Bills Digest no. 132 2012–13
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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Paula Pyburne
Law and Bills Digest Section
11 June 2013
Contents
Purpose of the Bill
Nature of the Bill
Structure of the Bill
Background
Committee consideration
Statement of Compatibility with Human Rights
Policy position of non-government parties/independents
Position of major interest groups
Financial implications
Key issues and provisions
Date introduced: 14 March 2013
House: House of Representatives
Portfolio: Treasury
Commencement: Various dates set out in the table in clause 2 of the Bill.[1]
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
The purpose of the Insurance Contracts Amendment Bill 2013 (the Bill) is to amend the Insurance Contracts Act 1984 (the Insurance Contracts Act)[2] to give effect to a number of recommendations of a Review Panel appointed to review that Act.[3]
The changes are technical in nature and respond to market developments and judicial decisions since the enactment of the Insurance Contracts Act.
Importantly, this Bill does not address the much debated application of an unfair contract terms regime to insurance contracts.[4] Nor does it take up the recommendations for amendment made by the Review Panel as part of the first phase of the review into section 54 of the Insurance Contracts Act.[5]
The Bill consists of seven schedules as follows:
- Schedule 1 contains amendments that relate to the scope and application of the Insurance Contracts Act
- Schedule 2 makes technical changes to the Insurance Contracts Act regarding the giving of notices, documents and information
- Schedule 3 contains amendments that give the Australian Securities and Investments Commission (ASIC) a statutory right to intervene in proceedings relating to matters arising under the Insurance Contracts Act as well as under Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (Medical Indemnity Act)[6]
- Schedule 4 clarifies existing provisions in relation to disclosure and misrepresentations
- Schedule 5 relates to the remedies available to life insurers where there has been a misrepresentation or failure to disclose a matter which should have been disclosed prior to entering into the contract
- Schedule 6 extends rights under a contract of insurance to certain third parties and
- Schedule 7 updates existing provisions in relation to subrogation.[7]
On 10 September 2003 the then Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, and the then Parliamentary Secretary to the Treasurer, Senator Ian Campbell, jointly announced that the Government would be undertaking a comprehensive review of the Insurance Contracts Act.[8]
Mr Alan Cameron AM and Ms Nancy Milne were appointed to a Review Panel to conduct the review (Cameron-Milne Review). The objective of the review was to make recommendations aimed at improving the overall operation of the Insurance Contracts Act through correcting deficiencies and clarifying ambiguities in its operation.[9]
The review was conducted in two stages. The first stage of the review focused on section 54 of the Insurance Contracts Act. This arose due to concerns that there had been changes in the pricing and availability of indemnity insurance (such as professional indemnity insurance) because of judicial interpretation of section 54 of the Insurance Contracts Act. This Bill does not contain any amendments to that section and the conclusions of the Cameron-Milne Review in relation to section 54 of the Insurance Contracts Act are not relevant to this Bills Digest.[10]
The second stage of the review examined the balance of the Insurance Contracts Act. In November 2003, public submissions were sought on issues relating to the Insurance Contracts Act which led to the release of an ‘issues paper on 24 March 2004, followed by consultation and the issue of a proposals paper on 25 May 2004’.[11]
The Cameron-Milne Review delivered its report to the Minister on the remainder of the Insurance Contracts Act on 30 June 2004, after taking into account comments made by stakeholders.[12]
A draft legislative package, including explanatory materials, to address the key recommendations that were made was released for public comment in February 2007.[13] After considering submissions made to the Cameron-Milne Review, the Insurance Contracts Amendment Bill 2010 (the 2010 Bill) was introduced into the House of Representatives in March 2010.[14] According to the Explanatory Memorandum for the Bill:
The Review Panel made detailed recommendations for changes to the IC Act to address issues that had been identified as arising from the above factors. This Bill gives effect to a number of the Review Panel’s recommendations. 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.[15]
The Bill lapsed when the Parliament was prorogued prior to the federal election in August 2010.
In the summer of 2010–11, floods inundated Queensland,[16] Western Australia,[17] New South Wales[18] and regional Victoria.[19] At the same time, cyclones buffeted Far North Queensland.[20] ‘The Victorian floods and storms, Queensland floods and cyclones, and the Western Australian fires of 2010-11 gave rise to a total of 188,816 insurance claims’.[21]
In the wake of these disasters, questions were raised about the capacity of the insurance industry to respond quickly and in good faith to the high volumes of claims. The Assistant Treasurer, Bill Shorten requested that the House of Representatives Standing Committee on Social Policy and Legal Affairs (Social Policy and Legal Affairs Committee) inquire into and report on the insurance industry's response to the 2010/2011 extreme weather events around Australia—with particular reference to, amongst other things, claims handling procedures.[22] The Social Policy and Legal Affairs Committee tabled the report of its inquiry in the Parliament on 27 February 2012.[23] The amendment in item 5 of Schedule 1 of the Bill operates to ensure that ASIC may exercise its powers in respect of an insurer that fails to comply with the duty of utmost good faith in claims handling or settlement of a potential claim.[24]
In the meantime, on 17 February 2012, Treasury held a roundtable with key stakeholders to discuss the potential re‑introduction of the measures previously contained in the 2010 Bill.[25] Subsequently, an exposure draft of this proposed legislation was released.[26] That exposure draft contained the measures previously contained in the 2010 Bill with four proposed refinements proposed by key stakeholders in relation to:
- the insured’s duty of disclosure
- remedies of the insurer: life insurance contracts
- the application of duty of disclosure changes and
- bundled life insurance contracts.[27]
These matters are discussed in detail under the ‘Key issues and provisions’ section of this Bills Digest.
