The country’s Insurance Contracts Act is about to be updated.

In Australia, most insurance contracts are governed by the Insurance Contracts Act (the Act). Introduced in 1984, it modifies the common law in many important respects. However, on 17 March 2010, the Insurance Contracts Amendment Bill 2010 (ICAB) was finally introduced into the Australian parliament. It will probably receive royal assent later this year, after which the ICAB provisions will be incorporated into the Act.

Many of ICAB’s provisions are similar (if not identical) to those contained in the exposure draft bill published by parliament three years ago. However, ICAB differs in several significant ways to the 2007 exposure draft. Most importantly, the long-awaited proposed amendments to sections 40 and 54 of the Act are not included in ICAB.

Duty of good faith

A failure by a party to a contract of insurance to comply with the duty of utmost good faith implied in a contract is also now a breach of the Act (section 13). In relation to an insurer, the Australian Securities and Investments Commission (ASIC) may exercise its powers under the Corporations Act 2001 dealing with the variation, suspension and cancelling of financial services licences as if the insurer’s failure to comply with the duty of utmost good faith amounts to a failure to comply with a financial services law. This provision was not contained in the 2007 exposure draft.

In addition to ASIC’s powers relating to a breach of the duty of utmost good faith, a new section 11F of the Act gives ASIC the power to intervene in any proceedings relating to any matter arising under the Act.

Duty of disclosure

The objective test of an insured’s duty of disclosure is amended by the substitution of a new section 21(1)(b). This new provision attempts to clarify the objective test by reference to one non-exclusive criterion – namely, “the nature and extent of the insurance cover to be provided under the relevant contract of insurance”. ICAB therefore does not adopt the two other non-exclusive criteria contained in the 2007 exposure draft.

In relation to eligible contracts of insurance, an insurer will (under section 21A) have to ask a proposed insured certain specific questions if it wants to be able to enforce the insured’s duty of disclosure. Under section 21B, the insurer will have to ask these questions both at the start of the policy and on renewal, but not on any variation, reinstatement or extension of the policy.  

But insurers will not be entitled to ask catch-all questions at the start (or on the renewal) of a policy, otherwise they will be treated as having waived the insured’s duty of disclosure.

On renewal, an insurer may, however, choose to seek updates to the answers previously provided by an insured, rather than go through all the original questions again.

Insurers’ obligation to inform

Clause 22 of ICAB imposes new requirements on insurers when it comes to informing insureds about their duty of disclosure. In particular, they must tell insureds:

  • (in writing) that the duty of disclosure applies right up until the time they enter into the proposed contract; and  
  • about the general nature and effect of sections 21A and 21B of the Act (if the contract is an eligible contract of insurance) and the effect of section 31A (if the contract is a contract of life insurance).  

If an insurer does not comply with these provisions, then it cannot rely on any failure by the insured to comply with the duty of disclosure unless that failure is fraudulent.

Life insurance

The provisions of ICAB relating to life insurance include the unbundling of contracts (see further below) and new remedies for non-disclosure and misrepresentation, which are essentially the same as those set out in the 2007 exposure draft.

The new “unbundles” life insurance contracts that combine more than one type of life insurance cover, so that different remedies for non-disclosure or misrepresentation will apply to each particular type of cover.

The remedies contained in section 29 of the Act are now limited to contracts of life insurance that contain a surrender value or provide cover in respect of death. Other types of life insurance are dealt with under the new section 28(1A), which offers the same remedies as section 28 in its current form.

As regards any life insurance contract to which section 29 applies, an insurer can now only avoid the contract on the basis of nondisclosure or misrepresentation if the insured would not have entered that particular contract (as opposed to another standard life insurance contract) on any terms.

Third party beneficiaries

ICAB contains a raft of changes regarding the rights and obligations of third party beneficiaries under insurance contacts. Most of these amendments are consistent with the changes contained in the 2007 exposure draft.

Section 41 of the Act is amended by ICAB to give third party beneficiaries the same rights as an insured under a contract to require the insurer to inform them:

  • in writing about any admission of indemnity in relation to a claim; and  
  • whether the insurer intends to conduct the proceedings.  

Under subsection 48(1), a third party beneficiary also has a right to recover from the insurer even though they are not a party to the contract.

Summary

While many of the amendments contained in the 2007 exposure draft have found their way into the 2010 bill in substantially the same form, some provisions are notable for their omission – in particular, the proposed amendments to sections 40 and 54 of the Act.

Additionally, the proposed change to section 31 of the Act – which extends a court’s discretion to review an insurer’s ability to reduce its liability to nil – has not been implemented. This is good news for insurers, given that the proposed amendment offered a likely means for insureds to challenge insurers’ denial of cover for innocent non-disclosure or misrepresentation.

Most of ICAB’s provisions will take effect from the date of royal assent. However, the provisions requiring insurers to provide certain notices regarding disclosure to insureds are the key exceptions to this general start date. These amendments will take effect 18 months after the new legislation comes into force. This is to give insurers a chance to amend their business practices in response to the new rules regarding the operation of the duty of disclosure and provision of associated notices.

The other provisions of ICAB that will have a delayed start are the Schedule 5 amendments regarding changes to the remedies for particular contracts of life insurance. These new rules will come into operation 12 months after the date of royal assent so as to give insurers a chance to factor into their affairs the changes to available remedies.

When implemented, the ICAB amendments to the Act will have a significant impact upon insurers from an administrative perspective, particularly regarding the form and nature of notices to be provided to insureds. But at least insurers will have a 12-18 month breathing space in which to update their businesses practices to accommodate most of the important changes.