2010 ALUCA TurksLegal Scholarship
Winning Paper Vanessa Back
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The Question
Question 2 - The ‘new’ Insurance Contracts Act - An Opportunity for Better Claims Solutions The amendments to the Insurance Contracts Act currently before the Federal Parliament have enjoyed widespread support because they strike a fairer balance between the interest of consumers and insurers. What problems do the amendments seek to address and how effectively and fairly do they do it? Your answer should compare and contrast the existing provisions with the new remedies offered under the proposed amendments with particular reference to the remedies for non-disclosure and misrepresentation and with respect to the issue of ’unbundling’. Please also evaluate the benefits for consumers and for life insurers in the current proposal and provide practical examples of the different approaches that claims people will be able to take under the new legislation.
The insurance Contracts Amendment Bill 2010 (the Bill) arose out of recommendations made by a review of the Insurance Contracts Act 1984 (IC Act). The review was conducted by a Panel comprising Mr Alan Cameron AM and Ms Nancy Milne. The review Panel’s main conclusion was that the IC Act was generally working satisfactorily to the benefit of insurers and insured’s. However, the review Panel found that some changes would be beneficial, given the passage of time since the Act was originally enacted, developments in the insurance market since that time and judicial interpretation of IC Act provisions. In several areas the Review Panel’s recommended approach was modified to take account of subsequent consultations with stakeholders on the details of the proposed amendments (Insurance Contracts Act Amendment Bill 2010 Explanatory Memorandum). The resulting changes to the Act can be seen as more “in the nature of technical adjustments rather than significant changes to the framework” (Insurance Contracts Amendment Bill 2010, second reading speech, 17 March 2010). However the key changes can be expected to have a considerable practical effect on insurance business in Australia (DLA Phillips Fox 2010). Chris Pearce in his 2007 media release stated “The purpose of the amendments is to update the Act, respond to market developments, clarify provisions in light of judicial interpretation and address anomalies in the operation of the Act.” On the 17 March 2010 the Federal Government introduced the Insurance Contracts Amendment Bill to parliament with the intent to address these deficiencies. There have been a number of amendments proposed within the Bill that will strike a fairer balance between the interests of consumers and insurers. The following will discuss a number of the key changes with respect to life insurance and the impact for claims people under the new legislation. Scope and application (Insurance Contracts Amendment Bill 2010) Duty of utmost good faith Section 13 of the Insurance Contracts Act implies a term into every contract of insurance that the parties will act towards each other with utmost good faith (Insurance Contracts Act 1984). The Bill amends section 13 to make failure to comply with the duty of utmost good faith a breach of the IC Act (Insurance Contracts Act Amendment Bill 2010 Explanatory Memorandum). If the proposed amendments are passed by parliament, the Australian Securities and Investments Commission (ASIC) would have access to remedies outlined in Chapter 7 of the Corporations Act 2001 (Cth). As a result, ASIC would have the power to take representative action on behalf of the aggrieved party. This is a dramatic shift from the current position
where the only remedy available to the aggrieved party is to pursue legal action (Cooper Grace Ward 2010). From a claims perspective, whilst the duty applies to both parties, it appears that it has not been extended in the same way to insurers and is less likely to have a negative impact on the consumer. Powers of ASIC (Insurance Contracts Amendment Bill 2010) Schedule 3 of the Bill inserts a new section 11F 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� (Insurance Contracts Amendment Bill cited in Edwards 2010). ASIC has been granted broader powers to enforce compliance with the Act including: To make an order in respect of variation, suspension or cancellation of an Australian financial services license because a licensee has failed to comply with the duty of utmost good faith in the handling or settlement of a claim or a potential claim. The application of a banning order is quite significant for Australian financial service license holders. Pursuant to a banning order, an Australian financial service license holder may be prohibited from providing financial services. The Explanatory Memorandum indicates that ASIC would not pursue a banning order if the party in breach had only committed a single, isolated breach of the duty of utmost good faith. A banning order is likely to be pursued by ASIC if the financial services license holder has exhibited numerous breaches of the duty as a result of lack of concern for compliance with the duty, or a lack of understanding of what is required to comply with the duty (Cooper Grace Ward 2010). If the new laws are passed, the changes which allow ASIC to intervene when an insured or insurer has breached the duty of utmost good faith will take effect immediately. This Bill may not have a long passage through Parliament and therefore insurers should undertake a review of their internal protocols, especially those relating to how claims are managed, to ensure that there is a general awareness of the nature of the duty of utmost good faith and what is required to comply with the duty (Cooper Grace Ward 2010). The ABI 2009 code of Practice outlines a number of implications that need to be considered by a claims manager when handling a claim. The Code of Practice states: "insurers are fully entitled to ask for any medical or other information needed to properly assess a claim. However, insurers should have legitimate reasons for requesting medical information at the point of claim� (p.3-4). Accordingly, insurers should only ask for medical information beyond that needed to assess whether the insured event has occurred, or to case manage a disability claim, to the extent