On 21 March 2013 the provisions of the Bill were referred to the Senate Economics Legislation Committee for inquiry and report by 25 June 2013.[28] The Economics Legislation Committee received 10 submissions in relation to the Bill.[29] The Economics Legislation Committee published its report on 13 May 2013 stating that:
The measures contained in the bill appear to be uncontroversial and their enactment will benefit all parties to an insurance contract. Given the important role that insurance has, as evidenced by a number of natural disasters in recent years, it is critical that the legislation governing insurance contracts is effective and that its requirements are well understood. The implementation of the measures contained in the bill should not be delayed further.[30]
The Senate Standing Committee for the Scrutiny of Bills published comments in relation to the Bill on 15 May 2013, noting in particular the delayed dates of commencement of the amendments in Schedules 4, 5 and 6 to allow insurers an opportunity to amend their business practices.[31]
The Parliamentary Joint Committee on Human Rights (the Joint Committee) published comments in relation to the Bill on 20 March 2013.[32] The Joint Committee considered whether the Bill engaged the right to privacy under article 17 of the International Covenant on Civil and Political Rights which provides that no one ‘shall be subjected to arbitrary or unlawful interference with his privacy, family, home or correspondence’.[33]
The Joint Committee concluded that as the Bill:
… regulates the disclosure, or non-disclosure, of information made under private contracts to which people voluntarily enter into and accept the terms and conditions on entering into the contract, it does not appear that the disclosure requirements would arbitrarily interfere with the right to privacy. [34]
As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[35] The Government considers that the Bill is compatible.
The Coalition supported the 2010 Bill.[36] Similarly, Liberal Party of Australia (Liberal) member, Tony Smith has stated, in relation to this Bill, that:
… the coalition is supporting this bill, which seeks to implement recommendations made by the coalition government's 2004 review into the Insurance Contracts Act 1984. The bill had its origins in recommendations made to the Howard government review of 2003-04 of the Insurance Contracts Act.[37]
This Bill has been the subject of extensive consultation with stakeholders, first through the Cameron-Milne Review and then in respect of successive drafts from February 2007.
According to the Explanatory Memorandum, the financial impact of the Bill is ‘low’. It will have no financial impact on the Commonwealth.[38]
Schedule 1—scope and application
The amendments in Schedule 1 of the Bill commence on Royal Assent.[39]
A basic tenet of insurance law is the legal concept of uberrimae fidei. This means of the utmost good faith. This is based upon the principle that the insured must provide adequate notice of the risk to enable the insurance policy to proceed. An important consequence of the duty of utmost good faith is the duty of disclosure. Part IV of the Insurance Contracts Act deals with disclosures and misrepresentations. With certain exceptions, an insured has a duty to disclose every matter that the insured knows (or a reasonable person could be expected to know) to be a matter relevant to the insurer's decision whether to accept the risk.
The Insurance Contracts Act imposes an obligation of utmost good faith on insurers which, through section 13 and related provisions, applies to the performance of the contract and to the time prior to the contract of insurance. In addition, section 14 of the Insurance Contracts Act directs attention to whether, in the circumstances of the particular claim, it is a breach of the obligation of utmost good faith to rely upon a term.[40]
Part 1A of the Insurance Contracts Act provides that ASIC is responsible for the general administration of the Act.[41] ASIC is also empowered to exercise certain supervisory powers in respect of insurers.[42] However, ASIC is not empowered to take licensing action for a breach of the duty of utmost good faith in relation to claims handling. Claims handling procedures are governed by the General Insurance Code of Practice.[43]
According to the Cameron-Milne Review it was suggested that a breach of the duty of utmost good faith should be a breach of the Insurance Contracts Act. In that case, ASIC would have the power to commence representative proceedings in relation to the breach.[44] Similarly, the Social Policy and Legal Affairs Committee recommended that the ‘Government empower the Australian Securities and Investments Commission to regulate claims handling and settlement of financial service providers’ and that legislation be introduced ‘so that breaches of the duty of utmost good faith in relation to claims handling constitute a breach of the Insurance Contracts Act’.[45]
Relevant provisions
Item 4 of Part 1 of Schedule 1 of the Bill inserts proposed subsections 13(2)-(4) into the Insurance Contracts Act so that a failure of a party to a contract of insurance to comply with the duty of utmost good faith is a breach of the Act and extends the obligation to act in good faith to a third party beneficiary under the contract from the time that the contract is entered into.[46] In accordance with the recommendation by the Cameron-Milne Review, the breach does not attract a penalty.[47]
Item 5 of Part 1 of Schedule 1 of the Bill inserts proposed section 14A into the Insurance Contracts Act. The section applies if an insurer has failed to comply with the duty of the utmost good faith in the handling, or settlement, of a claim (or potential claim) under the contract. In that case ASIC may exercise its powers under the Corporations Act 2001 (Corporations Act) in relation to the failure of the insurer to comply with the duty of utmost good faith.[48] The note to the proposed section explains that the relevant powers are the power to vary, suspend and cancel an Australian financial services licence[49] and the power to ban a person from providing financial services.[50] Whilst the Bill provides ASIC with the power to take action in relation to any and every failure of an insurer to comply with the duty of utmost good faith, the Cameron-Milne Review provides a realistic view of the manner in which the amendment will operate stating that:
… isolated breaches of the duty should not give rise to any risk of a banning order being imposed. However the ordinary operation of the licensing regime generally should mean that repeated breaches, or very serious breaches, of the duty by the insurer might be grounds for ASIC to consider imposing conditions on an insurer’s financial services licence or, in extreme cases, to ask an insurer to show cause why its licence should not be revoked.[51]
Section 9(1) of the Insurance Contracts Act lists the types of contracts and proposed contracts that the Act does not apply to. Paragraph 9(1)(e) of the Insurance Contracts Act provides that, except as otherwise provided, the Act does not apply to contracts entered into for the purposes of a law (including a law of a state or territory) that relates to workers’ compensation (subparagraph 9(1)(e)(i)), or compensation for the death of a person, or for injury to a person, arising out of the use of a motor vehicle (subparagraph 9(1)(e)(ii). The intent of the provision is that such a contract is not subject to section 54 of the Insurance Contracts Act which allows an insurer to reduce the amount of any payout under an insurance policy where the insured did not comply with the contractual requirements of the insurance policy.
