Part IV of the Insurance Contracts Act governs disclosures and misrepresentations by an insured. The TAL case study raised serious questions about whether the provisions contained in that Part strike an appropriate balance between the interests of insurers and insureds.
I consider that two amendments are necessary.
- First, I consider that Part IV of the Act should be amended in respect of consumer insurance contracts. For those types of contract, I consider that the duty of disclosure should be replaced with a duty to take reasonable care not to make a misrepresentation to an insurer. Any necessary consequential amendments should be made to the remedial provisions contained in Division 3.
- Second, I consider that section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.
I set out my views on each of these matters in turn.
4.2.1The duty of disclosure
The TAL case study demonstrated the difficulties of placing a duty on consumers seeking insurance to disclose to their potential insurer, before the contract of insurance is entered into, information about the matters specified by section 21 of the Insurance Contracts Act.
Section 21 provides that:[1]
an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
(a) 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
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant …
The effect of section 21 has been modified by sections 21A and 21B of the Insurance Contracts Act in respect of ‘eligible contracts of insurance’.
If a contract is an ‘eligible contract of insurance’,[2] then the insured’s duty of disclosure will be governed by section 21A (in relation to disclosures made before a contract is entered into) or by section 21B (in relation to disclosures made before a contract is renewed). These provisions are complex, but in simple terms, they operate so that prior to the entry into, or renewal of, a contract, an insurer may request that an insured answer one or more specific questions that are relevant to the insurer’s decision about whether to accept the risk (and if so, on what terms).[3]
If, following such a request, the insured discloses each matter that is known to them and that a reasonable person could be expected to have disclosed in the circumstances, then the insured will be taken to have complied with their duty of disclosure.[4] If the insurer does not make any request at all, the insurer is taken to have waived compliance with the duty of disclosure.[5]
Sections 21A and 21B do not in terms apply to all consumer contracts for insurance. The classes of contract specified to be ‘eligible contract[s] of insurance’ under regulation 6(2) of the Insurance Contracts Regulations 2017 (Cth) are wholly or predominantly classes of general insurance contracts. The practices of individual life insurers may, but will not necessarily, lead them to fall within the further definition of ‘eligible contract of insurance’ contained in regulation 6(3) of the Insurance Contracts Regulations. It is not apparent to me why life and general insurance contracts have been treated differently.[6]
If a consumer contract of insurance is not governed by sections 21A or 21B of the Insurance Contracts Act, then it will fall to be governed by the duty of disclosure contained in section 21 of the Act.
In my view, the duty of disclosure presently contained in section 21 of the Act does not recognise the breadth and depth of the gap between what a consumer knows and what an insurer knows. That is, the duty fails to recognise the extent of the information asymmetry between a consumer and an insurer. And that gap is not closed by referring to what ‘a reasonable person in the circumstances could be expected to know to be a matter so relevant’.[7] It is not closed because the question will always arise after the insurer has said that certain information was relevant and has said why it is relevant. The question will be asked and answered after the event (ex post) rather than before the event (ex ante). Or, putting the same points another way, a duty framed in this way fails to recognise that insurers are always better placed than an insured to identify the categories of information that they consider to be relevant to their decision of whether to insure a risk.[8]
These issues were considered by the UK Law Commission and the Scottish Law Commission in their 2009 report entitled Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation.[9] The report recognised that framing the duty in the way now reflected in section 21 of the Insurance Contracts Act has its roots in common law developments in the course of the eighteenth and nineteenth centuries that were later codified by the UK Parliament in 1906.[10] But times (and the parties to insurance contracts) have since changed markedly. Insurance is no longer the province of a mercantile class. It is a universal product.
A summary accompanying the joint report of the two British Law Commissions explained that:[11]
The current law requires a consumer to volunteer information about anything which a ‘prudent insurer’ would consider relevant. This no longer corresponds to the realities of a modern mass consumer insurance market. Most consumers are unaware that they are under a duty to volunteer information. Even if they are aware of it, they usually have little idea of what an insurer might think relevant.
