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July 2013201320132013 By Mark Brookes, Partner

Jason Savage, Senior Associate &

Michael Elliott, Solicitor

A facelift for the Insurance Contracts Act but section 54 avoids the knife The Insurance Contracts Amendment Bill 2013 (Cth) received Royal Assent on 28 June 2013 and is now in effect as the Insurance Contracts Amendment Act 2013 (Cth) (the ICAA).

The ICAA has travelled a long and bumpy road but now, almost ten years after it was first conceived,

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the ICAA has become law. This brings the Insurance Contracts Act 1984 (Cth) (the ICA) up to speed with

developments in technology and the insurance industry, as well as addressing a number of unforeseen problems that have arisen since the ICA was first drafted.

There is a vast amount of information available on the rationale of the amendments and this article contains only a broad overview of the background and effect of the amendments to the ICA.

Executive Summary

The key changes introduced by the ICAA are:

� There is a general theme of “unbundling” of insurance contracts so that the ICA applies to separate components of insurance contracts as if they were stand alone contracts;

� Certain notices that previously had to be delivered by post or by hand are now permitted to be delivered electronically;

� Australian Securities and Investments Commission (ASIC) has a greater role;

� The disclosure regime has been clarified, with an emphasis on making insureds aware of their obligations on inception of a new policy and on renewal;

� Third parties have greater rights and responsibilities;

� New remedies are available for life insurers, which make better sense having regard to the non-traditional life insurance products now on the market; and

� The priority of payment in subrogated recovery matters has been reworked.

But s 54 of the ICA remains the same.

Structure of the amendments

Schedule 1 Scope and application

Schedule 2 Electronic communication

Schedule 3 ASIC’s statutory right to intervene

Schedule 4 Disclosure and misrepresentations

Schedule 5 Remedies for life insurers due to misrepresentation or failure to disclose

Schedule 6 Extension of rights and obligations of third party beneficiaries

Schedule 7 Subrogation

Schedule 1 – Scope and Application

The amendments in this schedule commenced on 28 June 2013.

The ICA contains an obligation that parties to an insurance contract must act in the utmost good faith, both during the contract and in the period prior to its execution.

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Previously, ASIC was not able to act in instances where an insurer breached its obligation of utmost good faith with respect to claims handling. Schedule 1 of the ICAA introduced provisions which state that a failure to comply with the obligations of utmost good faith will now constitute a breach of the ICA

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and the relevant breach will be treated as a failure to comply with a financial services law as defined in s 761A of the Corporations Act 2001 (Cth). In those circumstances, ASIC will have the power to vary, suspend or cancel an Australian Financial Services Licence and the power to ban a person from providing financial services.

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Schedule 1 also extends the obligation of utmost good faith to third party beneficiaries. This will be relevant in situations where the contract of insurance contains a clause which confers a benefit on a party who is not a party to the insurance contract but wants to make a claim. For example, insured persons under a D&O policy.

Certain types of insurance policies are outside the ambit of the ICA (for example workers’ compensation policies). Due to the tradition of selling “bundled”

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types of cover, matters can become complicated where a bundled insurance contract covers both common law liability and the workers’ compensation liability.

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The intention behind the amendments is to:

� Leave workers compensation and employment liability policies bundled;

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� Otherwise, unbundle policies and treat the separate groups of provisions as if they were separate policies, with the ICA applying as appropriate.

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These “unbundling“ amendments do not apply retrospectively, but apply to policies entered into or renewed after 28 June 2013.

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Schedule 2 – Electronic Communication

This amendment commences upon a date to be fixed by proclamation, or by 28 December 2013 (whichever happens first).

Previously, certain notices had to be given personally or by post.

10 The amendments abolish that requirement

and allow those notices to be given electronically. This allows much greater versatility and speed of communication and will likely result in great cost savings for the insurance industry.

Schedule 3 – Power of ASIC

This amendment commenced on 28 June 2013.

The amendments proposed in this schedule tie in closely with the Schedule 1 amendments and give ASIC the power to intervene in any matter arising under the ICA or Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards ) Act 2003 (Cth).

As the body charged with administering the ICA, ASIC will play a new role in prosecuting breaches of duties and obligations of the ICA.

Schedule 4 – Disclosure and Misrepresentations

Part 1 – Insureds’ duty of disclosure – commences 28 December 2015

Under s 21 of the ICA, an insurer may avoid liability if it can prove the insured failed to disclose matters that are objectively or subjectively relevant to the insurer’s decision to accept the risk.

The purpose of the amendments is not to change the objective or subjective nature of the test, but to (non-exhaustively) identify factors that should be taken into account in the objective limb as being:

� The nature and extent of the insurance cover to be provided; and

� The class of persons who would ordinarily be expected to apply for such insurance.

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Part 2 – Eligible contracts of insurance

These amendments apply to motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance, consumer credit insurance and travel insurance.

The objective of these amendments is to make insureds aware of their obligations to provide disclosure upon renewal of their policies and to avoid placing an unfair burden on insureds in respect of remedies available against them for non-disclosure, whilst still providing sufficient information for insurers to decide whether to accept a risk and how to price it.

