Insurance Contracts Amendment Bill 2013
February 28, 2013
In November 2012, the Government released an exposure draft of the Insurance Contracts Amendment Bill 2013 (Cth) (‘2013 bill’) for public consultation. The 2013 bill reintroduces reforms proposed in the Insurance Contracts Amendment Bill 2010 (‘2010 bill’), with some minor refinements.
The 2010 bill was intended to implement a number of key changes to the Insurance Contracts Act 1984 (Cth) (‘ICA’) following the Cameron / Milne Review of the ICA in 2004 (‘Review’). The 2010 bill lapsed before passing through the parliamentary process, primarily as a result of the federal election in August 2010.
The 2013 bill essentially mirrors 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.
We discuss these changes below.
Insured’s duty of disclosure – additional factor introduced
Under s21 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 insured 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 matters so relevant (the objective test).
The Review recommended the addition of a list of non-exhaustive factors to be taken into account when determining the application of the duty of disclosure test.
The 2010 bill only included one non-exhaustive factor to which the court may have regard when determining whether a reasonable person in the circumstances could be expected to know to be matters so relevant – the nature and extent of cover provided by the contract of insurance.
The 2013 bill introduces an additional non-exhaustive factor recommended in the Review, namely, the class of persons who would ordinarily be expected to apply for insurance cover of that kind.
The inclusion of the additional factor was considered to provide a more balanced outcome for both the insured and insurer.
Application of the duty of disclosure changes – extension of transitional period
The 2010 bill proposed a transitional period of 18 months from the date of Royal Assent for the changes to the duty of disclosure obligations (under the new ss21, 21A and 21B) to take effect.
After consultation with the insurance industry, it was decided that the timeframe to comply with the changes was insufficient.
The 2013 bill extends the time by which to implement the changes to a period of 30 months. The extension now provides sufficient time for insurers to amend their business practices to comply with the changes.
Remedies for Non-disclosure and misrepresentation available to life Insurers – alternative approach proposed
Under the ICA, remedies for non-disclosure and misrepresentation by the insured are dealt with by s28 (general insurance contracts) and s29 (life insurance contracts).
The Review recommended that all contracts of life insurance other than those that cover mortality or contain a surrender value (i.e. traditional life insurance), should be subject to s28. The basis for the recommendation was that s29 was no longer appropriate for non-traditional life insurance (e.g. income protection insurance).
The 2010 bill limited the operation of s29 to traditional life insurance contracts whilst non-traditional life insurance would be subject to the remedies in s28.
The 2013 bill proposes an alternative approach where all life insurance contracts (both traditional and non-traditional) will continue to be subject to the remedies provided in s29 of the ICA. Under the new s29:
- A life insurer cannot avoid a life insurance contract after three years (which is consistent with current law)
- However it may, at any time, vary a life insurance contract in accordance with a prescribed formula
- If the insurer does not void the contract in the first three years or vary the contract in accordance with the prescribed formula, the insurer may vary a contract to place themselves in the position that they would have been, had the misrepresentation or breach of the duty of disclosure not occurred (but they must have regard to similar contracts of life insurance entered into by other reasonable and prudent insurers).
Bundled contracts – ‘unbundling’
Bundled contracts is the term used when a contract of insurance contains two or more types of cover.
The 2010 bill proposed an approach that looked at the kinds of insurance provided when determining whether life insurance contracts could be ‘unbundled’.
The 2013 bill has moved away from this approach, and instead provides that for the purposes of applying the remedies of s29, bundled life insurance contracts can be unbundled into separate contracts when the provisions can be separated into groups of provisions that could form a stand alone contract.
Submissions on the 2013 bill closed on 12 December 2012. Treasury has not released the outcome of the public consultation process. The government has not announced when the 2013 bill is likely to be introduced into parliament.
Authored by Victoria Chambers, Lawyer, Sydney.
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