Insurance Contracts Amendment Bill 2010 A PAPER BY ALPH EDWARDS MARCH 2010
Insurance Contracts Amendment Bill 2010
Summary The much anticipated amendments to the Insurance Contracts Act arising from the 2004 Cameron Milne report were introduced into Federal Parliament for a second reading on Wednesday 17 March 2010. The amendments include provisions which provide: • That a breach of the duty of good faith is a breach of the Act • For electronic communication between insurer and insured • For the ‘unbundling’ of different types of cover under the one policy for the purposes of applying remedies for non-disclosure and misrepresentation • That the life insured has the same duty of disclosure as the insured • An extension of the general insurance proportionate s28 remedy to life policies (except life policies providing death cover and those with a surrender value) • A continuation of the traditional s29 remedy for life policies providing death cover and those with a surrender value • For the cancellation of life polices on the same grounds as general insurance policies i.e. for a breach of the duty of good faith, non-disclosure, misrepresentation and a breach of a provision of the contract • Third party beneficiaries with the same right rights and obligations as insureds • A reworked s32 dealing with avoidance of group cover, which removes some well documented anomalies in the section
Who Does This Impact? Insurers and their legal advisors.
What Action Should Be Taken? All insurers should familiarise themselves with the proposed changes and particular note should be had of the changes to the disclosure notice requirements as this will require changes to company documents and procedures.
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Insurance Contracts Amendment Bill 2010
Contents: Introduction
2
Scope and Application of the Act
2
Electronic Communications
3
Powers of ASIC
3
Disclosure and Misrepresentations
4
Remedies
5
Third Party Beneficiaries
8
Non-Disclosure or Misrepresentation by a Member of a Group Life Insurance Scheme
9
Subrogation
9
Commencement
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Insurance Contracts Amendment Bill 2010 by Alph Edwards
Introduction On 17 March 2010, the Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services, Chris Bowen MP, introduced into the House of Representatives the Insurance Contracts Amendment Bill 2010 (the ICAB) to be read for a second time. The ICAB is legislation amending the Insurance Contracts Act 1984 (the ICA). This marks one of the final steps of reform of the ICA which commenced in 2003 with the announcement of an expert committee to review and comment on its operation. The Review Committee prepared an initial report in November 2003, solely concerned with s54 and a larger report dealing with the balance of the Act in May 2004. The ICAB addresses the issues identified by the Review Committee in its reports and is the product of their recommendations and an extensive process of consultation between Treasury and stakeholders. In this paper I focus on the critical changes to the ICA which will be brought about by the ICAB.
Scope and Application of the Act DUTY OF UTMOST GOOD FAITH The failure to comply with the duty of utmost good faith imposed by s13 of the ICA will become a breach of the ICA and third party beneficiaries to the policy will acquire the right to enforce that obligation as well as be subject to it. This will be affected by the addition of the following subsections to s13: 2.
A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act.
3.
A reference in this section to a party to a contract of insurance includes a reference to a third party beneficiary under the contract.
4.
This section applies in relation to a third party beneficiary under a contract of insurance only after the contract is entered into.
These amendments implement the Review Committee’s recommendation that a breach of the duty of utmost good faith should be both a breach of an implied contractual term and a breach of the Act, although the breach of the Act would not be an offence and would attract no penalty. Additionally, a new s14A of the ICA makes it explicit that ASIC may exercise its powers under Subdivision C of Division 4 of Part 7.6 of the Corporations Act 2001 or Subdivision A of Division 8 of Part 7.6 in respect of a failure by the insurer to comply with its duty of good faith in the handling or settlement of a claim or potential claim under the policy, as if the insurer’s failure to comply with the
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duty of good faith were a failure to comply with a financial services law. The changes under this part mean that breaches of the duty of utmost good faith by an insurer will enable ASIC to access a range of remedies under the Corporations Act 2001 in relation to the insurer’s Australian Financial Services Licence including cancellation or the imposition of an enforceable undertaking. It is also implicit that a breach of the duty of utmost good faith by the insurer will also become notifiable under the breach reporting requirements of AFS licensees under s912 of the Corporations Act 2001.