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When the insurance contract is originally entered into (i.e. not a renewal), the insurer may no longer ask “catch all” questions about exceptional circumstances (previously permitted by s 21A(4)(b) of the ICA). These amendments commence 30 months after Royal Assent, on 28 December 2015.

There is a new disclosure regime which applies to renewals in a similar way to how s 21A applies to new

policies. To obtain disclosure from the insured, the insurer may either:

� Ask the insured specific questions; or

� Provide the insured with a copy of answers previously provided and ask the insured to disclose if there are any changes to those answers.

If it does neither, then it is taken to have waived compliance with the insured’s duty of disclosure.

Whilst these amendments commenced on 28 June 2013, there is an effective 30 month transitional period in which the amendments do not apply unless the insurer has given the insured notice of the general effect of s 21B.

Part 3 – Insurers’ duty to inform of duty of disclosure – commencing 28 December 2015

The amended section clarifies the insurers’ obligation to give notice of the nature and effect of the duty of disclosure, and remind insureds that the duty continues until the contract is entered into (in circumstances where there is a delay between the proposal and the date the insurance contract comes into effect).

Part 4 – Non-disclosures by life insureds – commencing 28 December 2015

A misrepresentation by a “life insured” (that is, a person other than the insured whose life is insured under the insurance contract) was deemed to have been made by the insured. Previously, there has been no similar deeming provision for mere non-disclosure.

The new s 31A aligns the remedies available to insurers due to non-disclosure and misrepresentation by a life insured.

Schedule 5 – Remedies of Insurers: Life Insurance Contracts

The objective of the amendments in this schedule is to provide more flexible remedies for insurers in circumstances of non-disclosure or misrepresentation in life insurance contracts.

13 This is an acknowledgment

that the remedies formerly available under the ICA, while appropriate for the types of insurance contracts generally available in 1945,

14are no longer suitable for

the types of life insurance contracts now on the market.

To achieve this, the first step has been to “unbundle” life insurance contracts, so that contracts offering protection against multiple insurable events can be treated as if they were separate insurance contracts. This is done so that different remedies may be available in respect of each unbundled component of the insurance contract.

Next, a new suite of remedies is created to bring life insurance contracts into closer alignment with general insurance contracts, and to reflect the non-traditional insurance contract now available (for example, short-term total and permanent disability cover).

Non-disclosure and misrepresentation

For a non-traditional life policy (one that does not have a surrender value or provide “whole of life” or “endowment” style cover), if the insurer becomes aware of a non-disclosure or misrepresentation, it may vary the insurance contract at any time (although this may only

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be done in accordance with the terms of proposed s 29 of the ICA). Previously insurers were confined by a three year timeframe, after which it became difficult to amend the contract.

Misstatement of date of birth

Insurers now have an additional remedy available for misstatement of an insured’s date of birth. Under s 30(3A), the insurer may vary the contract by changing the expiration date to the date that would have been the expiration date if the contract had been based on the correct date of birth.

Cancellation of contracts

New s 59A provides a way for insurers to cancel life insurance contracts. Previously the remedy was available under s 210 of the Life Insurance Act 1995

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and there was no remedy contained in the ICA itself.

The section enables insurers to cancel a life insurance contract in the event the insured has made a fraudulent claim under the insurance contract or another insurance contract with the insurer current at the same time. The rationale for this is to reflect the fact that the relationship has soured to the point the insurer no longer wants to provide cover on any terms.

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The court may intervene to reinstate the cancelled contract if it is just and equitable to do so.

Schedule 6 – Third Parties

The objective behind the amendments in schedule 6 are to give third party beneficiaries rights and obligations that are consistent with the insured, and in context with the relationship between the third party, the insured and the insurer.

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The new s 41 is in substantially the same terms as the old s 41, save that it has been expanded to include third party beneficiaries. This means the third party beneficiary may now require insurers to give it notice of whether it intends to conduct the negotiation and defence of the claim. Failure by the insurer to comply with such a request relieves the third party beneficiary of any obligation it may have had to avoid compromising the proceedings or making any admissions or payments.

Similarly, ss 48, 48AA and 48A have been expanded to include third party beneficiaries. For example, any defence which an insurer previously had against an insured may now be used against the third party beneficiary.

Conversely:

� A third party beneficiary may bring an action against an insurer without intervention of the policy owner;

� A life insured may be deemed to be a third party beneficiary; and

� A third party beneficiary can provide a valid discharge to the insurer.

Previously ASIC has been empowered by section 55A of the ICA to bring representative actions on behalf of insureds. The proposed amendments to that section will extended ASIC’s role to bring representative actions on behalf of third party beneficiaries as well.

ASIC’s expanded powers commenced on 28 June 2013, with the balance of the proposed amendments in schedule 6 to take effect 12 months after Royal Assent, on 28 June 2014.

Schedule 7 - Subrogation

This amendment becomes effective six months after Royal Assent, on 28 December 2013.