that the circumstances of the claim reasonably prompt the insurer to believe that there might have been non-disclosure by the customer. Claims managers will need to consider the following to ensure that they are complying with the duty of utmost good faith: Keeping an audit trail of the reasons for requesting medical records (FOS will be concerned about the use of medical evidence clearly obtained without an appropriate reason). Note that an early claim is not a reason in itself to investigate non-disclosure (though may be a supporting factor). Many claims departments conduct investigations into non-disclosure as part of their standard process and may need to revisit their claims handling procedures. Carefully consider the time period for which it is appropriate to request information and the relevant areas that should be investigated. Ensure claims investigations are consistent with the timely collation of evidence and the need to make a claims decision promptly (ABI Code of Practice 2009, p.3-4). The importance of training and education on compliance with the duty of good faith and effective documentation and justification of decisions for claims managers cannot be overemphasised. Electronic Communication (Insurance Contracts Amendment Bill 2010) Changes in the world of technology and communication since 1984 have given rise to the need to amend provisions regarding the giving of notices, documents and information. Most notably, the amendment contains a note that the Electronic Transfers Act will now apply to permit electronic communication of notices or documents required to be given in writing. An amendment will also be made to the Electronic Transactions Act 1999 to remove the current exemption in relation to the insurance contracts legislation. Section 77 of the Act is to be repealed and the Bill proposes to address the electronic communication issues through a slightly modified mechanism (Moss and Giblett 2010). The use of electronic communication for various requirements under the IC Act, including for the dissemination of notices, documents and other information, has the potential to lower costs and increase convenience for insurers and insured’s. The objective is to ensure that the IC Act permits a range of means of communication between insurers and insured’s, including by electronic means, such as phone, facsimile, and the internet, provided that the risks for the recipients in the use of electronic means are not unreasonable. Savings for insurers from the use of electronic communication would be passed to consumers in the form of lower prices (Insurance Contracts Amendment Bill 2010).
From a claims perspective, electronic communication is likely to increase claim processing speed resulting in fewer complaints to internal dispute resolution teams as well as the Financial Ombudsman Service. From a business perspective, electronic communication is likely to result in policies being put on the books faster as well as appealing to our younger generation. It may also pave the wave for electronic based claims systems which may significantly change the future of claims processing. Disclosure and Misrepresentation (Insurance Contracts Amendment Bill 2010) The proposed amendment seeks to refine the objective element of the duty of disclosure currently in the Act (“an insured has a duty to disclose every matter that is known to an insured that a reasonable person in the circumstances could be expected to know is relevant”-Insurance Contracts Act 1984). The Bill seeks to add to that definition so that the objective element will continue “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”. This amendment appears to be a codification of the issue noted by Brooking J in Twenty-first Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd (1990) VR 919 who considered that extrinsic factors such as the type of policy in issue were the relevant factors to take into account (Newby and Cheung 2010). Brooking expressed that section 21 (1) (b): "did not take into account the personal and individual idiosyncrasies of the insured such as imperfect understanding of English, cultural background or unfamiliarity with business or insurance practice" (cited in Myatt and Walsh p12, 2006). The Investment and Financial Services Association (IFSA) opposes the proposed amendment stating that “the individual idiosyncrasies of the particular insured (eg. cultural background, level of education or business acumen) should not be taken into account” (IFSA Supplementary Submission 2007 p.5). The statement reflects the opinion that increasing complexity of the duty may result in more difficulty in matters of adjudication. Section 22 of the ICA currently requires insurers to notify the insured of the Duty of disclosure “before the contract is entered into” (Insurance Contracts Act 1984). The Bill adopts the review Panels recommendation that the insurers be required to remind prospective insured’s that their Duty of Disclosure continues until the time that the policy commences. For life insurance, this obligation extends to proposed life insured’s who are not the policy owner. These amendments aim to avoid harsh outcomes where a claim is denied for non-disclosure or a change in the insured’s circumstances that occurred between the proposal and commencement of cover. If in the event that an insurer fails to comply with the requirement of the reformed s22, it will be unable to rely on an insured’s breach of the duty of disclosure, unless that breach was fraudulent (Allens Arthur Robinson 2010). Advantages for insurers and the insured include an increased likelihood that insurers will be properly advised of the relevant factors necessary to assess risk and a significant reduction in claim denials due to a failure to understand that the duty of disclosure extends until the
