Over forty years ago Windeyer J aptly noted that law was “marching with medicine but in the rear and limping a little”.1 The statement remains relevant today, with medical science evolving at a pace that leaves the law looking relatively amoebic.
Recent developments in genomic research (the study of the way that multiple genes interact with environmental factors to increase or decrease an individual’s risk of disease) highlight the tensions between the growth of personalised medicine, the insured’s duty of disclosure, and current underwriting practices for risk-rated insurance products.
Genomic testing and its impact
Genomics is rapidly reshaping our understanding of the interplay between genetic predisposition to certain diseases and the way in which environmental factors influence gene expression. It has also led to the development of personalised medicine through pharmacogenomics (the study of how genes affect an individual’s response to specific medications). Genomic testing has the scope to identify susceptibility to complex diseases caused by multi-factorial genetic changes in large portions of the population. In contrast, testing for single gene disorders generally only identifies diseases that are comparatively rare.
As genomic testing becomes increasingly prevalent as a diagnostic tool, more and more people will have an understanding of which diseases they have a predisposition to develop (eg heart disease or certain kinds of cancer). One benefit of such knowledge is that many individuals will be better placed to reduce their risk of developing such diseases by taking preventative action through lifestyle and diet changes and by participating in targeted medical screening programs. In addition to this, the treatment of certain diseases is likely to be greatly improved by pharmacogenomic medications that are tailored to individuals’ genetic makeup.
Genetic information and the insured’s duty of disclosure and utmost good faith
Despite the benefits of genomic testing, there are also disadvantages to having knowledge of genetic information when applying for risk-rated insurance products. Such products include certain life insurance products (eg trauma, disability, sickness and accident, and income protection insurances) and some general insurance products (eg travel, professional indemnity, non-compulsory first and third party property motor vehicle, and some kinds of sickness and accident insurance). At present, applicants for risk-rated insurance products, such as life and general insurance products, are subject to a duty of disclosure to inform insurers where they are aware of any factors which may be relevant to an insurer’s decision to underwrite a risk. A duty of utmost good faith also applies to parties entering into such insurance contracts. These duties encompass the duty of an insured to declare the results of any genetic or genomic testing (together genetic testing) where they are relevant to the risk being underwritten in an insurance contract.
In the case of contracts to which the Insurance Contracts Act 1984 (Cth) (ICA) applies, the duty of disclosure will spring up as follows: for general insurance, the insured must comply with their duty of disclosure at the time cover is first applied for and thereafter (the time of any extension, variation, renewal or reinstatement of their insurance contract); and for life insurance, an insured must comply with their duty of disclosure at the time cover is first applied for and thereafter (the time of any extension, variation or reinstatement of their insurance contract).
If genetic test results indicate that an insurance applicant is predisposed to a certain disease, and that information is relevant to the risk being underwritten, then the applicant may in some circumstances be refused insurance altogether, or alternatively insurers may charge a higher premium or offer insurance on the basis that the specific genetic condition is excluded from cover. Subject to the provisions of the ICA, non-disclosure of such information may lead insurers to: avoid the policy (life insurers may avoid a policy within three years after a contract is entered into even where non-disclosure was not fraudulent, however, this is only the case where the insurer would not have entered into the policy had the insured complied with their duty of disclosure or had the relevant misrepresentation not been made by the insured); cancel an insurance contract prospectively, vary the policy (this may include the decision to charge a higher premium), or, in the case of certain general insurance products, reduce the amount an insured may claim under the policy (including to nil) proportionate to the amount that would place an insurer in the same position that it would have been in if not for the non-disclosure or misrepresentation. Deliberate non-disclosure of genetic test results also may entitle an insurer to void the policy.
What happens when genetic information becomes known to an insured during a period of insurance?
So long as an applicant complied with their duty of disclosure upon entering into a contract of general insurance, there will generally be no ongoing disclosure obligation for the insured during the policy period. However, there are two possible qualifications to this general rule:
(a) Statements made by an insured ‘in connection with a contract of insurance’
If an insured makes a statement ‘in connection with a contract of insurance’ it will have effect as if it were a statement made to the insurer before the contract was entered into. This means that remedies for non-disclosure and misrepresentation by an insured are applicable to such statements. For instance, if an insured made a representation to an insurer after a contract of insurance has been entered into with that insurer that there was nothing to disclose with respect to their health status (where in fact the insured had become aware of genetic information that was material to the type of risk being covered by the policy) then such a statement could be deemed to be a misrepresentation occurring ‘during negotiations’ for that insurance. That is, it is not to be given the status of a term of the insurance contract. The insurer is instead restricted to whatever remedy (if any) it has for misrepresentation inducing the insurance cover. If the genetic condition was not known at the time of formation of the insurance contract then it is outside the nexus of the insured’s duty of disclosure.
