The Insurance Contracts Act 1984 (Cth) (ICA) regulates most general and life insurance contracts entered into in Australia.
Before a person enters into an insurance contract that is regulated by the ICA, he or she has a duty of disclosure under section 21 of the ICA. The person has a duty to disclose every matter that:
- They know to be a matter relevant to the decision of the insurer whether to accept the risk, and if so, on what terms; or(b)
- A reasonable person in the circumstances could be expected to know to be a matter so relevant.
The duty does not extend to disclosure of a matter that:
- Diminishes the risk;
- Is of common knowledge;
- The insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or
- Where the duty of disclosure is waived by the insurer.
Pursuant to section 28 of the ICA, if an insured fails to comply with their duty of disclosure or makes a misrepresentation before the contract is entered into, the liability of the insurer can be reduced to the amount that would place the insurer in the position it would have been if the failure had not occurred. There is no reduction where the insurer would have entered into the contract for the same premium and on the same terms and conditions (unless there is fraud).
Barry.Nilsson. Lawyers recently successfully defended a case for Australian Alliance Insurance Co Ltd (AAI) against a Mr Michail on the basis that he failed to comply with his duty of disclosure under the ICA and made misrepresentations in order to secure insurance cover for his 2005 Aston Martin convertible.
On 6 May 2011, Mr Michail’s Aston Martin convertible, which was insured with AAI (with Shannons acting as agent), left a public road, entered a boat ramp, and then became partly submerged in seawater while being driven by Mr Michail.
AAI admitted that the actual loss and damage sustained by the vehicle as a consequence of it being driven into that body of water on that day amounted to a “total loss? under the contract of insurance.
The insurance contract was for an “agreed value? of $250,000 with an agreed excess of $2,500.
The problem for Mr Michail was that he had failed to disclose at least six offences for which three demerit points were assigned as well as one suspension within the relevant 5 year period that he was asked about by AAI. If Mr Michail had disclosed this, AAI argued that they would not have entered into the contract.
Judge Dorney in the Queensland District Court found that had this disclosure been made by Mr Michail, cover would not have been provided. The main reason for this was because AAI had guidelines which state that a risk is “unacceptable? if, relevantly, there is more than one loss of licence or suspension, or for drivers older than 25 years there are more than eight traffic infringements and/or offences?. This would have included Mr Michail. His Honour went on to highlight that the insurer was not liable under the policy because of the non-disclosure of the prior offences.
This decision is subject to appeal.
The case is not only a good reminder to insureds about the importance of disclosure of all relevant information to insurers prior to entering into the contract. It is also an excellent illustration of the importance of insurers being able to point to underwriting guidelines and what action they will take in certain circumstances i.e. what information they consider relevant in determining whether or not a policy will be issued. That is an easier task with the more homogenised risks and policies such as comprehensive car insurance. In this case, AAI was able to prove to the court with reference to such guidelines that if disclosure of the offences had been made then the policy would not have issued.