Recently, the Insurance Contracts Amendment Bill 2010 (Cth) was introduced into parliament and proposes to make significant amendments to the duty of utmost good faith and the duty of disclosure.

The duty of utmost good faith

The Bill proposes to make any breach of the duty of utmost good faith a breach of the Insurance Contracts Act 1984 (Cth) (ICA). As a result, ASIC would have the power to take representative action on behalf of the aggrieved party. This is a dramatic shift from the current position where the only remedy available to the aggrieved party is to pursue private legal action.

If the proposed amendments are passed by parliament, ASIC would have access to remedies outlined in Chapter 7 of the Corporations Act 2001 (Cth). This could have significant consequences for insureds and insurers who hold an Australian financial services licence because ASIC can request:

• a banning order;
• suspension or cancellation of the financial services licence; 
• conditions be imposed on the financial services licence; or 
• the financial services licence holder make an undertaking not to act in a specified manner.

The application of a banning order is quite significant for Australian financial service licence holders. Pursuant to a banning order, an Australian financial services licence holder may be prohibited from providing financial services.

The Explanatory Memorandum indicates that ASIC would not pursue a banning order if the party in breach had only committed a single, isolated breach of the duty of utmost good faith. A banning order is more likely to be pursued by ASIC if the financial services licence holder has exhibited numerous breaches of the duty as a result of a lack of concern for compliance with the duty or a lack of understanding of what is required to comply with the duty.

Duty of disclosure

The Bill also proposes to amend the law surrounding the duty of disclosure for eligible contracts of insurance which are contracts of insurance most commonly entered into by individual consumers.

In relation to the duty of disclosure, the ICA stipulates that the insurer must ask the insured specific questions relating to issues that are relevant to the insurer’s decision as to whether a policy will be provided and on what terms. Currently, insurers are able to ask “catch all” questions such as requiring an insured to disclose “exceptional circumstances”.

The Explanatory Memorandum explains that an insurer’s ability to ask catch all questions operates to the detriment of the insured because it is unlikely that the insured would be in a position to know what matters are “exceptional circumstances” and further whether the circumstances would be relevant to the insurer’s decision.

Accordingly, the Bill proposes to amend the ICA so that insurers will no longer be able to ask catch all questions in relation to eligible contracts of insurance.

In addition, the Bill proposes to amend the ICA so that the rules relating to duty of disclosure are applicable to the renewal of eligible contracts of insurance. Upon the renewal of an eligible contract of insurance, the proposed new laws will require the insurer to:

• ask the insured specific questions;
• provide the insured with a copy of their previous disclosures; and 
• ask the insured to inform the insurer if there have been any changes to the information previously disclosed.

Other proposed amendments

The Bill also proposes to amend:

• the remedies available to insurers when an insured has breached its duty of disclosure or made a misrepresentation in relation to contracts of life insurance;
• the rights of third parties, especially in relation to making a claim directly against the insurer in the circumstances where a third party has a damages claim against an insured who cannot be found;
• the ability to provide notices or documents electronically;
• the allocation of moneys that an insurer may recover when they have exercised a right of subrogation; and
• the test used for determining if an insured has satisfied the duty of disclosure.

Recommendation

If the new laws are passed, the changes which allow ASIC to intervene when an insured or insurer has breached the duty of utmost good faith will take effect immediately. This Bill may not have a long passage through parliament and therefore both insureds and insurers should undertake a review of their internal protocols, especially those relating to how claims are managed, to ensure that there is a general awareness of the nature of the duty of utmost good faith and what is required to comply with the duty.

Conclusion

In relation to the duty of utmost good faith, insureds need to be aware of:

• any provision of the policy of insurance to seek the insurer’s consent in certain circumstances;
• making claims under a policy of insurance which are bona fide and not reckless, exaggerated or fraudulent; and
• once a claim is made, providing the insurer with sufficient information to be able to determine whether it is bound to indemnify.

Insurers need to be aware of:

•  the drafting of policies of insurance to ensure that they do not contain ambiguous clauses;
• bringing to the attention of the insured any unusual term in the policy of insurance;
• informing the insured, within a reasonable time depending on the circumstances, the acceptance or rejection of any claim made under the policy;
• making prompt payment of any claim covered by the policy;
• conducting a defence in the best interests of the insured; and
• avoiding reliance on an ambiguous term of the policy of insurance or an overly technical interpretation of the policy to deny cover.
   

If you have any questions regarding this legal alert, please contact Andrew Cheetham, Partner on 07 3231 2960 or Kate Ogg, Lawyer on 07 3231 2419.