It is clearly important that insurers receive the information they need to assess risks. Most insurers, however, now accept that they should ask questions about the things they want to know …
The joint report observed that one practical manifestation of these issues was that:[12]
policyholders may be denied claims even when they act honestly and reasonably. Our survey of ombudsman cases shows that some insurers continue to use extremely general questions, where it is not clear what information the insurer is seeking. It is easy for consumers to misunderstand such questions, and therefore give inaccurate answers, even if they are doing their best to answer truthfully.
These observations apply as much in Australia as they do in the United Kingdom.
The UK Law Commission and the Scottish Law Commission recommended that legislation be passed to replace the duty of pre-contractual disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer.[13] In 2012, the UK Parliament enacted the Consumer Insurance (Disclosure and Representations) Act 2012 (UK), which introduced a duty in the terms recommended by the Law Commissions.[14] The Act applies to all consumer insurance contracts.[15]
The Commission received a range of submissions on the topic of whether the duty of disclosure should be replaced with a duty to take reasonable care not to make a misrepresentation.
Several entities – including ASIC and a number of consumer bodies – considered that moving to a duty to take reasonable care not to make a misrepresentation would bring benefits.[16] Other entities – principally APRA, insurance industry bodies and insurers – did not consider that this sort of modification would be beneficial.[17] As I understood APRA’s position, it was that to change the rules would affect the pricing of risk. It may. Even so, I favour making the change. It is of the essence of insurance that risk is spread between the holders of insurance. If the consequence of this change is that pricing may rise, the benefits of having more persons with effective insurance outweigh the detriments of increased pricing.
For the reasons given by the UK Law Commission and the Scottish Law Commission, I recommend that the Insurance Contracts Act be amended, for consumer insurance contracts, to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer. I consider that this style of duty is more appropriate for consumer insurance contracts than the duty that currently exists in section 21 of the Insurance Contracts Act. It is also substantially less complex than the modified forms of duty contained in sections 21A and 21B of the Insurance Contracts Act. A duty to take reasonable care not to make a misrepresentation to an insurer places the burden on an insurer to elicit the information that it needs in order to assess whether it will insure a risk and at what price. The duty does not require an individual to surmise, or guess, what information might be important to an insurer.
In saying this, I do not propose to affect the operation of section 21 in respect of other classes of contracts. My recommendation will likely result, however, in sections 21A and 21B of the Insurance Contracts Act having little or no work to do, and it may be thought desirable for those sections to be repealed.
Breach of the duty of an insured not to misrepresent will engage the provisions of Division 3 of Part IV of the Act (sections 27A–33). Some consequential amendments to those provisions will be needed to recognise that there will no longer be a duty, in some cases, to make disclosures, only a duty not to misrepresent. The particular form of those amendments need not be examined here.
4.2.2Section 29(3) of the Insurance Contracts Act
As I have said, I consider that section 29(3) of the Insurance Contracts Act should be amended.
Before 2014, section 29(3) provided that:
If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract.
The effect of this framing was that an insurer could avoid a contract of life insurance for non-disclosure or as a result of a misrepresentation only if the insurer would not have entered into a contract with the insured on any terms.
Following the passage of the Insurance Contracts Amendment Act 2013 (Cth),[18] the subsection was amended to take its current form. Subsection 29(3) now reads:
If the failure was not fraudulent or the misrepresentation was not made fraudulently, the insurer may, within 3 years after the contract was entered into, avoid the contract.
Given that a number of changes to section 29 were effected by the amending Act, the shift in the standard for avoidance may not be immediately apparent. However, the submissions to the Commission showed that the amendment has been understood, at least by some, as expanding the circumstances in which an insurer could avoid a contract of life insurance, so that a life insurer can now avoid a contract of life insurance if it can show that it would not have entered into the same contract of life insurance.[19] As explained in Westpac’s submissions to the Commission:[20]
In effect, the removal of the words ‘on any terms’ meant that an insurer is no longer required to demonstrate that it would not have entered into a policy on alternative terms had the non-disclosure or misrepresentation not occurred.