policy is entered into. This will result in a reduced need to resolve disputes involving a failure to disclose events between application and contract (Insurance Contracts Act Amendment Bill 2010 Explanatory Memorandum). Insurer’s will need to ensure that they have an adequate follow up process in place to ensure compliance with the Act. Remedies of insurers: life insurance contracts (Insurance Contracts Amendment Bill 2010) Section 29(3) of the ICA states “If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract”(Insurance Contracts Act 1984). Some stakeholders have expressed the view that section 29 is no longer appropriate because of the changed nature of life insurance. Given the wider range of risks now underwritten by life insurers (such as trauma and income protection) and the fact that they are often in the same policy (that is bundled contracts), the range of remedies provided by section 29 is now said to be limited and , in some cases, inappropriate. In relation to bundled contracts section 29 does not allow avoidance or correction of one cover without there being an effect on all other covers (Insurance Contracts Act Reform, Australian Government- The Treasury 2009). The 2003 decision of the Queensland Court of Appeal in Schaffer v Royal Sun Alliance Life Assurance Australia Ltd [2003] QCA 182 determined that the insurer’s obligation under section 29 (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 (Edwards 2010). For example if the insured has a bundled trauma and income protection policy, the insurer would need to demonstrate that it would not have offered either in order to avoid the contract. In relation to the distinction between “the contract” and “a contract”, IFSA states the problem as being that “a life insurer’s right to avoid the contract contained within section 29(3), is predicated on the fact that the insurer would not have been prepared to enter into “a contract” of life insurance with the insured on “any terms”. IFSA believes that subsection 29(3) “effectively traps life insurers and rewards those who fail to comply with their duty of disclosure or misstate material facts” (Insurance Contracts Act Reform, Australian Government- The Treasury 2009). The Australian Life Underwriting Claims Association (ALUCA) suggests that “it would be better for both insured’s and insurers if specific provisions were made, in cases where the non-disclosure or misrepresentation affects one of the covers only and not just the others, to allow avoidance or correction of one cover, including adjustment of the premium if appropriate, without other covers being affected”(submission by ALUCA cited in Insurance Contracts Act Reform, Australian Government- The Treasury 2009).
The Insurance Contracts Amendment Bill proposes the introduction of a new section 27A that will enable life insurance products to be unbundled into their respective covers for the purpose of exercising remedies in relation to each type of cover. The reforms 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. For example, an insured non-discloses three significant musculoskeletal disorders on his bundled income protection, life and trauma policy. A retrospective underwriting opinion indicates that the insurer would not have offered income protection but would have offered life and trauma. Under the reformed Act, the insurer can seek to avoid the income protection component of the contract independently of the other forms of cover. Additionally, the new section 27A allows for unbundling where two or more lives are insured under the same policy, as well as the unbundling of a policy that contains underwritten and non-underwritten cover such as is common in group insurance where an insured with automatic acceptance limit cover tops this up with additional underwritten cover (Edwards 2010). Insurers will also be entitled to change the expiration date of a life insurance contract where that date has been calculated by reference to the insured’s incorrectly stated date of birth. Additionally, the statutory framework in the IC Act for cancellation of general insurance contracts will be extended to life insurance contracts (subject to forfeiture rights for nonpayment of premiums under the Life Insurance Act 1995) (Insurance Contracts Act Amendment Bill 2010 Explanatory Memorandum). Insurers will benefit from simplification of remedies for non-disclosure, with unbundling of remedies allowing for greater flexibility and alignment of life remedies more realistically reflecting market realities. Holders of life insurance policies will benefit from less harsh and inflexible remedies being available to insurers with respect to innocent non-disclosure, with insured’s generally benefiting from fewer cost pressures placed on premium rates(Insurance Contracts Act Amendment Bill 2010 Explanatory Memorandum). The ICA is over 20 years old and it appears to have been successful in its stated purpose of reforming and modernising the law so that a “fair balance is struck between the interests of insurer, insured’s and other members of the public” (Preamble to the ICA). It appears that the Bill addresses the majority of the identified issues. The Bill has arisen from a consultation process involving all aspects of the life insurance industry and has thereby benefited from adopting a consensus view to the various concerns expressed by insured’s, insurers and insurance intermediaries (Wotton Kearney 2007). From a claims perspective, the Bill may have significant implications in the way we approach claims management. Changes to electronic communication regulations may pave the way for a faster, technologically driven approach to claims lodgement and assessment. Changes to the duty of utmost good faith may lead to claims decisions that are not purely based on the finer details of the policy, but also on what is fair and reasonable. Changes to the law in
relation to the issue of unbundling of contracts appears to be a common sense approach, allowing insurers to penalise significant non-disclosure and ultimately reward consumers with a consequent reduction in premiums. Claims people should be aware of the impending changes and their responsibility to comply with the duty of utmost good faith as well as the practical approaches that can be taken to claims under the new legislation.
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Pearce, C., (2007). Media Release of 12/02/2007. Review of the Insurance Contracts Act 1984: Final Report Released. Retrieved October 2010, http://www.treasurer.gov.au/Display Docs.aspx?pageID=&doc=pressreleases/2007/00 Wotton Kearney Insurance Lawyers (2007). Insurance Contracts Act Reform Package.