This is complicated where an insurance policy covers both a statutory scheme and a common law liability of an employer for injury to an employee due to negligence. This is known as a ‘bundled policy’. In Moltoni Corp Pty Ltd v QBE Insurance Ltd (Moltoni) the High Court of Australia rejected the argument that the Insurance Contracts Act was inapplicable to a policy which included both types of cover.[52] Rather the High Court held that the exemption from the operation of the Insurance Contracts Act applies only to the cover for the statutory scheme and not to the common law liability cover.[53]
The Cameron-Milne Review considered four options to address the problem of insurance policies that are bundled so that some of the cover is excluded from the operation of the Insurance Contracts Act and some is not:
- the first option was to bring all bundled policies within the scope of the exclusion, so the Insurance Contracts Act would not apply to any part of a bundled policy
- the second option was to remove all bundled policies from the scope of the exclusion, so that the Insurance Contracts Act would apply to the whole of the bundled policy
- the third option was to give a decision maker a discretion to allow bundled polices to benefit from the exclusion and
- the final option was to make no change, leaving the Moltoni decision to stand and uncertainty regarding the application of the Insurance Contracts Act to be determined by a court by ‘unbundling’ as and when required.
The Cameron-Milne Review recommended that the Insurance Contracts Act should be amended so that insurance contracts that are entered into for the purposes of workers’ compensation are excluded from the operation of the Insurance Contracts Act in their entirety—even if the contracts also contain cover for employers’ common law liability to pay damages to workers for employment related personal injury.[54]
Relevant provisions
To give effect to that recommendation, item 7 in Schedule 1 of the Bill inserts proposed paragraph 9(1)(f) into the Insurance Contracts Act to exempt contracts and proposed contracts which are entered into both for the purposes of a law that relates to workers’ compensation and to provide insurance cover in respect of an employer’s liability to pay damages for employment related personal injury under the common law.
As noted above, subsection 9(1) of the Insurance Contracts Act lists a number of other types of insurance contracts that are excluded from the operation of the Act. Or
Other types of insurance contracts that are excluded from the operation of the Insurance Contracts Act under subsection 9(1) include, for example, certain insurance contracts entered into by a private health insurer under the Private Health Insurance Act 2007 [55]and contracts to which the Marine Insurance Act 1909 applies.[56]
The Cameron-Milne Review took a different view of those bundled contracts that are not entered into for the purposes of workers’ compensation, recommending that the exceptions in subsection 9(1) of the Insurance Contracts Act should apply to each aspect of the bundled cover as if they were included in separate insurance contracts.[57]
Relevant provisions
Item 9 of Schedule 1 of the Bill inserts proposed subsections 9(1A)–(1C) into the Insurance Contracts Act to give effect to that recommendation.
Proposed subsection 9(1A) provides that where a contract of insurance has provisions, some of which would be exempted from the operation of the Insurance Contracts Act under subsection 9(1) (called the first group of provisions) and some of which would not (called the second group of provisions), the groups of provisions are effectively ‘unbundled’ and are treated as separate contracts of insurance.
Proposed subsection 9(1B) confirms that for those contracts of insurance where the first group of provisions are for the purposes of a law that relates to workers’ compensation[58] and the second group of provisions are to provide insurance cover in respect of an employer’s liability to pay damages for employment related personal injury under the common law[59], then the provisions will remain ‘bundled’ and the entire insurance contract is exempt from the Insurance Contracts Act.
Under proposed subsection 9(1C), where contracts of insurance are ‘unbundled’ (and treated as separate contracts) and include elements of cover (known as related provisions), the related provisions are considered to be part of the group of provisions (contract) that they relate to. If that contract is exempt from the operation of the Insurance Contracts Act then the related provisions are also exempt.
The amendments in Schedule 2 of the Bill commence on the earlier of a single day to be fixed by Proclamation or six months after Royal Assent.[60]
The Insurance Contracts Act contains a number of provisions which require an insurer to notify an insured of certain information in writing, for example:
- insurer is to inform the insured of the duty of disclosure[61]
- insurer is to inform the insured whether the contract provides cover in respect of flood[62] and
- insurer is to inform the insured if the insurer’s liability is excluded or limited by reason that a notice of a claim in respect of a loss was not given to the insurer during the period of the insurance cover.[63]
At present, the Insurance Contracts Act is exempt from the Electronic Transactions Act 1999 (Electronic Transactions Act)[64] by regulation.[65]
Section 77 of the Insurance Contracts Act requires that notices and other documents must be given personally or by post. Section 72 requires any notice, statement or information which is to be given to a person, in writing, under the Insurance Contracts Act to comply with any prescribed requirements as to the legibility.
The Cameron-Milne Review considered that it was desirable:
… to recognise the increasing use of electronic communications in the context of the Insurance Contracts Act and to facilitate electronic communications where possible so long as any consumer protections issues arising in the context of insurance contracts can be satisfactorily dealt with.[66]
Accordingly, the Cameron-Milne Review recommended that the Insurance Contracts Act be amended to allow communications to be made electronically—subject to appropriate safeguards in relation to clarity, consent to receive electronic communications on the part of the recipient, ability to print and retain the communications, and certainty of time and place of origin and receipt.[67]
It has been reported that ‘insurers hope to receive government approval to communicate electronically with policy holders in a move that could save companies tens of millions of dollars each year’.[68]
Relevant provisions
According to the Explanatory Memorandum, the regulations under the Electronic Transactions Act will be amended so that the exemption for the Insurance Contracts Act will be removed.[69]
Item 7 of Schedule 2 of the Bill repeals existing section 72 and inserts proposed sections 72 and 72A into the Insurance Contracts Act. The amendments operate so that a notice, a statement or any other documents may be given to a person electronically. The Electronic Transactions Act was updated in 2011[70] to reflect the internationally recognised standards of electronic commerce set out in the United Nations Convention on the Use of Electronic Communications in International Contracts, 2005.[71] The amendments included default rules on time of dispatch,[72] time of receipt[73] and place of dispatch and place of receipt.[74] Existing paragraph 9(2)(d) of the Electronic Transactions Act provides that a recipient must consent to receive electronic communications.