(b) Continuous disclosure of risk a contractual requirement
It is possible for a contract of insurance to contain a provision requiring an insured to notify the insurer of a specified act (or omission) of the insured while the contract is on foot, and for the insurer to enforce a right to cancel the contract if such notification is not provided as contractually required. Also, if a policy requires notification of any material change in the nature of the risk which is being underwritten during the policy period, then an insured may have a continuous obligation to disclose certain facts to an insurer. For example, such a provision could be included in certain ‘claims made and notified’ policies such as a professional indemnity insurance policy (eg it would be relevant to an insurers risk if a surgeon were to discover that they were genetically predisposed to early onset Parkinson’s disease).
If an applicant becomes an insured under a life insurance policy and then discovers (eg via genetic testing) that they are likely to develop certain diseases, then life insurance cover will generally continue on the basis that it was arranged upon. This is because most life insurance products are guaranteed renewable.
However, such test results may affect the portability of any life insurance held by an insured because they would be required to be disclosed to an insurer in the event that the insured wishes to alter or upgrade their existing policy with that insurer, or to take up a life insurance policy with a different insurer, or enter a new superannuation fund (where the life insurance products are part of a blanket superannuation group policy). This is because the duty of disclosure will spring up upon the formation of a new contract of life insurance (this includes where a life insurance policy is extended or varied in any way).
Impending legislative and regulatory reform
The newly released Insurance Contracts Amendment Bill 2013 (Cth) (ICA Bill) will, if enacted in its current form, implement a number of key changes to the ICA. These changes will impact upon the duty of disclosure owed by insurance applicants, insureds and by third party beneficiaries such as lives insured under a policy of life insurance. The ICA Bill will also amend disclosure obligations for eligible contracts of insurance, the insurer’s duty to provide notification of the duty of disclosure to insurance applicants and insureds, and the remedies available to life insurers for non-disclosure and misrepresentation. Importantly, under the ICA Bill, a failure to disclose relevant information by a proposed life insured will be imputed to the insured under a contract of life insurance. For more information on the ICA Bill please see our alert.
Also, Commonwealth anti-discrimination laws are soon to be consolidated into a single legislative instrument. An Exposure Draft of the proposed Human Rights and Anti-Discrimination Bill 2012 (the Bill) has been released by the Senate. The Bill contains an exemption which allows insurers to discriminate on the basis of age, disability, or sex under similar conditions as the current exemption in section 46 of the Disability Discrimination Act 1992 (Cth) ie discrimination must be either: based on actuarial or statistical data and must be reasonable in the circumstances; or reasonable having regard to other relevant factors (this arm of the exemption applies in circumstances where data is not available or cannot reasonably be obtained). If the Bill is enacted, the exemption for discrimination with respect to insurance will be subject to a review after three years. It should be noted that recent trends in regulatory reform indicate that going forward it is possible that the Insurance Reform Advisory Group (IRAG) will investigate striking a balance between the underlying actuarial and statistical underwriting requirements of insurers and the insurance needs of Australians.
For example, the Australian Law Reform Commission (ALRC) has recommended that IRAG consider: establishing an independent body to assess practices in relation to underwriting and compiling actuarial data; requiring general insurers to publish a quarterly report detailing all age specific data and claims details; and whether another mechanism should be introduced requiring insurers to demonstrate whether age based actuarial and statistical information relied upon for underwriting purposes is reasonable. In addition to this, a review of the General Insurance Code of Practice (the Code) is being conducted, with a view to amending the Code to encourage insurers to consider the needs and circumstances of persons with a disability. It is possible that such amendments, if made, will contemplate the conduct of insurers when using genetic information in underwriting decisions.
The use of genomic information in underwriting
As genomic testing becomes more prevalent and more accurate, it is likely insurers will look to impose insurance restrictions (particularly with respect to life insurance products) on larger numbers of people. However, the scope and extent to which certain forms of genomic information could be relied upon is not clear as the interplay between different genes and the environment in causing certain pathologies is not definitively understood at present. In the event that an insurer refused to issue or renew a policy of insurance because of an insured’s genomic test results, the onus would be on the insurer to demonstrate that reliance on the information to discriminate against the insured is ‘reasonable’ in the circumstances. Arguably, such a burden would be difficult to discharge without a clear nexus of causation between the disability likely to emerge from an insured’s genetic code and the risk being underwritten by the insurer. Notably, life insurers are subject to certain dispute resolution and notice requirements where genetic information is used as a basis to adverse underwriting decisions.2
There is an argument that the increased accuracy of genomic testing will allow insurance underwriters to understand risk factors associated with the likelihood of an individual developing a disease and then use this knowledge to tailor underwriting modelling so that it is more finely calibrated. However, there is no firm evidence that this is occurring. At present it is not known how the development of genomic testing will challenge underwriting practices in insurance going forwards.
Submissions on each Bill are being sought before 21 December 2012.
Insurers and insureds ought to be aware that the regulatory environment for insurance is shifting and that the rise of personalised medicine will have significant implications for underwriters and insurance applicants alike.