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ICAChangesAN EXPLANATION OF THE CHANGES PROPOSED BY THE INSURANCE CONTRACTS AMENDMENT BILL 2010By Mark Radford
The amendments to the Insurance Contracts Act 1984 (Cth) (IC Act) have now been released and are expected to be passed this year, possibly as early as June/July. The changes will have a significant impact on the insurance industry and insurance brokers. To take account of the changes:
The key changes are as follows:
THE REASON FOR THE CHANGES The changes are as a result of a Government review of the IC Act conducted in 2003, the resultant recommendations made in 2005 and consultation that has occurred since then with relevant stakeholders after release of exposure draft legislation. The review essentially concluded that the IC Act had been generally operating satisfactorily to the benefit of insurers and insureds but that changes were required to take into account the effluxion of time since its enactment, developments in the insurance market and judicial interpretation of the Act. PAST PROPOSED CHANGES THAT HAVE BEEN REMOVED A number of significant proposals contained in the 2007 exposure draft have been removed which are worth noting:
Overall, the removal of the above has been a good decision. The following sets out the relevant changes that will go ahead, dealing first with the changes that apply to both general and life insurance and then those that apply to each separately. CHANGES THAT APPLY TO BOTH GENERAL INSURANCE AND LIFE INSURANCE Duty of utmost good faith Currently, section 13 of the IC Act implies into a policy a provision requiring each party to act towards the other in respect of any matter arising under and in relation to it with the utmost good faith. It only applies to the insurer and contracting insured. The changes will:
However, a breach by an insurer allows ASIC to commence or continue a representative action pursuant to section 55A for such a breach. It also allows ASIC to pursue remedies under the Corporations Act against AFS Licensee insurers. The power in this regard has also been extended to cover claims handling and settlement services which are not themselves financial services. The changes apply to:
but only in relation to the variation. As most insurers are probably already treating third party beneficiaries in the same way as they would treat an insured, it is unlikely the change will have a significant impact for most insurers. Electronic communication changes Whether or not notices and information can be delivered electronically under the IC Act has been open to some debate. The IC Act is currently excluded from the operation of the Electronic Transactions Act 1999 (Cth) which allows for written notices to be given electronically subject to certain rules being met. It is proposed that the Electronics Transactions Act regulations will be amended to remove the IC Act exclusion and the IC Act notice provisions will expressly permit electronic communication of notices or other documents or information under the IC Act. An updated section 72 will also provide a new regulation-making power regarding the content and legibility of notices and documents and material accompanying them. The aim is to ensure that the content of relevant statutory notices under the IC Act is able to be digested by the recipient without interruption or distraction by other material provided with the notice. Regulations are yet to be released. There is no change regarding the operation of section 71(1) which provides that any provision of the IC Act other than the obligation to give a renewal notice under subsection 58(2) with respect to the giving of a notice or other document or information to the insured before a policy is entered into, does not apply where the policy was arranged by an insurance broker as agent of the insured. These changes will apply to a notice or other document or information given to a person under the IC Act on a date to be proclaimed, but not later than 6 months after Royal Assent. The aim is to proclaim a date that is consistent with the changes to be made to the Electronic Transactions Act. This is a significant change for the industry and one that is likely to allow great costs savings. Section 21 - the insured's duty of disclosure Section 21(1)(b) test Currently, under section 21(1), an insured has a duty to disclose to the insurer, before the relevant policy is entered into, every matter that is known to the insured, being a matter that:
The new factor is the nature and extent of the insurance cover to be provided under the relevant policy. This change appears unlikely to fix the issues which have previously arisen in relation to this test. It applies to:
but only in relation to the variation.