WORKERS’ COMPENSATION CONTRACTS Workers’ compensation policies will continue to be exempt from the ICA but the ICAB will provide that the exemption will now extend to any part of the policy that also provides employers common law liability cover.
BUNDLED CONTRACTS The ICAB amends s9(1) of the ICA to introduce a new sub paragraph (1A), which provides that where a contract of insurance or a proposed contract contains provisions that if they were a single contract would not be covered by the ICA as well as provisions that if they were a single contract would be covered by the ICA, then for the purposes of s9(1), each set of provisions is treated as a separate contract.
Electronic Communications The Review Committee supported updating the ICA to allow for electronic communication with insureds. The effect of Schedule 2 of the ICAB together with amendments to be made to the Electronic Transactions Regulations 1999 (to remove the current exemption in relation to the ICA) will allow for notices or other documents or information required to be given under the ICA, to be given in electronic format. Earlier versions of the ICAB introduced the concept of ‘appropriate address’ and other restrictions around electronic communications. Such restrictions do not apply in the current ICAB and the provisions of the Electronic Transaction Act 1999 will apply.
Powers of ASIC INTERVENTION IN LEGAL PROCEEDINGS Schedule 3 of the Bill inserts a new s11F into the ICA which gives ASIC powers to intervene and acquire the status of a party in any legal proceedings ‘relating to a matter arising under this Act.’ The provision gives ASIC the opportunity to be heard in legal disputes that raise matters of importance to it and is similar to the existing power that ASIC has to intervene in matters arising under the Corporations Act 2001.
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Disclosure and Misrepresentations SECTION 21 CLARIFICATION OF THE SUBJECTIVE/OBJECTIVE TEST Schedule 4 of the ICAB proposes to amend the mixed objective/subjective test of the duty of disclosure in paragraph (b) of s21 (1) to give an example of the types of matters that should be taken into account in determining what ‘a reasonable person in the circumstances’ could be expected to know was relevant to the insurer’s consideration of the risk. The amended provision will add on to the end of s21 (1) (b) the words ‘having regard to factors including, but not limited to, the nature and extent of the insurance cover to be provided under the relevant contract of insurance’. All in all, s21 has a fairly settled interpretation and has not been the subject of any great controversy. Accordingly, one wonders why a need was felt to change the section. Be that as it may, it is difficult to see that the additional words will change the operation of s21 in any substantive way. Note that the current proposed change is quite a step back from the change that was proposed in the earlier version of the ICAB which contained a more detailed range of non-exclusive factors that should be taken into account in determining the basis of what ‘a reasonable person in the circumstances’ could be expected to know.
ELIGIBLE CONTRACTS OF INSURANCE Section 21A of the ICA sets out the terms of the disclosure obligations that apply to personal lines of insurance such as motor vehicle, home contents and travel insurance which are classified as ‘eligible contracts of insurance’ under the IC regulations. The section currently requires the insurer to ask specific questions or forfeit the right to disclose by the insured. However, it is also currently permissible for the insurer to ask the insured a ‘catch all’ question, which requires an insured to disclose ‘exceptional circumstances’ that a reasonable person could be expected to know would be relevant to the insurer’s decision whether to accept the risk, and which would be unreasonable for the insurer to specifically question. The Review Committee recommended that this confusing exception be removed and the ICAB proposes its deletion.
SECTION 21A TO APPLY TO RENEWALS Section 21A currently also only applies when a contract is initially entered into and does not apply to renewals that trigger the general duty of disclosure provisions under s21. The ICAB proposes to introduce a new s21B which in effect expands the new rules in s21A to renewals. This change will mean that any insurer wishing to rely on the duty of disclosure in relation to eligible contracts of insurance on renewal, must ask the insured specific questions again at the time of renewal or ask the insured to confirm that there has been no change to matters previously stated.