Item 8 of Schedule 2 of the Bill repeals section 77 of the Insurance Contracts Act.
The amendments in Schedule 3 of the Bill commence on Royal Assent.[75]
ASIC has the power to intervene in Court proceedings under Part 2 of the Australian Securities and Investments Commission Act 2001which contains the consumer protection provisions that relate to financial services.[76] ASIC has equivalent powers under section 1330 of the Corporations Act 2001 to intervene in Court proceedings. However, there is no such provision in the Insurance Contracts Act.
The Cameron-Milne Review considered that giving ASIC a statutory power under the Insurance Contracts Act:
…would provide certainty and give ASIC rights to adduce evidence and raise issues in addition to those raised by the parties … [which] … would allow ASIC, as the body charged with administering the [Insurance Contracts] Act, to fulfil this function better.[77]
Relevant provisions
Item 3 in Schedule 3 of the Bill inserts proposed section 11F into the Insurance Contracts Act to give ASIC the power to intervene in any proceeding relating to a matter arising under the Insurance Contracts Act or Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003.[78] Consistent with the terms of ASIC’s other powers to intervene, as set out above, ASIC may appear and be represented in a proceeding in which it intervenes by a staff member of ASIC, by a person to whom ASIC has delegated its function and powers or by a solicitor or by counsel (proposed subsection 11F(3)).
The provisions discussed under this heading commence on the day after the end of the period of 30 months beginning on the day of Royal Assent.[79]
Section 21 of the Insurance Contracts Act sets out the duty of disclosure owed by an insured person to an insurer up to the time the insurance contract is entered into. An insured person has a duty to disclose every matter that is known to him or her, being a matter that:
- the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms (that is, a subjective test) (paragraph 21(1)(a)) or
- a reasonable person in the circumstances could be expected to know to be a matter so relevant (that is, an objective test) (paragraph 21(1)(b)).
The consequence of a failure to comply with the duty of disclosure (if the failure is fraudulent), is that the insurer may avoid the contract.[80] The interpretation of section 21 of the Insurance Contracts Act by the Courts has not been uniform and it is unclear whether extrinsic matters and/or intrinsic matters[81] should be taken into account in determining what a reasonable person could be expected to know.[82] The Cameron-Milne Review concluded that section 21 of the Insurance Contracts Act ‘puts an unreasonable burden’ on an insured person in that he or she is ‘expected to know what the insurer regards as relevant’.[83] By comparison, for instance, applicants for consumer credit ‘must answer the credit provider’s questions accurately, but are not expected to know what other information the credit provider needs to assess the loan application’.[84]
The Cameron-Milne Review did not recommend a substantive change to the mixed subjective and objective test which is set out in the section.[85] Rather, it recommended that section 21 of the Insurance Contracts Act be amended to include non-exclusive factors that can be taken into account when determining the application of the duty of disclosure test.[86]
Relevant provisions
Part 1 of Schedule 4 of the Bill responds to this recommendation. Paragraph 21(1)(b) of the Insurance Contracts Act is repealed and replaced so that, in determining whether a reasonable person in the circumstances could be expected to disclose a matter that is relevant to the contract of insurance which is to be entered into, regard is to be had to factors such as, but not limited to:
- the nature and extent of the insurance cover to be provided under the contract of insurance (proposed paragraph 21(1)(b)(i)) and
- the class of persons who would ordinarily be expected to apply for insurance cover of that kind (proposed paragraph 21(1)(b)(ii)).
The amendments in items 3–5 of Part 2 of Schedule 4 of the Bill commence on Royal Assent. The amendments in item 6 of Part 2 of Schedule 4 of the Bill commence 30 months after Royal Assent.
Subsection 21A(9) of the Insurance Contracts Act provides that an eligible contract of insurance is one which has been specified in regulations. Regulation 2B of the Insurance Contracts Regulations 1985[87] specifies that the following insurance contracts are eligible contracts of insurance:
- motor vehicle insurance (outlined in regulation 5)
- home buildings insurance (outlined in regulation 9)
- home contents insurance (outlined in regulation 13)
- sickness and accident insurance (outlined in regulation 17)
- consumer credit insurance (outlined in regulation 21) and
- travel insurance (outlined in regulation 25).
Under existing section 21A of the Insurance Contracts Act, the duty of disclosure which applies to an eligible contract of insurance at the time that the contract is entered into is different from the duty of disclosure which generally applies under section 21. Section 21A operates so that the insurer is taken to have waived compliance with the duty of disclosure concerning the contract unless it complies with one or other of the following before the contract is entered into:
- the insurer requests the insured to answer one or more specific questions relevant to its decision whether or not to accept the risk and, if so, on what terms[88] or
- the insurer asks specific questions as above and expressly requests the insured to disclose those exceptional circumstances that satisfy the conditions listed in subparagraphs 21A(4)(b)(i)—(iv) of the Insurance Contracts Act.[89]
Subsection 21A(1) specifically states that the section applies to an eligible contract of insurance unless it is entered into by way of renewal. On renewal, if an insurer wishes to rely on the insured person’s disclosure obligations, a fresh round of questions must be sent to the person.[90]
According to the Cameron-Milne Review, ‘in practice this may simply be a request for an update to the answers provided’ at the inception of the contract.[91] The Cameron-Milne Review considered that section 21A of the Insurance Contracts Act should be amended so that it applies to renewals[92] but suggested that ‘a lengthy transitional period be allowed so that the changes can be incorporated over time into the insurance companies’ usual business practice’.[93]
Relevant provisions
Item 6 of Part 2 of Schedule 4 of the Bill repeals and replaces section 21A so that an insurer is not permitted to ask exceptional circumstances questions.[94] Item 3 adds a note at the end of subsection 21A(1) of the Insurance Contracts Act to indicate that section 21B applies in relation to the renewal of an eligible contract of insurance.
