Major insurance bill finally passed

The Insurance Contracts Amendments Bill was finally passed last week after a decade of reviews and delays but it creates greater obligations for the insurer, policyholder and possibly the broker.

Under the bill, general insurer’s duty of utmost good faith will also apply to third party beneficiaries as soon as the contract is entered; and adds changes to the duty of disclosure, including an obligation on the insurer to explain that the duty of disclosure continues up until early entry into the policy.

It also extends the requirement on an insurer to give notice of an insured’s duty of disclosure to renewals where it was previously only required for policies prior to inception. But the insurer will only be allowed to ask specific questions and/or provide copy of prior disclosure requesting update before renewal.

Legal experts say the passing of the bill is good news for the insurance industry.

Mark Radford, principal of Radford Lawyers, and speaking on behalf of the National Insurance Brokers’ Association, said: “The significance of these proposed changes is that they have been on the table since the review of the Insurance Contracts Act in 2003. Recommendations were made as a result of the review in 2005; we got a bill, and another bill in 2007 and another one in 2010.  Most of them have lapsed or did not proceed. The passing of the bill is good news for the industry.

“For consumers, there is an extension of rights to third party beneficiaries; there are improvements to the rights of insured in relation to the duty of disclosure and eligible contracts.

“For insurers, there is clarification that notices can be delivered by electronic means, which a few already do,” Radford said.  But he conceded there were new obligations on the insurer, which might cost them money to adhere to such as the duty of disclosure for eligible contracts.

Radford said the law indirectly impacted brokers. “It provides important new rights for brokers’ clients. Brokers need to be aware of the rights and obligations their clients so they can properly advise the insured and help them take advantage of rights that did not previously exist.”

Radford urged brokers to be aware of their clients’ new obligations under the act, whether the client is the policyholder, or the insurer, under a binder agreement.

Paul Angus, partner at TurksLegal, said the new law means general insurers need to change the way they renew personal lines products.

“General insurers need to be careful that they advise an insured of the amended duty of disclosure and that if they wish to rely on certain information from an insured when renewing a policy, that they ask specific questions of the insured at renewal time. “

The Insurance Council of Australia hailed the use of electronic communication being legislated.

ICA CEO Rob Whelan said it “heralds an era of greater communication between insurers and consumers by providing insurers with legal certainty over the use of electronic communication to provide policies and other notices”.

The main proposed changes (general insurance):

Changes to duty of utmost good faith (s13, 14A and 11F)

• The duty in section 13 will be extended to apply to third to third party beneficiaries (i.e. persons specified as covered under the policy who are not contracting insureds) from time of contract entry.

A breach of the duty by an insurer will also result in a breach of the IC Act and allow ASIC to bring a representative action and/or take action under the Corporations Act 2001 (Cth) for such a breach.

• Electronic notices

IC Act notices/information requirement will clearly be able to be given by electronic means (previously arguable).

• Subrogation (s67)

Subrogation provision will be significantly amended to provide fairer result. Rights will also be extended to apply to third party beneficiaries.

• Third Party beneficiaries (TPB) (ss48 and 41)

Section 48 (3) will be amended 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 will be amended to apply to TPBs as well as the contracting insured. This section gives the right to request that the insurer notify whether they admit policy applies to the claim, and if so whether they will conduct for insured the defence. A failure to do so prevents reliance on such matters by insurer.

Section 13 will be amended to extend the duty of utmost good faith in relation to TPBs as well as contracting insureds. However, the duty will only apply 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.

• Rights of third parties to recover against liability insurer (s51)

Third parties will now gain access to the liability insurance of third party beneficiaries under a policy in circumstances where they die or cannot be found have been extended to. The right is currently limited to the policy of an insured.

• Duty of disclosure in relation to eligible contracts – new business (s21A)

The right for an insurer to ask an exceptional circumstances question will be removed from s21A. The insurer will only be able to ask specific questions. A failure to comply results in a waiver of the insurer’s rights regarding a breach of the duty of disclosure.

• Duty of disclosure of eligible contracts - renewal (s21B)

New duty of disclosure obligations will apply for renewal of eligible contracts. The insurer will only be able to ask specific questions and/or provide copy of prior disclosure requesting update before renewal. A failure to comply results in a waiver of the insurer’s rights regarding a breach of the duty of disclosure but won’t affect rights regarding past failures for original entry or renewals. No response by insured is deemed to be no change.

• Duty of Disclosure notice changes (s22 - also deemed notice change in s11(1) and 11(10A) affecting s40 and certain liability policies)

These will provide:

• For an updated prescribed form of notice given s21A and s21B changes above.
• A new obligation to explain that the duty of disclosure continues up until entry into the policy.
• That if an insurer’s acceptance or counter offer is more than 2 months after the insured’s last disclosure, the insurer must in the counter offer or acceptance, remind the insured that the duty applies until entry.
• Amend the "deemed notice exception" in s11(10) to also require the section 22 and s40 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”.

Source: Radford Lawyers