NEW FORM OF NOTIFICATION OF THE DUTY OF DISCLOSURE Under the present s22 of the ICA an insurer that wishes to seek a remedy for a failure to comply with the duty of disclosure must have given the insured a notice of that duty ‘before the contract is entered into’.
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Part 3 of Schedule 4 of the ICAB repeals the former s22 entirely and substitutes a new set of provisions with substantially the same effect but which make it clear that any notification given should explain the effect of the new s21A or 21B, the new s31A for life insurance (see below), and that the duty of disclosure applies right up until the time that the proposed contract is entered into. The new section also provides that in contracts of life insurance, the life insured (when different from the insured) must also be provided with the s22 notice. Consistent with this, the ICAB replaces the current s22(3) with a new subsection which provides that where the insurer’s acceptance, or offer on terms in relation to the proposed policy is made more than two months after most recent disclosure, then along with the acceptance or counter-offer, the insurer must also provide a reminder that the duty of disclosure applies until the contract is entered into. As is currently the case, the failure to comply with all the relevant notice provisions of s22 will prevent the insurer from obtaining a remedy for a breach of the duty of disclosure, unless the breach is fraudulent. Also with respect to the new s22(3) notice, the insurer only waives its right to act with respect to ‘new matters,’ being matters the insured became aware of after the most recent disclosures.
LIFE INSURED TO HAVE DUTY OF DISCLOSURE The life insured is not necessarily also the policy owner under a policy of life insurance but the policy owner is the only relevant insured for the purposes of the ICA. This means that while a misrepresentation by a life insured may be actionable under s25, the life insured currently has no positive duty of disclosure under the Act if they are not the owner of the policy. Part 4 of Schedule 4 of the ICAB will add a new s31A to the Act which will provide that when a person, who would become a life insured under a life insurance policy, who fails to disclose the same matters which an insured must disclose under s21, the effect will be the same as if the failure to disclose had been by the insured.
Remedies UNBUNDLING OF CONTRACTS The ICAB proposes the introduction of a new s27A that will enable life insurance products to be ‘unbundled’ into their respective covers for the purposes of exercising remedies in relation to each type of cover. The fact that various types of life insurance benefits are sold ‘bundled’ in the one policy has created significant issues for life insurers seeking to enforce remedies under s29 of the ICA since the 2003 decision of the Queensland Court of Appeal in Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182. In Schaffer, the Court determined that the insurer’s obligation under s29(3) of the ICA, was such that it had to demonstrate that it would not have issued a policy of life insurance on any terms before it could obtain the remedy of avoidance that the subsection provides. Differing underwriting criteria will apply to the various parts of the bundled product so that insurers have been placed in a difficult
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situation where they would have been prepared to offer some but not all of the types of benefits provided by the policy if the true position was known. One widely held view is that in these circumstances the insurer has to demonstrate that none of the various types of benefit available under the policy would have been offered in order to demonstrate that it would not have issued a policy of life insurance on any terms and consequently access the remedy under s29(3). This of course significantly reduces the availability of the remedy for insurers and may produce unfair outcomes in practice as the insured may be able to enforce a claim for a benefit the insurer would never have been prepared to offer, if the insured had complied with their duty of disclosure. The new s27A aims to overcome this deficiency by splitting the policy into its component benefit types for the purposes of obtaining remedies for non-disclosure and misrepresentation. This will enable the insurer to make a proportionate response to a non-disclosure or misrepresentation, as it can seek to avoid only those parts of the cover it would not have issued if the true position had been known. Additionally, the new s27A will allow for unbundling where two or more lives are insured under the same policy as well as unbundling of a policy which contains underwritten and non-underwritten or differently underwritten cover such as is common in group insurance where an insured with AAL cover tops this up with additional underwritten cover. This last scenario emerged in Robert Virag v United Super Fund Pty Ltd and Hannover Life re of Australasia Ltd [2009] VCC, although the unbundling problem was not dealt with by the Court in that matter.
