The Insurance Contracts Amendment Act 2013 (Cth) (ICAA) finally received the Royal Assent on June 28, 2013, almost 10 years after the Howard Government first announced it would be undertaking a comprehensive review of the Insurance Contracts Act 1984 (ICA). The amendments will have a significant impact on the insurance industry and insurance brokers.
Key amendments include:
- Section 13 of the ICA has been amended so that a breach of the duty of utmost good faith constitutes a breach of the ICA, and it extends to third party beneficiaries.
- The general duty of disclosure in Section 21 of the ICA has been amended so that the objective test of “reasonable person in the circumstances” is to be applied having regard to the:
- nature and extent of insurance cover to be provided under the relevant insurance policy; and
- the class of persons ordinarily expected to apply for such insurance.
This amendment does not take effect until December 28, 2015, and only applies to contracts that are entered into or renewed after this date, providing a transition period for the industry and brokers to take on board the implications of the amendment.
It will remain to be seen whether the amendments to section 21 will mean that the reasonable person in the circumstances test will be applied more consistently by the Courts, particularly as the factors to be considered are non-exhaustive, and raise the question of what other factors should be considered.
Insurers now have more onerous obligations regarding informing an insured of the nature and effect of the duty of disclosure prior to the policy being entered into. Section 22 of the ICA has been extended to require an insurer to inform an insured of the general nature and effect of the duty of disclosure; and that the duty of disclosure applies up until the proposed contract is entered into.
If there is a period of more than two months between the last disclosure and the commencement of the contract, an insurer must give the insured a reminder notice stating that the duty of disclosure applies. Where an insurer fails to do this, it is unable to deny coverage if an insured has failed to comply, except in cases of fraud.
Going forward insurers need to be aware of the more onerous disclosure notice obligations imposed by section 22 and whether their existing claims procedures and documentation comply. The amendment favours insureds by providing ongoing obligations on insurers to follow up on disclosure documents whether directly or via insurance intermediaries. However the changes will provide all parties with greater clarity around the disclosure requirements, particularly where there is a delay from initial application to agreement as to terms.
One of the most expected but significant changes by the ICAA is the extension of the rights and obligations conferred on third party beneficiaries. In addition to extending the duty of utmost good faith to third party beneficiaries, the ICAA has:
- Extended to third party beneficiaries the right to request that an insurer inform them in writing whether the insurer admits the policy applies to the claim, and if so, whether the insurer proposes to conduct, on behalf of the insured, the negotiations in any legal proceedings on behalf of the third parties beneficiaries.
- Clarified section 48(2) so as to make it clear that an insurer may raise, as against the third party beneficiaries, a defence based upon the conduct of the insured (such as non-disclosure or breach of conditions).
- Extended section 51 so the third party can exercise similar rights in relation to a third party beneficiary covered under the relevant policy.
The ICAA has re-written the existing provision of the ICA dealing with subrogation and inserted a new section 67 which provides that the person who funds the recovery has priority over the proceeds of the recovery to the extent of its payments and the costs of the recovery action, with the balance to be paid to the non-funding party and any excess to the funding party. This regime applies equally to third party beneficiaries. It is also subject to any agreement to the contrary either contained in the policy or entered into subsequent to the loss. Insurers should review their policy wordings and determine whether they are content to rely on the ICA or wish to have a contractual priority right in respect of recovered payments.
Whereas previously the Australian Securities and Investments Commission (ASIC) only had general authority to administer the ICA, ASIC is now able to intervene in a proceeding arising under the ICA, and to be represented in that proceeding. In relation to a breach of the duty of utmost good faith by an insurer, ASIC may vary, suspend, revoke or cancel an Australian Financial Services Licence or ban an insurer from providing financial services.
Insurers also need to be aware of their increased risk exposure through the expansion of the rights of third party beneficiaries and check policy terms to ensure the premium is being rated correctly.