Currently under the IC Act different duty of disclosure obligations apply in relation to "eligible contracts". An eligible contract is essentially defined in Regulation 2B as a contract which is for new business and wholly in a specified class of contracts which are Regulation 5 (Motor Vehicle Insurance), Regulation 9 (Home Buildings Insurance), Regulation 13 (Home Contents Insurance), Regulation 17 (Sickness & Accident Insurance), Regulation 21 (Consumer Credit Insurance - this also applies to life policies) and Regulation 25 (Travel Insurance). A contract for new business that is not within the above classes can still be an eligible contract if the insurer, in accordance with the regulation, chooses to "opt in". Section 21A only applies when the relevant eligible contract is first entered into (i.e. new business and not for renewals, variations, reinstatements, extensions or replacements). Section 21A requires the insurer to ask the insured specific questions and, where the insurer chooses to do so, an exceptional circumstances question as well. If the insurer does not comply with these requirements it effectively waives its duty of disclosure in relation to the failure. Section 21A is to be amended so that the insurer will only be permitted to ask specific questions for new business eligible contracts. No exceptional circumstances questions will be permitted. In addition to the above, a new section 21B will apply in relation to the renewal of eligible contracts of insurance. This requires an insurer wishing to rely on the duty of disclosure to:
If the insurer fails to do these things, it is taken to have waived compliance with the duty in relation to the renewed policy. However, this does not affect the insurer's rights in relation to non-disclosures made under previous renewals or at the time of the policy's original inception. An insurer can rely on any such non-disclosure or misrepresentation made prior to the last disclosure but not in relation to any changes that occur after that time. Interestingly, section 21 will apply to all variations, extensions and reinstatements of eligible contracts that do not constitute renewals. This means that, depending on the circumstances, three different types of obligation can apply. The changes apply both to the original inception of a policy (in the case of s21A) and renewals (in the case of s21B) that take place 18 months after Royal Assent. Insurance brokers need to be aware of these new rights and obligations when advising their clients regarding their duty of disclosure obligations.
Insurers have a current obligation, before the policy is entered into, to clearly inform the insured in writing of the general nature and effect of the duty of disclosure and, where it has application, section 21A. There is a prescribed form of writing which can be used. Any insurer that has not complied may not exercise a right in respect of a failure to comply with a duty of disclosure unless the failure was fraudulent. Exceptions to this obligation apply, notably:
The proposed changes:
The aim of this change is to ensure that, where there is a significant delay between the initial disclosure and the policy commencing, the insured is well aware of its obligation to continue to update the disclosure. The "deemed notice exception" (see above) has been amended to also require the section 22 notice for a variation where the varied policy will provide a kind of insurance cover that was not provided by the policy immediately before the variation and, in the case of a life policy, where the variation will increase the sum insured in respect of the insured. [the same change also applies in relation to the s40(30 notice It is important to note that the deemed notice exception won't work for renewals, extensions and reinstatements that first occur after the changes start to apply. Insurers will be required to give the new section 22 notice for such renewals, extensions or reinstatements, but from the time the new notice has been given the deemed notice exception will apply as per normal. New forms of prescribed notice will be required and implemented in the regulations. No change has been made to the rights that an insured has if the insurer fails to provide the section 22 notice. A failure to comply with the new reminder obligation precludes the insurer from exercising a right in respect of the failure to disclose any "new matter" (i.e. a matter that the insured first becomes aware of after its most recent disclosure). The changes are to apply to contracts originally entered into or renewed, extended, varied or reinstated 18 months after Royal Assent. Specific changes have also been made in relation to life insurance duty of disclosure obligations which are dealt with in the life insurance section below. GENERAL INSURANCE SPECIFIC CHANGES Bundled workers' compensation contracts and Bundled contracts generally The IC Act currently exempts certain policies or proposed policies that have been entered into for the purposes of a state or territory law that relates to workers' compensation or compensation for death or injury to a person arising from the use of a motor vehicle. Some contracts provide employees with cover that is both within the scope of the IC Act and outside the scope of the IC Act (e.g. contracts of insurance that bundle both cover for compulsory workers' compensation purposes and cover for liability to employees at common law arising from employment-related personal injury). Given the problems associated with these bundled workers' compensation policies the entire policy is to be exempted from the IC Act. This means that any contracts entered into (or proposed to be entered into) that bundle compulsory workers' compensation cover and cover in respect of an employer's liability under the rule of common law that requires payment of damages to a person for employment-related personal injury will be exempt from the IC Act. To the extent that they are mixed with other forms of cover different rules apply (see below). There are no provisions or unbundling rules in the IC Act in relation to contracts that cover insurance caught by the IC Act and insurance not caught by the IC Act. New rules have been introduced to provide for the unbundling of contracts which contain both types of cover. Essentially, as a result of the new rules, the different covers and relevant provisions applicable to them will be treated as separate contracts for the purposes of the IC Act. A different rule applies in relation to bundled workers' compensation and common law cover as discussed above. Those two covers will be treated together as a separate policy to the other covers that might be caught by the IC Act. The other covers will, to the extent that they are and are not caught by the IC Act, be separated in accordance with the rules. The changes to bundled workers' compensation and other bundled contracts apply to any policies originally entered into or renewed after Royal Assent. Third Party Beneficiaries The concept of a third party beneficiary (i.e. a person specified in the policy as entitled to claim but who is not a contracting insured) is currently dealt with in section 48 of the IC Act. A new definition of "Third Party Beneficiary" (TPB) has been inserted into the Act because the term is now used in a number of provisions other than section 48. A TPB is defined as a person who is not a party to the policy but is specified or referred to in the policy, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the policy extends (section 11(1)). Currently:
Under subsection 48(3) a change has been made to make it clear that, in defending an action brought by a TPB, a general insurer may raise defences relating to the conduct of the insured which occurred either before or after the policy was entered into (e.g. non-disclosure by the insured). Section 41 has been amended to extend this right to TPBs as well as the contracting insured. Under section 41 of the IC Act, an insured that has made a claim under a contract of liability insurance may require the insurer to inform them in writing:
If the insurer fails to do so within a reasonable time the insurer is prevented from refusing the claim or reducing the amount payable by reason of a breach of the policy for the above reasons. The above changes apply to contracts originally entered into 12 months after Royal Assent or originally entered into before Royal Assent and renewed 12 months after it. In addition, section 13 has been amended to extend the duty of utmost good faith in relation to TPBs as well as contracting insureds. However, the duty only applies after the policy is entered into because to apply the duty pre contractually would be impractical. The duty is of most relevance to TPBs where they wish to make a claim under the policy. This change applies to contracts entered into and renewed after Royal Assent. It is crucial that insurance brokers understand the different rights and obligation of such third party beneficiaries when compared with the rights and obligations of the contracting insured, as to fail to do so can expose them to risk if such persons do not have the cover or rights they expect they would have.
Currently section 51 of the IC Act provides that under a contract of liability insurance, where an insured has died or cannot, after reasonable enquiry, be found, a third party may bring an action against the insurer directly for an amount equal to the insurer's liability under the policy regarding the liability of the insured. Section 51 has been amended to also cover the liability of a TPB so the third party can exercise similar rights in relation to a TPB covered under the relevant policy. This applies to contracts originally entered into 12 months after Royal Assent or originally entered into before Royal Assent and renewed 12 months after it. Subrogation changes Significant changes have been made in relation to the rules regarding subrogation which are currently set out in section 67. The rules apply where an insurer that is liable under a general insurance policy in respect of a loss has a right of subrogation in respect of the loss and an amount is recovered (whether by the insurer or insured) in respect of the loss. Any of the new rules are subject to the terms of the policy and any agreement made after the relevant loss has occurred. The rules have been extended to apply to TPBs as well as the contracting insured. The changes apply to contracts originally entered into 6 months after Royal Assent or originally entered into before Royal Assent and renewed 6 months after it. Where the insurer has recovered the relevant amount:
Where the insured recovers the amount:
Where there is a joint recovery:
The above is a significant change and insurers will need to consider current practices having regard to these new default rules and amend procedures and policies where appropriate. LIFE INSURANCE CHANGES Non-disclosure by Life Insureds Life policies are often entered into by a person to cover the life of another person (life insured). Currently, a life insured (where such a person is not the contracting insured under the life policy) will not be subject to the duty of disclosure obligations. The proposed section 31A effectively applies the duty of disclosure to a life insured and provides that any non-disclosure by a life insured is imputed to the insured. The exceptions for non-disclosure of matters that currently apply to section 21 will also now apply to the new section 31A (e.g. matters known to the insurer or which the insurer waives the duty in relation to). Section 31A applies to:
but only to the extent of the variation. Insurers will need to make changes to their policies to reflect the above and insurance brokers need to ensure they advise their clients about these changes. Unbundling of life policies Currently, due to the bundling of life policies, remedies which are available for misrepresentation or non-disclosure in relation to only one aspect of a bundled life policy, have to be applied to the policy as a whole. Section 27A proposes to change this by providing that:
The unbundling provisions of section 27A have retrospective effect and will apply to a life policy whether originally entered into before or after the date of Royal Assent. This is a significant change and insurers will need to amend their policies to reflect the above and insurance brokers need to ensure they advise their clients about the new rights in situations where there is alleged non disclosure and misrepresentation. Currently, section 29 of the IC Act provides certain remedies to life insurers in respect of non-disclosure and misrepresentation. There was a concern that these remedies were too limited in scope and were not applicable to many types of life policies available on the market. A new section 28(1A) will provide remedies in respect of life policies (other than life policies that have a surrender value or provide death cover) in the same terms as are available for general insurance policies under the current section 28 of the IC Act. The remedies under section 29 are to be limited to life policies that have a surrender value or provide death cover. Section 29 has been clarified to make it clear that the insurer can avoid the particular policy if they would not have extended cover under the particular policy (as opposed to any policy) on any terms, had the true facts been known. The changes apply to:
but only to the extent of the variation.