A NEW ‘PROPORTIONAL’ REMEDY FOR NON-DISCLOSURE OR MISREPRESENTATION IN RELATION TO LIVING INSURANCE PRODUCTS The ICAB proposes that s28 of the ICA be amended so that the remedy provided by this section applies to life policies other than two excluded types of life policies. The excluded life policies are those that have a surrender value and those which provide cover in respect of the death of the life insured (Excluded Life Policies). In other words, s28 will apply so called ‘living life insurance’ products, such as disability, trauma and total and permanent disablement. The existing s29 regime will continue but only for Excluded Life Policies. The intention of the amendment is once again to achieve a proportionate response to the insured’s failure to comply with their duty of disclosure. Consequently, the provision will enable insurers to reduce their liability in the event of non-disclosure or misrepresentation proportionately to the amount that ‘would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made’. In practice, this will mean that if the insurer would not have been prepared to provide this benefit, its liability in relation to a claim for that benefit will be reduced to nil. Similarly, the remedy will apply, for example, if the insurer would have issued an endorsement by way of exclusion, had it known the true position. If the insurer would have excluded the medical condition or hazardous pastime that gave rise to the claim, the life
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insurer will, under the amended s28, be able to reduce its liability in relation to that claim to nil. Presently, the ICA places life insurers in the position of having to find grounds to avoid the whole of an insured’s contract in these situations. However, if an insurer would have been prepared to underwrite a policy subject to exclusion and it cannot therefore establish it would not have issued a life policy on any terms, it leaves the insurer without any form of redress. In other words, the ICA as currently framed may provide too much remedy or none at all. The proposal to add a new proportionate remedy is consequently very welcome.
AMENDMENTS TO SECTION 29 The issues raised by the Schaffer decision in 2003 have already been raised in the context of the new s27A and unbundling. In Schaffer, Schaffer the Court focused on the requirement that an insurer seeking to avoid a policy for ‘innocent’ non-disclosure or misrepresentation under s29(3) had the onus of proving that it would not have entered into ‘a contract of life insurance … on any terms’, if it had known the true position. The judgment equated ‘a contract of life insurance’ to any form of contract that satisfied the definition in the Act. Commentators have consequently taken the view that it was not sufficient for the company to prove that it would have issued a modified form of cover or only issued some parts of the cover applied for. The ICAB proposes to amend s29(3) by removing the reference to ‘a contract’ and replacing it with ‘the contract,’ with the result that the insurer will only need to demonstrate it would not have issued the same cover on the same terms. This is consistent with the current position in relation to general insurance contracts under s28. However, this liberalisation has to be viewed in the context of the narrower scope of s29 under the ICAB, which will only apply to Excluded Life Policies.
MISSTATEMENTS OF AGE Section 30 of the ICA currently provides for the sum insured or the premium charged to be appropriately adjusted to reflect the correct age of the life insured, if their age was misstated when the policy was entered into. This is not always a sufficient remedy where the policy will remain in force or benefits will continue to remain payable during a period which has been determined on the basis of the incorrect age. In response to this deficiency, the ICAB proposes a new s30 (3A), which will offer insurers an alternative remedy of varying the contract period.
CANCELLATION OF LIFE CONTRACTS Cancellation of general insurance contracts is expressly dealt with by s60 of the ICA but there is nothing in the ICA at present which sets out if or when an insurer may cancel a life policy. The Review Committee declined to recommend any alteration to remedy this gap in the ICA as it was of the view that insurers’ rights to cancel were sufficiently clearly established at common law.
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Since the Review Committee’s report, his Honour Justice Einstein commented in Walton v The Colonial Mutual Life Assurance Society Limited [2004] NSWSC 616, that a life insurer did not have a right under the common law to cancel a contract of life insurance in circumstances where a fraudulent claim had been made upon it. This observation has since been adopted by alternative dispute resolution bodies and lower courts as expressing the current position of the law. Against this background, the ICAB proposes a new s59A which allows an insurer to cancel a life policy in the same circumstances in which an insurer may cancel a contract of general insurance under s60 with the exception of cancellation for non-payment of premium which is carved out on the basis that cancellation on this basis is dealt with by s210 of the Life Insurance Act. A new s63 also provides that a life insurer may only cancel a life policy under the ICA or s210 of the Life Insurance Act.
