What information does not need to be communicated in an insurance contract?

Limebite 06/21

The duty of disclosure under the Insurance Contracts Act 1984 (ICA) is changing.

Under the current law, an insured is required to disclose matters known to the insured that are relevant to the insurer’s decision of whether to accept the risk of insurance and, if so, on what terms.

The Financial Services Royal Commission concluded that the current approach to disclosure is no longer appropriate for modern consumer insurance contracts as it does not adequately safeguard consumers from having claims denied when they have inadvertently failed to disclose information, because the insurer did not ask the right questions. “Consumer insurance contracts” are insurance contracts obtained for the personal, domestic or household purposes of the insured – such as Home and Contents Insurance and Motor Vehicle Insurance.

For consumer insurance contracts, the existing duty of disclosure will be replaced with a new duty to take reasonable care to not make a misrepresentation to an insurer. As now, the new duty applies before the relevant contract of insurance is entered into.

Whether an insured has taken reasonable care to not make a misrepresentation will be determined with regard to all of the relevant circumstances, and there is no limitation on the circumstances that can be considered. However, the ICA identifies a number of matters that may be taken into account to determine whether or not an insured has breached the new duty. Those matters are:

1. the type of consumer insurance contract in question and its target audience;

2. explanatory material or publicity produced or authorised by the insurer;

3. how clear, and how specific, any questions asked by the insurer of the insured were;

4. how clearly the insurer communicated to the insured the importance of answering those questions and the possible consequences of failing to do so;

5. whether or not an agent was acting for the insured;

6. whether the contract was a new contract or was being renewed, extended, varied or reinstated.

Also, if an insurer was, or should have been, aware of particular characteristics or circumstances of the insured, those characteristics or circumstances are also to be taken into account to determine whether an insured has breached the new duty.

The insured is not to be taken to have made a misrepresentation merely because the insured failed to answer a question or gave an obviously incomplete or irrelevant answer to a question.

A misrepresentation made fraudulently is taken to be a breach of the new duty.

The existing remedies for non-disclosure and misrepresentation under the ICA will continue to be available to an insurer if an insured breaches the new duty.

The changes to the ICA will apply to insurance contracts entered into on or after 5 October 2021.

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.

Under one of the recommendations made by Commissioner Hayne in the Final Report of the Financial Services Royal Commission, the existing duty of disclosure for consumer insureds will be replaced with a duty to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts entered into (and in some cases varied) on or after 5 October 2021.

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Response Bill) amended the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act) which introduced the insured’s duty to take reasonable care not to make a misrepresentation to the insurer before a consumer contract is entered into, with effect on and after 5 October 2021.

This new duty replaces the insured’s duty of disclosure to the insurer in relation to consumer insurance contracts. The insured’s duty of disclosure to the insurer under section 21 of the Insurance Contracts Act continues to apply for any other insurance contracts that are not consumer insurance contracts.

The existing duty of disclosure imposed on insureds under section 21 of the Insurance Contracts Act requires an insured to disclose every matter that is known to the insured:

• which 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; or
• a reasonable person in the circumstances could be expected to know to be a matter so relevant.

Consumer Insurance Contracts

The term “consumer insurance contract” is a new concept in Australian insurance law and will cover those contracts of insurance, including general and life insurance contracts, which are obtained wholly or predominantly for the insured’s personal, domestic or household purposes.[1]

Scope of the New Duty

Section 20B of to the Insurance Contracts Act sets out the scope of the insured’s new duty to take reasonable care not to make a misrepresentation. Whether or not an insured has taken reasonable care not to make a misrepresentation will be determined with regard to all the relevant circumstances.

This provision states that the following matters may be taken into account in determining whether an insured has taken reasonable care not to make a misrepresentation:

• the type of consumer insurance contract in question, and its target market;
• explanatory material or publicity produced or authorised by the insurer;
• how clear, and how specific, any questions asked by the insurer of the insured were;
• how clearly the insurer communicated to the insured the importance of answering those questions and the possible consequences of failing to do so;
• whether or not an agent was acting for the insured;
• whether the contract was a new contract or was being renewed, extended, varied or reinstated.[2]

An insured is not taken to have made a misrepresentation merely because the insured failed to answer a question or gave an obviously incomplete or irrelevant answer to the question.[3] However, any fraudulent misrepresentation will be a breach of the new duty.[4]

What does this mean for insurers?

The new duty for consumer insurance contracts shifts the burden onto an insurer to elicit the information which it requires in order to assess whether it will insure a risk and the price at which the insurer will insure the risk. In contrast to the existing duty of disclosure under section 21 of the Insurance Contracts Act, this new duty does not require an individual to surmise what information may be important to an insurer.

As a result of this regulatory reform, insurers will need to review the questions asked of consumer insureds at inception or renewal for consumer insurance contracts to ensure that they are sufficiently clear and precise, and insurers will also need to update the duty of disclosure warning notices in consumer insurance contracts to reflect the new duty.

Warnings to insureds regarding duties in insurance contracts

Before a contract of insurance is entered into, and in the manner outlined in section 22 of the Insurance Contracts Act, insurers are still required to clearly inform the insured of the insured’s duty of disclosure in relation to insurance contracts that are not consumer insurance contracts in writing. The form of duty of disclosure written notice which may be used for general insurance and life insurance contracts is prescribed under Schedule 1 of the Insurance Contracts Regulations 2017 (Cth) for the purposes of section 22 of the Insurance Contracts Act.

However, there is no similar prescribed text under the Insurance Contracts Act (or its subordinate regulations) outlining the manner in which an insurer is required to inform the insured of the insured’s new duty to take reasonable care not to make a representation for consumer insurance contracts.

The Explanatory Memorandum for the Response Bill (Explanatory Memorandum) states that although Section 22 of the Insurance Contracts Act does not apply to consumer insurance contracts, this does not change the insurer’s obligation to give a clear explanation of the new duty to the insured.[5]

The Explanatory Memorandum also states that an insurer should give a clear explanation of the duty to take reasonable care not to make a misrepresentation and the consequences of a misrepresentation (including the remedies available to the insurer if the insured fails to take reasonable care) to the insured. This explanation can be given to the insured in the form that the insurer considers to be effective.[6]

In summary, insurers are still required to inform the insured of their duty to take reasonable care not to make a misrepresentation and the consequences involved for consumer insurance contracts. However, there is no required format in which the insurer is required to explain this. The insurer must only communicate this to the insured in a way the insurer considers to be effective.

Remedies for breach of duty

Where an insurer is aware, or ought reasonably to have been aware, about particular characteristics or circumstances about an insured individual, these factors must be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation.

Where a breach of duty is established, the remedies available will depend on the nature of the consumer’s representation. Generally, the insurer will be able to cancel a contract of insurance in relation to the failure to comply with the duty to take reasonable care not to make a misrepresentation. The onus of proof will be on the insurer to show that the insured has failed to discharge the duty to take reasonable care.

What does this mean for insurance brokers?

For brokers who arrange both wholesale and retail products to clients, care will need to be taken to ensure that clients properly understand the different disclosure obligations that will apply. The new duty of disclosure for consumer insurance contracts will not apply to commercial lines and for these policies, clients will still need to inform insurers of information which may be relevant to the underwriting of a risk.

[1] Section 11AB of the Insurance Contracts Act.

[2] Section 20B(3) of the Insurance Contracts Act.

[3] Section 20B(5) of the Insurance Contracts Act.

[4] Section 20B(6) of the Insurance Contracts Act.

[5] 2.66 of the Explanatory Memorandum for the Response Bill.

[6] 2.65 of the Explanatory Memorandum for the Response Bill.

End