Currently, section 30 of the IC Act sets out specific remedies for life insurers in circumstances where the date of birth of one or more of the life insureds was incorrectly stated at the time the life policy was entered into. An additional remedy is to be included which will allow an insurer to vary the life policy by changing its expiration date to a date calculated on the basis of the correct date of birth (where known) in circumstances relevant to section 30. The changes apply to:
but only to the extent of the variation. Insurers will need to amend their wordings and procedures to take account of the above. Insurance brokers will need to advise their clients of the impact of this new insurer remedy when explaining the client's duty of disclosure and obligations regarding representations. Cancellation of life policies Currently, there is no section 60 (general insurance cancellation rights) equivalent for life polices, and no provision in the IC Act that allows for a life insurer to cancel a life policy for any reason (cancellation of life policies for non-payment of premium is currently regulated by the Life Insurance Act 1995 (Cth)). A new section 59A is to provide a life insurer with the right to cancel a life policy for the same reasons that an insurer may cancel a contract of general insurance, except in relation to non-payment of a premium (which will still be regulated by the Life Insurance Act). The current section 63 (which prohibits an insurer from cancelling a general insurance policy except as provided for in the IC Act and which renders all such cancellations void) will be amended to provide for a mirror contravention in relation to purported cancellations (contrary to section 63) of life polices. Accordingly, cancellations of life policies (other than under the Life Insurance Act) will be void, unless they are effected in accordance with the new section 59A. The changes will apply to life policies that were originally entered into after Royal Assent. Insurers will need to change policies and procedures to take the above into account and insurance brokers will need to understand the change to properly advise their clients where an insurer relies on a cancellation right. Third party beneficiaries (TPBs) (life policies) Section 48AA applies where a retirement savings account (RSA) provider takes out a policy for the benefit of RSA holders. It provides the same rights to an RSA holder as those provided under section 48 referred to above in relation to general insurance. As with the proposed subsection 48(3), a change has been made in subsection 48AA(3) to make it clear that in defending an action made by a TPB the life insurer may raise defences relating to the conduct of the insured and the conduct that may have occurred either before or after the policy was entered into (e.g. non-disclosure by the insured). Currently, section 48A applies to life policies that are effected on the life of one person, but expressed to be for the benefit of another person (a TPB). It is to be amended to:
The changes apply to:
but only to the extent of the variation. It is crucial that insurance brokers understand the different rights and obligation of such third party beneficiaries when compared with the rights and obligations of the contracting insured. Non-Disclosure and Misrepresentation by Members of Life Insurance Schemes Currently, section 32 of the IC Act provides that non-disclosures or misrepresentations made in respect of scheme members of superannuation and retirement schemes are treated as though the life policy were an individual policy that was entered into at the time when the proposed member joined the scheme. There was a concern that section 32 will deny an insurer a remedy if non-disclosure or misrepresentation occurred between joining of the scheme and obtaining the life cover. Section 32 will be amended to provide:
It is also proposed that the term 'blanket superannuation contract' in subsection 4(2) be replaced with the expression 'superannuation contract (other than an individual superannuation contract)'. The changes apply to:
but only to the extent of the variation. Given the changes are effectively "fine tuning" the legislation it is not surprising that most are non contentious (especially with the removal of the proposed changes in relation to s54 for claims made and claims made and notified policies) but it is questionable whether the proposed duty of disclosure changes are appropriate. Most of the changes require insurers to consider whether existing procedures and documentation are affected and if so, make amendments to take them into account. Insurance brokers acting for insureds will need to ensure they understand the new rights and obligations and the impact on insureds and third party beneficiaries so they can properly advise their clients.
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