Third Party Beneficiaries DEFINITION OF THIRD PARTY BENEFICIARY Central to the reforms in this area is the proposal to introduce a new definition of a third party beneficiary, who is: A person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.
THIRD PARTY BENEFICIARIES TO HAVE EXPANDED RIGHTS The ICAB gives effect to the Review Committee’s recommendations that third party beneficiaries should have access to the following privileges currently reserved to the insured under the ICA: •
The same rights and obligations as an insured for the purposes of subrogation;
•
The power to enforce (and to be subject to) the duty of utmost good faith (but not pre-contractually); and
•
Where the Act presently allows the insured to give certain notices to the insurer, a third party beneficiary should be equally able to give such a notice.
The notices in question are: •
A notice of circumstances that may give rise to a claim under s40(3);
•
A notice to elect to indemnify and take over the conduct of proceedings under s41; and
•
A request for a copy of the policy document under s74.
The ICAB also reflects the desire of the Review Committee that s48(3) of the Act should spell out that a third party beneficiary is in no better position to enforce the policy than the insured and confirms that insurers will be able to raise both the pre and postcontractual conduct of the insured in defence to a claim brought by a third party beneficiary.
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LIFE INSURED – RIGHT OF ACTION AS THIRD PARTY BENEFICIARY The ICAB proposes to amend s48A to provide that where a contract of life insurance is expressed to be for the benefit of a third party beneficiary, that person may commence proceedings to enforce the policy. The amended provision largely reflects the existing s48A, however, the new definition of third party beneficiary means that s48A will now have wider reach. For example, it will allow a life insured under a group scheme to take proceedings directly against an insurer (note this right to sue in the group context has been held to exist in any event. See Sayseng v Kellogg Superannuation Pty Ltd & Anor [2003] NSWSC 945 13 November 2003). Amendments to s48AA carry across the same changes to policies in connection with Retirement Savings Accounts (RSAs).
LIABILITY POLICIES – RIGHT OF INJURED PARTY TO RECOVER DIRECTLY AGAINST INSURER The ICAB proposes to expand the rights of claimants to recover directly against an insurer under a liability policy under s51 to claims against the third party beneficiaries. Consequently, a right of direct action will now arise under the Act whenever the insured or a third party beneficiary has: •
Died; or
•
Cannot, after reasonable inquiry be found.
Non-Disclosure or Misrepresentation by a Member of a Group Life Insurance Scheme Section 32 of the ICA has been out of step with the practical realities of group life insurance cover for some time. In particular, the fact that the section deemed the duty of disclosure to apply from the date the life insured joined their superannuation fund rather than the date they actually obtained cover under the fund’s policy could produce absurd results. The decision of Virag demonstrates some of the judicial gymnastics courts have had to perform in order to avoid such absurd results. The ICAB will remedy these problems by bringing the timing of the life insured’s disclosure obligations into line with the application for cover under the policy. The ICAB will also clarify that an individual’s cover under a group policy can be separately avoided and expand the Section to apply to group life arrangements generally and not just to policies issued to superannuation funds.
Subrogation The arrangements which currently apply to actions conducted by an insurer in the name of an insured under a right of subrogation are also to be expanded by the ICAB so that they apply to third party beneficiaries.
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Commencement The amendments contained in the ICAB will generally only apply to insurance contracts entered into or renewed after the commencement date of the ICAB. In cases where a life contract was originally entered into before the commencement date but varied after commencement, the amendments will generally only apply to the extent of the variation. There are however some amendments which apply to contracts entered into before commencement of the ICAB. These amendments are those dealing with Electronic Communications - Schedule 2, Powers of ASIC - Schedule 3 and Schedule 5, Part 1 - Unbundling of contracts and Schedule 6, Part 5 - Representative actions by ASIC on behalf of third party beneďŹ ciaries.
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For more information, please contact: Alph Edwards Partner T: 02 8257 5703 alph.edwards@turkslegal.com.au
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