments to the duty of disclosure
The amendments to the duty of disclosure prescribed in the 2010 Bill (described in more detail in our previous alert) were originally set to commence 18 months after Royal Assent. After consultation, the 2013 Bill has extended the transition period for the amendments to the duty of disclosure to 30 months. This will allow the insurance industry to have more time to comply with the new requirements. This will likely benefit insurers, as they will be required to give notice of the duty of disclosure before a contract is entered into.
Insurer’s remedies in relation to life insurance contracts
The ICA currently contains two separate provisions dealing with remedies for non-disclosure and misrepresentations by the insured:
- section 28, which deals with general insurance contracts; and
- section 29, which deals with life insurance contracts.
The current remedies for life insurers in section 29 of the ICA are not well-suited to non-traditional life insurance policies (e.g. short-term cover for income protection or permanent disability). The 2010 Bill attempted to resolve this issue by limiting the application of section 29 to contracts of life insurance involving a surrender value or death cover. Other contracts of life insurance would be dealt with similarly to the remedies that apply to general insurance contracts.
Under the 2013 Bill, all life insurance contracts will continue to be subject to the remedies in section 29 of the ICA. However, if a contract does not have a surrender value or does not provide cover in respect of the death of a life insured (e.g. a non-traditional life policy):
- the insurer may vary the contract at any time after the contract is entered into; and
- if the insurer does not avoid the contract or has not varied the contract in accordance with the statutory formula, the insurer may vary the contract to place the insurer in a position that the insurer would have been in if the duty of disclosure had been complied with or the misrepresentation had not been made. In varying the contract, the insurer must have regard to the position in which other reasonable and prudent insurers that had entered into similar contracts of life insurance would have been, at the time the relevant contract was entered into.
Bundled life insurance contracts
The 2010 Bill attempted to “unbundle” contracts of life insurance which contained two or more types of cover by attempting to identify the kinds of insurance provided by the contract. This is consistent with the approach taken in the Corporations Act 2001 (Cth). However, the Explanatory Material to the 2013 Bill indicates that it was unclear from the 2010 Bill the extent to which contracts should or could be unbundled.
To provide further clarity around this issue, the 2013 Bill has moved away from the “kind of insurance” approach. Instead, bundled life insurance contracts will be unbundled into separate contracts for the purposes of applying the remedies in section 29 of the ICA when the provisions can be separated into groups of provisions that could form a single contract of life insurance.
The 2013 Bill does not address the following issues:
- the 2013 Bill does not remove the general insurance exemption from unfair contract terms laws. The Government has previously noted that it will consider introducing legislation once all submissions have been considered. Insurers should consider how the proposed amendments in the 2013 Bill to section 13 of the ICA (the duty of utmost good faith) will impact on any decision as to whether to remove the exemption to unfair contract terms laws.
the General Insurance Code of Practice Independent Review 2012 Issues Paper suggests that the amendments to the duty of utmost good faith which were proposed in the 2010 Bill should be narrowed, so that a remedy would only be available for:
- a breach of a “contract terms” section of the ICA; and
- a breach of a “communication term” section of the ICA.
In contrast, it would not be appropriate to amend the ICA to include a remedy for a breach of the duty of utmost good faith where the conduct breached a “pre-contract conduct” provision, or a remedial, mechanical or ancillary provision. However, the proposed amendments to section 13(2) of the ICA remain unchanged from the 2010 Bill.
Submissions are due by 12 December 2012.