Item 4 of Part 2 of Schedule 4 of the Bill inserts proposed section 21B—which will apply on the renewal of an eligible contract of insurance—into the Insurance Contracts Act. The section allows the insurer to ask specific questions and/or provide a copy of the answers previously provided and ask the insured to disclose any changes before the contract is renewed.
Whilst this item commences on Royal Assent—that is, it applies in relation to the renewal of an eligible contract of insurance from that time, regardless of when it was entered into—proposed subsection 21B(2) of the Bill provides that it does not apply during the transition period unless the insurer has informed the insured person in writing of the nature and effect of section 21B of the Insurance Contracts Act.[95] The transition period is defined in proposed subsection 21B(13) as the period of 30 months beginning on the day that the section commences. The lengthy transition period is consistent with the recommendation of the Cameron-Milne review and is an acknowledgement that insurers may need to change Product Disclosure Statements and policy wordings where the disclosure duties are usually explained.
The amendments under this heading commence 30 months after Royal Assent.[96]
Existing section 22 of the Insurance Contracts Act sets out an insurer’s duty to inform an insured person, in writing, before a contract of insurance is entered into, of the general nature and effect of the duty of disclosure.[97]
The Cameron-Milne Review recognised that:
many insureds do not realise that the duty of disclosure obligations still apply between the date of application for the policy and date the policy comes into effect … [even though] … in some circumstances the time between providing the disclosure and the commencement of the contract can be some months.[98]
Whilst some insurance companies ask for further disclosure immediately prior to a policy coming into effect, the Cameron-Milne Review noted that ‘this is not universal practice’.[99] The consequences of a failure to disclose facts that come to light between the time an insurance proposal is completed and the contract of insurance comes into effect (even if inadvertent) may ‘mean that claims and even entire policies may be jeopardized to the serious detriment of insureds or their dependants and beneficiaries’.[100]
That being the case, the Cameron-Milne Review recommended that the Insurance Contracts Act ‘be amended so that an insurer must provide to the insured, at the time when the insurance policy is issued, a reminder that the duty of disclosure obligations continue until the time the policy is entered into’.[101]
Relevant provisions
Item 12 of Part 3 of Schedule 4 of the Bill implements this recommendation by repealing and replacing section 22 of the Insurance Contracts Act. The amended section will operate so that the insurer must, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure (proposed paragraph 22(1)(a)) and that the duty of disclosure applies until the proposed contract is entered into (proposed paragraph 22(1)(d)). If the insurer complies with that requirement and proposes to enter into a contract of insurance more than two months after the insured person’s most recent disclosure, then the insurer must give to the insured person a reminder notice stating that the duty of disclosure applies until the proposed or other contract is entered into (proposed subsection 22(3)). An insurer who has not complied with these requirements may not exercise a right in respect of a failure to comply with the duty of disclosure, unless the failure was fraudulent (proposed subsections 22(5 and 6)).
The amendments under this heading commence 30 months after Royal Assent.
At present, section 25 of the Insurance Contracts Act provides that, where a misrepresentation is made prior to a life insurance contract being entered into, the misrepresentation is deemed to be made by the insured. The problem that arises is that there is no equivalent provision in relation to non-disclosure by a life insured. The Cameron-Milne Review recommended that section 25 should be expanded to include non-disclosure by a person whose life is insured under the contract in order to address this inconsistency.[102]
Relevant provisions
Item 14 of Part 4 of Schedule 4 of the Bill inserts proposed section 31A into the Insurance Contracts Act for this purpose. Proposed subsection 31A(2) provides that if, during contract negotiations, a person fails to disclose to the insurer a matter that the person knew to be relevant to the insurer’s decision to accept the risk, or that a reasonable person in the circumstances could have been expected to know would be relevant, the Insurance Contracts Act has effect as if the failure to disclose the matter was a failure of the insured person to comply with the duty of disclosure. In such a circumstance the insurer could avoid the contract in accordance with section 29 of the Act.
Importantly, proposed subsection 31A(3) of the Bill clarifies that the non-disclosure rule above does not apply to a matter that diminishes the risk; is of common knowledge; that the insurer knows (or ought to know) or about which the insurer has waived the duty of disclosure.
The Insurance Contracts Act contains different remedies for misrepresentation and non-disclosure depending on whether the relevant contract related to general insurance (section 28) or life insurance[103] (section 29).[104]
For general insurance, the Insurance Contracts Act permits general insurers to reduce their liability to what it would have been (including nothing) had full disclosure occurred where there has been ‘innocent’ misrepresentation/non-disclosure. There is no time limitation on when this remedy can be exercised.
However, life insurers only have the first three years of the policy to avoid the contract (which only applies if the insurer would not have been prepared to enter into it on any terms).[105] Otherwise their only remedy is to vary the sum insured in accordance with a formula prescribed by the Insurance Contracts Act.[106] This limitation is not appropriate in relation to ‘non-traditional’ life cover.[107]
The 2010 Bill attempted to resolve this issue by limiting the application of section 29 to contracts of life insurance involving a surrender value or death cover. Other contracts of life insurance would be dealt with similarly to the remedies that apply to general insurance contracts.