When understood in this way, I consider that the amendment results in an ‘avoidance’ regime that is unfairly weighted in favour of insurers. A number of entities recognised that the effect of the 2013 amendments was to tilt the balance in favour of insurers.[21]
I recommend that the position that existed prior to the amendment of section 29(3) be restored, so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms. A change of this nature was supported by a number of consumer organisations[22] and by the FSC.[23]
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Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer Part IV of the Insurance Contracts Act should be amended, for consumer insurance contracts, to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer (and to make any necessary consequential amendments to the remedial provisions contained in Division 3). Recommendation 4.6 – Avoidance of life insurance contracts Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms. |
[1] Insurance Contracts Act s 21(1).
[2] ‘Eligible contracts of insurance’ are prescribed by regulation to include contracts for motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance, CCI and travel insurance, if certain conditions are met: Insurance Contracts Regulations reg 6(2). Other types of contracts of insurance may also qualify in particular circumstances, under reg 6(3).
[3] Insurance Contracts Act ss 21A(2), 21B(3).
[4] Insurance Contracts Act ss 21A(5), 21B(7).
[5] Insurance Contracts Act ss 21A(3), 21B(4).
[6] See Explanatory Memorandum, Insurance Laws Amendment Bill 1997 (Cth), 31 [117], which explains the rationale for introducing s 21A in a way that appears equally applicable to general and life insurance contracts.
[7] Insurance Contracts Act s 21(1)(b).
[8] See similar observations in CALC, Module 6 Policy Submission, 33–4 [127]–[131] and FRLC, Module 6 Policy Submission 31–2; see also Professors Allan Fels AO and David Cousins AM, Module 6 Policy Submissions, 10–11.
[9] The Law Commission and The Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009), 14 [2.20]. It should be noted that there had been previous calls for reform in this area: The Law Commission and The Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation – Joint Report – Summary (2009), 2 [1.8].
[10] The Law Commission and The Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation – Joint Report – Summary (2009), 2 [1.6].
[11] The Law Commission and The Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation – Joint Report – Summary (2009), 1 [1.2]–[1.3].
[12] The Law Commission and The Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009), 14 [2.20].
[13] The Law Commission and The Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation – Joint Report – Summary (2009), 1 [1.1].
[14] Consumer Insurance (Disclosure and Representations) Act 2012 (Cth) s 2(1), (2), (4).
[15] In general terms, contracts of insurance between an insurer and ‘an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession’: see Consumer Insurance (Disclosure and Representations) Act s 1 (definition of ‘consumer insurance contract’).
[16] Westpac, Module 6 Policy Submission, 36–8 [118]–[125]; PIAC, Module 6 Policy Submission, 12; FRLC, Module 6 Policy Submission, 31–2; ASIC, Module 6 Policy Submission, 39–40 [163]–[165]; CALC, Module 6 Policy Submission, 33–5 [127]–[132]; Professors Allan Fels AO and David Cousins AM, Module 6 Policy Submission, 10–11.
[17] AAI Limited, Module 6 Policy Submission, 10 [46]–[47]; ANZ, Module 6 Policy Submission, 19–20 [87]–[88]; AMP, Module 6 Policy Submission, 20–1 [98]–[100]; ICA, Module 6 Policy Submission, 25–6; APRA, Module 6 Policy Submission, 3 [11]–[12]; AFA, Module 6 Policy Submission, 19–20.
[18] See Sched 5, Pt 2 of the Insurance Contracts Amendment Act 2013 (Cth).
[19] See generally PIAC, Module 6 Policy Submission, 11; Westpac, Module 6 Policy Submission, 35–6 [114]–[116].
[20] Westpac, Module 6 Policy Submission, 35–6 [116].
[21] PIAC, Module 6 Policy Submission, 11–12; Slater + Gordon Lawyers, Module 6 Policy Submission, 13 [49]–[50]; Westpac, Module 6 Policy Submission, 35–6 [114]–[116]; CALC, Module 6 Policy Submission, 33 [125]–[126]; FRLC, Module 6 Policy Submission, 31. See more generally ASIC, Module 6 Policy Submission, 38–9 [160]–[162].
[22] See PIAC, Module 6 Policy Submission, 11–12; CALC, Module 6 Policy Submission, 33 [125]–[126]; FRLC, Module 6 Policy Submission, 31.
[23] The FSC proposed this as part of a broader package of reforms to s 29: see FSC, Module 6 Policy Submission, 26–7.