The handling and settlement of insurance claims, or potential insurance claims, is now carved out from the definition of ‘financial service’ by regulation 7.1.33 of the Corporations Regulations.[1] As a result, some of the general obligations set out in section 912A of the Corporations Act, including in particular the obligation to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly, do not govern the ways in which insurers:[2]
- make a decision about a claim, including investigating claims and interpreting policy provisions;
- conduct negotatiations in respect of settlement amounts;
- prepare estimates of loss or damage, or likely repair costs; and
- make recommendations about mitigation of loss.
In my view, there is no basis in principle for continuing to exclude claims handling from the definition of ‘financial service’. It is as much the provision of a financial service as any other financial service. And as ASIC rightly said:[3]
For consumers, the intrinsic value of an insurance product lies in the ability to make a succesful claim when an insured event occurs.
A number of the case studies examined in the sixth round of hearings demonstrated the need to remove the ‘claims handling’ exemption. In the life insurance context, this was demonstrated by the CommInsure and TAL case studies. In the general insurance context, this was demonstrated by the Youi and AAI case studies, which related to the handling of home insurance claims following natural disasters or severe weather events.
Because of the claims handling exemption, ASIC is limited in the regulatory interventions it can take in this regard.[4] Numerous submissions supported the removal of the claims handling exemption.[5]
There can be no basis in principle or in practice to say that obliging an insurer to handle claims efficiently, honestly and fairly is to impose on the individual insurer, or the industry more generally, a burden it should not bear. If it were to be said that it would place an extra burden of cost on one or more insurers or on the industry generally, the argument would itself be the most powerful demonstration of the need to impose the obligation. The argument can be made only if claims handling is not now conducted efficiently, honestly and fairly. And if that is the case, it should no longer be tolerated by the industry or by the law.
I recommend that the Corporations Regulations be amended, so that the handling or settlement of insurance claims, or potential insurance claims, is no longer excluded from the definition of ‘financial service’. I recognise that the Government has commissioned Treasury to undertake work on this issue, and that Treasury is currently considering the preferable way forward.[6] No doubt the views I have expressed will be considered.
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Recommendation 4.8 – Removal of claims handling exemption The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’. |
[1] See also Corporations Act s 766A(2).
[2] See also ASIC, Module 6 Policy Submission, 27 [107].
[3] ASIC, Module 6 Policy Submission, 27 [110]; see also CALC, Module 6 Policy Submission, 24 [81].
[4] ASIC, Module 6 Policy Submission, 27 [110]; see also CALC, Module 6 Policy Submission, 24 [81].
[5] See, eg, Professors Allan Fels AO and David Cousins AM, Module 6 Policy Submission, 8–9; AFA, Module 6 Policy Submission, 15; AIST, Module 6 Policy Submission, 11–12 [17]; APRA, Module 6 Policy Submission, 7 [24]; CALC, Module 6 Policy Submission, 24 [79]–[82]; FPA, Module 6 Policy Submission, 12 [17]; FRLC, Module 6 Policy Submission, 18–19; FSU, Module 6 Policy Submission, 7 [55]–[56]; ISA, Module 6 Policy Submission, 3 [8]; Legal Aid NSW, Module 6 Policy Submission, 5.
[6] Treasury, Module 6 Policy Submission, 8 [38], [40].