Relevant provisions
This Bill takes a different approach. First, proposed section 27A of the Insurance Contracts Act is inserted into the Insurance Contracts Act by item 1 of Part 1 of Schedule 5 of the Bill to allow a contract of life insurance that offers different types of protection against more than one type of insurable event resulting from death, sickness or accident to be ‘unbundled’—that is, each type of cover is to be treated as if they are separate contracts of life insurance. This amendment takes effect on Royal Assent.[108]
The amendment operates so that all life insurance contracts will continue to be subject to the remedies in section 29 of the Insurance Contracts Act. This is consistent with the recommendation made by the Cameron-Milne Review.[109]
Second, item 2 of Part 1 of Schedule 5 of the Bill inserts a note after subsection 29(1) of the Insurance Contracts Act so that it is beyond doubt that, where section 27A applies to a contract of life insurance, different remedies may be available in respect of each separate contract of life insurance that is taken to exist.
Consistent with the note, items 4–10 of Part 2 of Schedule 5 of the Bill amend section 29 of the Insurance Contracts Act in relation to available remedies for non-disclosure and misrepresentations by an insured.[110]
If a contract does not have a surrender value or does not provide cover in respect of the death of a life insured (that is, the life policy is a non-traditional life policy):
- the insurer may vary the contract at any time after the contract is entered into[111]
- if the insurer does not avoid the contract, or has not varied the contract in accordance with the statutory formula, the insurer may vary the contract to place the insurer in a position that the insurer would have been in if the duty of disclosure had been complied with or the misrepresentation had not been made[112] and
- in varying the contract, the insurer must have regard to the position in which other reasonable and prudent insurers that had entered into similar contracts of life insurance (in terms of scope and time of issue) would have been, at the time the relevant contract was entered into.[113]
At present, section 30 of the Insurance Contracts Act provides a formula for varying the sum insured, or reducing the premium payable, where there has been a failure to disclose the date of birth of the person insured, or there has been a misrepresentation as to the person’s date of birth. That formula contains a reference to interest ‘at the prescribed rate’ (subparagraph 30(2)(b)(i) of the Act). Section 4 of the Insurance Contracts Regulations 1985 sets ‘the prescribed rate’ at 11 per cent per annum.
Relevant provisions
Item 12 of Part 3 of Schedule 5 of the Bill inserts proposed subsection 30(3A) into the Insurance Contracts Act to provide a further remedy in the event that a person has not provided their correct date of birth at the time that the life insurance contract was entered into. Under proposed subsection 30(3A), an insurer may vary the contract by changing its expiration date to the date that would have been the expiration date if the contract had been based on the correct date of birth. The Cameron-Milne Review recommended the amendment so that section 30 is made relevant to today’s insurance market.[114]
Section 60 of the Insurance Contracts Act provides for the cancellation of a contract of general insurance where:
- the insured fails to comply with the duty of the utmost good faith
- the insured has failed to comply with the duty of disclosure
- the insured made a misrepresentation to the insurer during the negotiations for the contract but before it was entered into
- the insured failed to comply with a provision of the contract, including a provision with respect to payment of the premium or
- the insured has made a fraudulent claim under the contract or under some other contract of insurance.
However, there is no equivalent provision in respect of life insurance.
Relevant provisions
Item 15 of Part 4 of Schedule 5 of the Bill inserts proposed section 59A into the Insurance Contracts Act to allow for the cancellation of a contract of life insurance where the insured has made a fraudulent claim under that contract (known as the first contract) or under another contract of insurance with the insurer that provides insurance cover during any part of the period during which the first contract provides insurance cover. However, proposed subsections 59A(2)–(5) set out the powers of the Court to make certain orders as an exception to that blanket rule as follows:
- if an insurer has cancelled a contract of life insurance because of a fraudulent claim, in any proceedings in relation to the claim, the court may, if it would be harsh and unfair not to do so disregard the cancellation and order the insurer to pay, in relation to the claim, an amount that the court considers just and equitable in the circumstances and order the insurer to reinstate the contract[115]
- if an insurer has cancelled a contract of life insurance because of a fraudulent claim under another contract of insurance with the insurer, in any proceedings in relation to the claim, the court may, if it would be harsh and unfair not to do so, order the insurer to pay an amount that the court considers just and equitable in the circumstances and order the insurer to reinstate the cancelled contract[116]
- if an insurer has cancelled a contract of life insurance because of a fraudulent claim, in any proceedings in relation to the cancellation, the court may, if it would be harsh and unfair not to do so order the insurer to reinstate the contract.[117]
Item 16 of Part 4 of Schedule 5 of the Bill repeals and replaces section 63 of the Insurance Contracts Act to put beyond doubt that an insurer must not cancel a contract of life insurance except as provided by proposed section 59A of the Insurance Contracts Act or by section 210 of the Life Insurance Act 1995 (proposed subsection 63(2)).[118]
The Cameron-Milne Review recognised a number of issues regarding persons who are not party to an insurance contract, but are beneficiaries of the insurance cover provided in it.[119] The amendments in Schedule 6 of the Bill address these issues.
Existing section 41 of the Insurance Contracts Act is repealed and replaced.
New section 41 is drafted in substantially the same terms as the current section 41, except that it is drafted to give third party beneficiaries (claimants) the same rights as insureds under the section.[120]
Proposed subsection 41(1) applies if it would constitute a breach of an insurance contract if, without the consent of the insurer either the insured or a third party beneficiary were to settle or compromise a claim or to make an admission or payment in respect of a claim.
