Crocodiles, kangaroos, boomerangs and beaches. These are some of the things that make Australia unique. However, unless you are a travel insurer, they are not particularly relevant to insurance. One thing that is both unique and relevant to underwriters however is the Insurance Contracts Act 1984 (ICA) and the power it has, particularly where a policy wording has been issued without having regard to the provisions of this unique piece of legislation.
The uniqueness of claims-made cover
It is often a source of surprise, and sometimes bewilderment, for London underwriters when we inform them that the effect of their policy wording, in combination with the ICA, is that a recent claim against an insured may fall into a policy period sometimes many years earlier even though the insured did not notify any circumstances to underwriters.
Suddenly underwriters are on risk for a claim which may have been brewing for many years yet they have never been made aware of. Their short-tail risks have effectively been converted into a long-tail ones. Underwriters will appreciate that this can cause practical difficulties too. Books that were closed or in run-off subsequently require reserves to be raised and claims to be handled.
How can this happen?
There are two things that operate in conjunction which allow this to happen:
- Firstly, section 54 of the ICA; and
- Secondly, the use of a deeming provision in the relevant policy wording.
Section 54 is a form of relief for insureds which applies to acts (or omissions) after entry into the contract. It effectively says that where there is a provision in an insurance policy which purports to entitle underwriters to refuse cover by reason of an act of someone, where the act is not causative or contributory to loss underwriters cannot in fact refuse cover solely by reason of that act. Instead underwriters can only reduce their liability to the extent they have suffered prejudice.
To demonstrate the operation of section 54 take the typical policy requirement that an insured must obtain underwriters' consent before incurring defence costs. In Australia if an insured does not obtain such consent that is not fatal to that insured retrospectively obtaining cover for the defence costs that they have incurred. Instead those costs will be covered under the policy - subject to any prejudice underwriters have suffered (we should record that prejudice in those circumstances is notoriously difficult to establish). In this way section 54 cures an insured's failure to obtain consent.
Section 54 becomes very powerful where a policy has a deeming provision.
A deeming provision provides that a claim will be deemed to have been made during the period of insurance if it arises from circumstances which were notified to underwriters during the period of insurance.
As with the defence costs example above, section 54 works to forgive the failure of an insured to notify circumstances.
It means that where:
- a policy has a deeming provision;
- an insured fails to notify circumstances during an earlier period; and
- a claim, which arises out of those circumstances, is later made against that insured;
then that claim will still be eligible for cover under the earlier period. All that is required in that situation is the insured's subjective awareness of the circumstances during the earlier period.
How can underwriters manage this risk?
The answer is simple – underwriters who wish to avoid an exposure to such claims need to remove deeming provisions from their Australian insurance policy wordings. If a policy does not have a deeming provision then section 54 cannot operate to provide relief to the insured.
Underwriters presumably have noble intentions when including a deeming provision in the policy wording. They wish to give their insureds comfort that notified circumstances which later give rise to claims will be covered. However, in Australia it is unnecessary to include a policy provision to achieve this.
Removing a deeming provision from the policy wording will not prevent the policy from responding to circumstances that are notified to underwriters. This is because the ICA contains another provision, section 40, which legislates that claims arising out of previously notified circumstances will fall for cover during the insurance period when they were notified. Relevantly section 54 cannot operate in relation to section 40 the same way that it operates for deeming provisions. Therefore the advantage of removing deeming provisions is that underwriters at the end of the policy period will know exactly what claims or circumstances a policy period is going to respond to. There are no surprises several years later.
If the deeming provision is not removed underwriters run the risk that there are circumstances that an insured is aware of, which they have not notified that will later result in a claim and which a policy several years old will respond to.