Insurance Contracts Amendment Bill 2013 (Part 2)
February 28, 2014
In the February 2013 edition of Legal Directions, we reported on the Commonwealth Government’s release of an exposure draft of the Insurance Contracts Amendment Bill 2013 (Cth) (‘2013 Bill’) for public consultation. On 20 June 2013, the 2013 Bill passed through the Senate and received Royal Assent on 28 June 2013. The purpose of the 2013 bill was to implement key changes to the Insurance Contracts Act 1984 (Cth) (‘ICA’).
The 2013 bill followed the Insurance Contracts Amendment Bill 2010 (Cth) (‘2010 bill’), which lapsed before passing as a result of the federal election in August 2010.
The 2013 bill mirrored the 2010 bill, with the exception of some minor changes to:
- The insured’s duty of disclosure
- The transitional period for the application of the duty of disclosure changes
- Remedies for non-disclosure and misrepresentation available to life insurers
- Bundled contracts.
In this article, we revisit and discuss some of the key changes to the duty of utmost good faith and duty of disclosure under the ICA that have become law as a result of the 2013 bill.
Duty of utmost good faith
Section 13 of the ICA provides for the duty of utmost good faith. The 2013 bill amends the previous s13 so that a breach of the duty of utmost good faith now constitutes a breach of the ICA (whereas previously it was only characterised as a breach of the contract of insurance). The effect of this is that ASIC will be entitled to initiate a representative action on behalf of the insured against an insurer where it is in the public interest to do so.
In addition, the duty in s13 now extends to apply to third party beneficiaries, that is, persons specified as covered under the policy but who are not contracting insureds.
The 2013 bill also provides for the addition of s14A that applies if an insurer has failed to comply with the duty of utmost good faith in relation to the handling or settlement of claims. In that instance, ASIC will be entitled to take certain action under the Corporations Act 2001 (Cth) for any breach.
These amendments apply to new contracts of insurance, renewed contracts of general insurance and all existing contracts of life insurance if varied by agreement in terms of the sum insured or type of cover offered.
Duty of disclosure
Insured’s duty of disclosure – additional factor introduced
Under s21(1) of the ICA, insureds have a duty to disclose to the insurer, before a contract of insurance is entered into, every matter that is known to the insured, 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 (the subjective test)
- A reasonable person in the circumstances could be expected to know to be a matter to be relevant (the objective test).
The 2013 bill provides for the addition of non-exhaustive factors to be taken into account when determining the application of the objective test under s21(1). These are:
- The nature and extent of cover provided by the contract of insurance (new s21(1)(b)(i))
- The class of persons who would ordinarily be expected to apply for insurance cover of that kind (new s21(1)(b)(ii)).
These amendments commence on 28 December 2015. They will only apply to new policies, renewed contracts of general insurance and all existing contracts of life insurance if varied by agreement.
Duty of disclosure in relation to eligible contracts – new business (s21A) and renewals (s21B)
The 2013 bill removes the right for an insurer to ask an ‘exceptional circumstances’ question under s21A in respect of eligible contracts for new business. Now, the insurer may only ask the insured specific questions that are relevant to the decision of whether the insurer accepts the risk. An insurer’s failure to comply is a waiver of the insurer’s rights regarding a breach of the duty of disclosure.
A similar duty of disclosure will now apply with respect to the renewal of eligible contracts under a new s21B. The insurer will only be able to ask specific questions and / or provide a copy of a prior disclosure requesting updates before renewal. An insurer’s failure to comply is a waiver of the insurer’s rights regarding a breach of the duty of disclosure. If no response is received from the insured, there is deemed to be no change.
These amendments commence on 28 December 2015.
Duty of disclosure – notice changes (s22)
Section 22 of the ICA has previously required insurers to inform the insured clearly in writing of the nature and effect of the duty of disclosure. If an insurer failed to comply with s22, it could not exercise any right in respect of a failure to comply, except in the case of fraudulent conduct on behalf of the insured.
The 2013 bill provides for more extensive obligations on behalf of the insurer with respect to its duty to inform an insured of the duty of disclosure. A new s22 provides a new obligation on the insurer to explain to the insured that the duty of disclosure continues up until entry into the policy.
The amendments are intended to ensure that insureds are fully aware of the ongoing nature of their obligations to the insurer up to inception of the policy.
As with the other amendments in relation to duty of disclosure, these changes will apply from 28 December 2015.
In brief, other amendments to the ICA include:
- Bundled contracts: where a contract of insurance includes both provisions that fall within the scope of the ICA and those that would ordinarily be exempt from the ICA, then each of the covers may be ‘unbundled’ such that they can be treated as separate stand-alone contracts of insurance
- Electronic communication: The 2013 bill now expressly recognises electronic communication of notices or other documents which will be possible on the lifting of the exclusion of the ICA from the Electronic Transactions Act 1999(Cth).
David Parker, Special Counsel, of our Sydney office, has prepared a detailed paper on all aspects of the 2013 bill. A copy of David’s paper is available on request.
Authored by Victoria Chambers, Lawyer, Sydney.
 Previously under s21A, the insurer was permitted to ask a ‘catch-all’ question that expressly requested the insured to disclose each exceptional circumstance that fell within s21A(4)(b)(i) to (iv).
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