AAI issues 37 home and contents insurance products through 13 different brands, including AAMI.[1]
Generally speaking, AAI’s home and contents policies are ‘sum insured’ policies, which require the policyholder to nominate the amount for which their home and contents will be insured.[2] However, AAMI offers optional CRC on its building insurance and landlord insurance policies.[3] CRC provides cover for the total amount that it would cost AAI to repair or rebuild a building.[4] As a result, if a policyholder takes out CRC, there is no need for the policyholder to nominate a particular sum for which a building will be insured.[5] When a claim is accepted under the CRC policy, AAI can choose to either repair or rebuild the property, or to cash settle the claim for the amount that it would cost AAI to do the work.[6]
AAI introduced CRC in September 2006.[7] Between 1 January 2015 and 31 May 2018, AAI issued about 1.59 million policies in which customers had CRC, accounting for almost 70% of the policies in which CRC was available.[8] In the same period, AAI received more than $1.48 billion in premiums in respect of those policies.[9]
While CRC was introduced to mitigate the risk of underinsurance,[10] Mr Dransfield accepted that it would only achieve that purpose if the cash settlements offered by AAI represented the true cost of repairing or rebuilding the insured home.[11]
10.2.1 Wye River bushfires
AAI received 63 claims following the Wye River bushfires, 34 of which related to AAMI products.[12] In 28 of those 34 claims, the policyholder had opted in to CRC.[13] AAI settled the majority of contents claims within a few weeks, but the building claims and more complex contents claims took longer to settle. Despite having initially estimated that within a few months, claims would be cash settled or would have their scope of works and cost of repairs confirmed, Mr Dransfield accepted that those timelines were not met for the majority of the claims.[14] Mr Dransfield did not consider that AAI’s actions were the cause of the delays,[15] but he said that AAI could nonetheless have communicated better with customers and could have done more to keep them informed of the progress of their claims.[16]
On 8 November 2016, Ms Sarah Henderson MP gave a radio interview criticising AAMI’s handling of the Wye River claims, and its CRC product more broadly.[17] These criticisms related to a number of matters, including: delay in the resolution of claims; issues with AAI’s advertising; and concerns that AAI was underquoting the cost of rebuilding.[18]
Following these criticisms, Kelly O’Dwyer MP referred Ms Henderson’s allegations to ASIC.[19] ASIC commenced an investigation into AAI’s claims handling practices in connection with the Wye River bushfires,[20] and its marketing of the CRC products.[21] ASIC was limited in the actions that it could take in respect of the claims handling allegations, because the handling of insurance claims is excluded from the definition of a ‘financial service’ by regulation 7.1.33 of the Corporations Regulations 2001 (Cth).[22]
10.2.2 Marketing of the CRC product
In May 2015, about six months prior to the Wye River bushfires, AAI ran a direct mail campaign that promoted its CRC to AAMI personal insurance customers.[23] The mail–out included the following statement:[24]
… with our Complete Replacement Cover you can have peace of mind that we cover the repair or rebuilding of your home if it is damaged or destroyed by an insured event, no matter the cost to us.
In July 2015, AAI published similar representations on the AAMI website.[25] The statements on the Home Building Insurance part of the website were:[26]
Optional extra: Complete Replacement Cover. Our best protection against underinsurance, with no set limit. We cover the rebuilding of your home, no matter the cost to us.
In November 2016, almost a year after the Wye River bushfires, AAI began a mass market radio campaign promoting its CRC option.[27] The radio advertisement included the statement: ‘we’ll repair or rebuild your house – no matter the cost’.[28] At around the same time, AAI also introduced search engine marketing with the tagline: ‘rebuild your house regardless of cost if damaged or destroyed by [an] insured event’.[29]
Mr Dransfield acknowledged that the clear message of the advertising material, both before and after the Wye River bushfires, was that AAI would repair or rebuild homes subject to CRC, no matter the cost to AAI.[30] Mr Dransfield accepted that:[31]
- It was not correct that AAI would necessarily repair or rebuild homes covered by the CRC product, because AAI could choose to provide a cash settlement instead.[32]
- It was not correct that AAI would repair or rebuild, ‘no matter the cost’ to AAI.[33] There were cost limits, both ‘in terms of the costs that AAI felt was fair and reasonable in relation to the scope of work’, and from the requirement that AAI was to repair or rebuild on a ‘new for old’ basis.[34]
More broadly, Mr Dransfield accepted that where AAI chose to cash settle a claim, it would generally do so on the basis of the lowest quote to AAI that was ‘sufficient and appropriate to complete the scope of works’.[35] Mr Dransfield also accepted that in some circumstances, it may cost AAI less to perform works than it would cost a policyholder to do so. This could result in a cash settlement being insufficient for customers to repair or rebuild themselves.[36] Mr Dransfield acknowledged that there were significant differences between the amounts offered by AAI to cash settle some Wye River claims, and the quotes that those policyholders had received from other builders.[37]
By late November 2016, AAI was aware that ASIC was looking into the way in which it was marketing the CRC product.[38] After deciding not to launch a new advertisement as planned in January 2017,[39] AAI sought ASIC’s views on its new advertising materials in February 2017.[40] ASIC sent AAI an email in the following terms:[41]
As you are already aware, we are currently conducting inquiries into the existing promotional and advertising materials relating to AAMI’s Complete Replacement Cover feature. These inquiries have been focused on the existing materials, however having viewed the materials sent through yesterday, we note that there are similarities in the messaging of the previous advertising materials and some of the new materials.