Proposed subsection 41(2) provides that where an insured or third party beneficiary makes a claim under a contract of insurance, the claimant may by notice in writing to the insurer, require the insurer to inform the claimant in writing that the contract applies to the claim and whether the insurer proposes to conduct the negotiations and any legal proceedings in respect of the claim.[121] The effect of this subsection is that the protections available to the insured under proposed subsection 41(3) are extended to third party beneficiaries.[122]
items 3–6 and 8–12 of Part 2 of Schedule 6 of the Bill amend sections 48 (entitlements of third party beneficiaries under contracts of general insurance) and 48AA (life policies in connection with Retirement Savings Accounts for the benefit of third party beneficiaries) of the Insurance Contracts Act to make references to third party beneficiaries. Items 7 and 13 amend subsections 48(3) and 48AA(3) respectively to allow an insurer to raise defences relating to the conduct of an insured, including conduct occurring prior to the time that the contact was entered into in respect of a claim by a third party beneficiary. This ensures that third party beneficiaries are not in a better position, in terms of their ability to claim, than the insured.[123]
Item 16 of Part 3 of Schedule 6 of the Bill repeals subsections 48A(1) and (2) of the Insurance Contracts Act and inserts proposed subsections 48A(1), (1A) and (2). The effect of the amendments which are consistent with the recommendation of the Cameron-Milne Review[124] is that:
- a third party can bring an action against an insurer without the intervention of the policy owner
- the life insured can be nominated as a third party beneficiary and
- a third party beneficiary can provide a valid discharge to the insurer.[125]
Similarly, the amendments in Part 4 of Schedule 6 of the Bill amend section 51 of the Insurance Contracts Act to provide for rights of third parties to recover against insurers in certain circumstances.
The amendments in Schedule 7 of the Bill commence six months after Royal Assent.
Subrogation is:
the substitution of one person for another in respect of a lawful claim, demand, or right, so that the person substituted succeeds to or acquires the rights, remedies, or securities of the other in relation to the claim. The person who is subrogated to another stands in that other person’s shoes.[126]
Subrogation operates where an insurer pays out a claim for accident damage under a motor vehicle insurance policy. The insurer (in the name of the insured person) is permitted to seek damages from third parties who contributed to causing the accident. The problem arises however, if the amount recovered by the insurer from the third party is more than the amount that the insurer paid to the injured person.
For instance, Mr Brown suffers an injury in a motor vehicle accident. His loss is quantified as $10 000. However, the policy which he has entered into with his insurer is capped at $5000, which the insurer duly pays. Mr Brown’s insurer subsequently exercises its rights to make a claim against the person who caused the accident and recovers $8000 from the person’s insurer. Mr Brown’s insurer has recovered $3000 more than it actually paid Mr Brown. The question arises as to whether Mr Brown, who is, after all, the injured person, should receive the $3000 or whether it should remain with the insurer who has taken the recovery action.
Whilst section 67 of the Insurance Contracts Act deals with rights with respect to moneys recovered under subrogation, the Cameron-Milne Review recommended that it be amended in line with the principles enunciated by the Australian Law Reform Commission in its report into the Marine Insurance Act 1909.[127] The amendments in Schedule 7 of the Bill are consistent with this recommendation.[128]
Relevant provisions
Item 2 of Schedule 7 of the Bill repeals and replaces section 67 of the Insurance Contracts Act to clarify the rights of the insurer and the insured person in respect of money recovered under subrogation.
If the amount is recovered by the insurer, proposed subsection 67(2) provides that the insurer is entitled to the amount paid by the insurer to the insured person in respect of the loss plus an amount representing administrative and legal costs expended in respect of the recovery. However, if the recovered amount is greater than this, the balance is paid to the insured person up to the amount of the loss. The insurer is entitled to any amount in excess of this. Using the example of Mr Brown above, the insurer is entitled to retain $5000 from the $8000 it has recovered (being the amount it actually paid to Mr Brown) and an amount equal to its legal and administrative costs but must pay the balance to Mr Brown up to the amount of Mr Brown’s loss, being $10 000. If there was any amount remaining the insurer would be entitled to it.
If the amount is recovered by the insured, proposed subsection 67(3) provides that the order of payment is reversed. If in the example of Mr Brown above, it was Mr Brown who took action against the person who caused the accident and recovered $8000 from the person’s insurer, he would be entitled to retain $5000 (that is, the total amount of his $10000 loss less the amount that his insurer paid) as well as an amount equal to his legal and administrative costs. Mr Brown must pay the balance to his insurer up to the amount of $5000.
Where the amount is recovered jointly by the insurer and the insured person, proposed subsections 67(4)–(7) of the Insurance Contracts Act apply to ensure that where funds are available the insurer and the insured receive their entitlements. Where the amount recovered is less or greater than entitlements then funds are distributed on a pro-rata basis.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.
[1]. The commencement dates in relation to the various provisions of the Bill are further explained where relevant under the ‘Key issues and provisions’ section of this Bills Digest.
[3]. See information on the Cameron-Milne Review under the heading ‘Background’ of this Bills Digest.
[4]. P Durkin, ‘Government targets unfair insurance’, The Australian Financial Review, 20 December 2012, p. 3, accessed on 26 April 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F2117330%22 D Crowe and J Owens, ‘No excuses this time MPs warn insurers’, The Weekend Australian, 2 February 2013, p. 4, accessed on 26 April 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F2203771%22 C Munro, ‘Fairness falls short’, The Sydney Morning Herald, 12 August 2009, p. 10, accessed on 26 April 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1DDU6%22 and F Zumbo, ‘Let’s ensure fairness in fine print’, The Hobart Mercury, 17 March 2011, p. 22, accessed on 26 April 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F628540%22
[7]. A definition of ‘subrogation’ is outlined on page 25 of this Bills Digest.
[24]. Explanatory Memorandum, paragraph 1.8, p. 14.
[27]. Treasury website, ‘Insurance Contracts Amendment Bill’, op. cit.
[34]. Parliamentary Joint Committee on Human Rights, Fourth Report of 2013, op. cit., p. 62.
[35]. The Statement of Compatibility with Human Rights can be found at page 103 of the Explanatory Memorandum to the Bill.
[38]. Explanatory Memorandum, p. 7.
[39]. Item 2 of the table in clause 2 of the Bill.