Subrogation is a right existing at common law which permits the insurer to step into the insured’s shoes to enforce any of its rights.

Section 67 of the ICA deals with priority of payment of any recovery in the event there is an uninsured component of the loss and only a partial recovery. It also deals with the unusual circumstance where there may be a windfall. Due to its awkward wording, the section left many confused.

The amendments in the ICAA seek to clarify the operation of s 67, and alter the order of priority of repayment based on who takes the initiative to effect the recovery:

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� If the insurer effects the recovery, the priority is:

(1) the insurer’s legal and administrative costs and what it paid out under the contract

(2) the insured’s uninsured loss and

(3) any windfall may be kept by the insurer;

� If the insured effects the recovery, the priority is:

(1) the insured’s legal and administrative costs and its uninsured loss,

(2) the amount paid out under the contract and

(3) any windfall may be kept by the insured; and

� If the insured and the insurer jointly effect the recovery, the funds are distributed on a pro-rata basis.

These priorities remain subject to any agreement between the insurer and the insured (whether contained in the insurance contract, or made after the loss).

What about section 54?

There have been no significant amendments to the way s 54 of the ICA operates.

This is perhaps ironic, because the first part of the Cameron-Milne review

19 was undertaken due to the

concern that the pricing and availability of insurance was affected by cases such as FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd

20. It is

unclear whether this has been left for a later date, or abandoned entirely.

Unfair Contracts

One of the more controversial reforms – the unfair contract term regime - was carved out of the Act and given a separate home in the Insurance Contracts Amendment (Unfair Terms) Bill 2013.

That bill is currently before the House of Representatives but is unlikely to be passed until the next Parliamentary term.

Conclusion

The amendments in the ICAA address a number of the irregularities in the ICA which have become apparent since it was first drafted, in addition to bringing it up to speed with current technology and the insurance products now on the market.

Otherwise, there is a welcome theme of “unbundling”, balancing and simplification.

With regards to s 54 and s 40(3), it appears the legislature is content with the way that relationship is currently interpreted by the courts.

The next major development that impacts insurance contracts may therefore be the establishment of an unfair contracts regime in line with the exposure draft of the Insurance Contracts Amendment (Unfair Terms) Bill 2013.

1 The amendments were founded on the recommendations of

the Cameron-Milne Review, which was initiated in September 2003. 2 s14 Insurance Contracts Act 1984 (Cth).

3 Previously this was enforceable only via private legal action,

however it was thought this was only onerous to consumers and did not solve any systemic breaches. 4 Part 7.6 of the Corporations Act 2001 (Cth).

5 Insurance contracts that offer multiple types of cover within

the one policy. 6 See for example Moltoni Corp Pty Ltd v QBE Insurance Ltd

(2001) 205 CLR 149. 7 Explanatory Memorandum, Insurance Contracts Amendment

Bill 2013 (Cth) 16. 8 Explanatory Memorandum, Insurance Contracts Amendment

Bill 2013 (Cth) 16 – 17. 9 In the case of life insurance, if there is a non-automatic

variation to the insurance contract after commencement, then the provisions apply to the extent of the variation. 10

For example, notices to inform the insured of its duty of disclosure – s 22 ICA.

11 Explanatory Memorandum, Insurance Contracts Amendment

Bill 2013 (Cth) 23. 12

Explanatory Memorandum, Insurance Contracts Amendment Bill 2013 (Cth) 28 – 31, 74. 13

Explanatory Memorandum, Insurance Contracts Amendment Bill 2013 (Cth) 89 – 91. 14

The remedies in the ICA are derived from those formerly in the Life Insurance Act 1945. 15

Forfeiture due to non-payment of the premium. 16

Explanatory Memorandum, Insurance Contracts Amendment Bill 2013 (Cth) 39. 17

Explanatory Memorandum, Insurance Contracts Amendment Bill 2013 (Cth) 96. 18

Explanatory Memorandum, Insurance Contracts Amendment Bill 2013 (Cth) 49-51. 19

A Cameron and N Milne, Review of the Insurance Contracts Act: report into the operation of section 54, Commonwealth of Australia, 31 October 2003. 20

(2001) 204 CLR 641.

Authors

Mark Brookes Partner

T (07) 3000 8301 E mbrookes@carternewell.com

Jason Savage Senior Associate

T (07) 3000 8358 E jsavage@carternewell.com

Michael Elliott Solicitor

T (07) 3000 8401 E melliott@carternewell.com

Ethical Professional Conduct in the Workplace

Carter Newell Workplace Relations special counsel Stephen Hughes and Nola Pearce will be presenting at the upcoming Legalwise CPD program.

Stephen and Nola will explore the following topics:

� What is ethical professional conduct;

� Understanding your range of obligations as employee, colleague, boss,

officer of the Court and private citizen;

� Bullying and harassment: when do ethics come into play?

� Ethical dilemmas you may face. For more information or to register, visit www.legalwiseseminars.com.au

When: Friday 03 September 2013

Where: Mercure Hotel, Brisbane

Time: 2.00pm – 5:15pm

Seminar Code: 139Q04