[41]. Section 11A of the Insurance Contracts Act 1984.
[42]. Sections 11C–11E of the Insurance Contracts Act 1984.
[44]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 2.
[45]. Standing Committee on Social Policy and Legal Affairs, In the wake of disasters: inquiry into the operation of the insurance industry during disaster events, op. cit., recommendation 7, p. 100.
[46]. Item 2 of Part 1 of Schedule 1 of the Bill inserts the definition of third party beneficiary into subsection 11(1) of the Insurance Contracts Act so that, under a contract of insurance, third party beneficiary means 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.
[47]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 1.2.
[48]. The text of the Corporations Act 2001 can be viewed at: http://www.comlaw.gov.au/Details/C2013C00003/Download Under subsection 14A(2) of Schedule 1 of the Bill, the insurer’s failure to comply with the duty of the utmost good faith is to be treated as if it were a failure to comply with a financial services law as defined under section 761A of the Corporations Act.
[49]. Subdivision C of Division 4 of Part 7.6 of the Corporations Act 2001.
[50]. Subdivision A of Division 8 of Part 7.6 of the Corporations Act 2001.
[51]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 3.
[53]. Ibid., paragraph 30.
[54]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 1.3, p. 7.
[57]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 1.4, p. 7.
[58]. Proposed subparagraph 9(1)(f)(i) of the Insurance Contracts refers.
[59]. Proposed subparagraph 9(1)(f)(ii) of the Insurance Contracts refers.
[60]. Item 3 of the table in clause 2 of the Bill.
[61]. Section 22 of the Insurance Contracts Act refers.
[62]. Section 37C of the Insurance Contracts Act refers.
[63]. Section 40 of the Insurance Contracts Act refers.
[66]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., pp. 17–18.
[67]. Ibid., recommendation 2.1, p. 19.
[69]. Explanatory Memorandum, p. 4.
[72]. Section 14 of the Electronic Transactions Act.
[73]. Section 14A of the Electronic Transactions Act.
[74]. Section 14B of the Electronic Transactions Act.
[75]. Item 4 of the table in clause 2 of the Bill.
[77]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 25.
[79]. Item 5 of the table in clause 2 of the Bill.
[80]. Section 28 of the Insurance Contracts Act. Note that section 28 does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure.
[81]. See for example, Delphin v Lumley General Insurance Ltd (1989) 5 ANZ Ins Cas 60-941 in which the Court concluded that the relevant tests required both extrinsic and intrinsic factors to be taken into account.
[83]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 31.
[84]. Explanatory Memorandum, p. 67.
[85]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 33.
[86]. Ibid., recommendation 4.1, p. 34.
[88]. Subsection 21A(3) of the Insurance Contracts Act.
[89]. Subsection 21A(4) of the Insurance Contracts Act.
[90]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 33.
[92]. Ibid., recommendation 4.2, p. 34.
[94]. This amendment is consistent with the second bullet point in recommendation 4.2 of the Cameron-Milne Review.
[95]. Item 6 of the table in clause 2 of the Bill.
[96]. Item 8 of the table in clause 2 of the Bill.
[97]. The wording of the information about the general nature and effect of the duty of disclosure is prescribed in Schedule 1 to the Insurance Contracts Regulations 1985.
[98]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 35.
[100]. Explanatory Memorandum, p. 78.
[101]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 4.3.
[102]. Ibid., p. 36, recommendation, 4.4.
[103]. The term contract of life insurance is defined in subsection 11(1) of the Insurance Contracts Act as a contract that constitutes a life policy within the meaning of the Life Insurance Act 1995.
[104]. Note that in either type of insurance contract (general or life), fraud permits the insurer to avoid the policy entirely. Subsections 28(2) and 29(2) of the Insurance Contracts Act, respectively.
[106]. The formula is contained in subsection 29(4) of the Insurance Contracts Act.
[107]. That is, disability or income protection insurance (which provides for regular sums to be paid while an insured person is unable to work due to sickness or injury), trauma insurance (which provides for the payment of an agreed lump sum if the insured person is diagnosed with one of a list of specified conditions).
[108]. Item 9 of the table in clause 2 of the Bill.
[109]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 7.1, p. 69.
[110]. These amendments commence 12 months after Royal Assent. Item 10 of the table in clause 2 of the Bill.
[111]. Subsection 29(2) of the Insurance Contracts Act added to by item 5 of Part 2 of Schedule 5 of the Bill.
[112]. Proposed subsection 29(6) of the Insurance Contracts Act.
[113]. Proposed subsection 29(7) of the Insurance Contracts Act.
[114]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 7.5, p. 70.
[115]. Proposed subsection 59A(2) of the Insurance Contracts Act.
[116]. Proposed subsection 59A(3) of the Insurance Contracts Act.
[117]. Proposed subsection 59A(4) of the Insurance Contracts Act.
[118]. Section 210 of the Life Insurance Act 1995 prevents a life insurance contract from being cancelled for non-payment of premium in certain circumstances.
[119]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., p. 87.
[120]. Explanatory Memorandum, op. cit., p. 42.
[121]. The term third party beneficiary under a contract of insurance is inserted by item 2 of Part 1 of Schedule 1 of the Bill to mean 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 who the benefit of the insurance cover provided by the contract extends.
[122]. Item 1 of Part 1 of Schedule 6 of the Bill.
[123]. This is in accordance with recommendation 10.2 of the Cameron-Milne Review.
[124]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 10.3, p. 93.
[125]. Proposed subsection 48A(1) and (2) of the Insurance Contracts Act.
[126]. Butterworths Concise Australian Legal Dictionary, third edition, LexisNexis Butterworths, Australia, 2004, p. 415.
[128]. A Cameron and N Milne, Review of the Insurance Contracts Act, Final report on second stage: provisions other than section 54, op. cit., recommendation 11.1, p. 107.
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