Our inquiries relating to your existing promotional and advertising materials are ongoing at this time. As you would be aware, ASIC does not approve advertisements, and we are also unable to provide advice in relation to the proposed advertisements. However, we encourage you to consider the best practice guidelines in ASIC’s Regulatory Guide 234, and/or to seek legal advice if you require further guidance.
Despite this, AAI launched its new advertising materials in early March 2017.[42] Mr Dransfield told the Commission that it did this because there was a strong belief that the advertising material satisfactorily explained the way in which the CRC product worked, and that the material was not misleading.[43] However, Mr Dransfield accepted that AAI ‘could not have had certainty’ that the material was not misleading in circumstances where ASIC was conducting an investigation into similar AAI advertising material.[44] He also acknowledged that AAI launched the new campaign because the ‘business imperative [to grow the home insurance portfolio] trumped any desire to ensure that [AAI’s] marketing materials were not misleading to … customers’.[45]
Between March and October 2017, ASIC and AAI continued to discuss ASIC’s concerns with AAI’s advertising.[46] AAI maintained that its advertising was not misleading or deceptive, and that it did not contain false or misleading representations.[47]
At a meeting between ASIC and AAI on 30 October 2017, ASIC told AAI that it planned to issue infringement notices in respect of the advertising.[48] On 6 November 2017, ASIC issued four infringement notices alleging contraventions of section 12DB(1)(e) of the ASIC Act, relating to representations made in radio advertisements and on AAMI’s website between late 2016 and mid-2017.[49] The infringement notices said that ASIC had reasonable grounds to believe that AAMI had contravened section 12DB(1)(e) of the ASIC Act by ‘making false or misleading representations that services had particular benefits’, namely, that AAMI would repair or rebuild an insured’s house no matter the cost.[50]
The total value of the infringement notices was $43,200,[51] which AAI paid.[52] Had the matters been litigated, the maximum penalty that a Court could have awarded in respect of each potential contravention would have been $1.8 million.[53] The effect of paying the infringement notices was that the Commonwealth and ASIC could not bring proceedings against AAI for the alleged contraventions.[54]
Mr Dransfield told the Commission that AAI paid the infringement notices despite having maintained throughout the ASIC investigation, and still maintaining, that its advertising was not misleading or deceptive.[55] The cost of paying the four infringement notices was approximately 0.01% of AAI’s premium income from its CRC product in 2017.[56] Mr Dransfield agreed that it could be concluded that the balancing of commercial risks and rewards paid off for AAI.[57]
In March 2018, at ASIC’s request, AAI introduced a Supplementary PDS to make the features and operation of the CRC product more transparent.[58] The Supplementary PDS contained three key terms, which were said to reflect AAI’s existing claims handling practices.[59] Mr Dransfield recognised that the Treasury proposals paper on the extension of the Unfair Contracts Terms regime referred to examples of potentially unfair contract terms, including a term that looked very similar to the second term in the Supplementary PDS.[60] However, Mr Dransfield did not accept that this term was potentially unfair to AAI policyholders.[61] The third term introduced a definition of ‘reasonable cost’, which was defined to mean the lesser amount of any quotes obtained by AAI.[62] Mr Dransfield did not agree it would be confusing to customers to define ‘reasonable cost’ in this way.[63]
When asked about his broader views on the extension of unfair contract terms protections, Mr Dransfield said that there was no clear rationale for the extension, and that it would increase the underwriting risk borne by insurers without commensurate enhancement in protection for consumers.[64] Mr Dransfield also expressed the view that section 13 of the Insurance Contracts Act, coupled with the dispute resolution environment, already afforded strong protections to consumers.[65] Mr Dransfield accepted that he placed a heavy reliance on the EDR body in his assessment of customer protection.[66]
[1]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 2 [10].
[2]Transcript, Gary Dransfield, 20 September 2018, 6281.
[3]Transcript, Gary Dransfield, 20 September 2018, 6281; see also AAI Ltd, Module 6 Case Study Submission, 2 [5].
[4]Transcript, Gary Dransfield, 20 September 2018, 6281.
[5]Transcript, Gary Dransfield, 20 September 2018, 6282.
[6]Transcript, Gary Dransfield, 20 September 2018, 6283.
[7]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 8 [19]; Transcript, Gary Dransfield, 20 September 2018, 6282.
[8]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 11 [31].
[9]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 11 [31].
[10]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 8 [19]; Transcript, Gary Dransfield, 20 September 2018, 6283.
[11]Transcript, Gary Dransfield, 20 September 2018, 6283.
[12]Transcript, Gary Dransfield, 20 September 2018, 6283.
[13]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 27 [76]; Transcript, Gary Dransfield, 20 September 2018, 6284.
[14]Transcript, Gary Dransfield, 20 September 2018, 6284.
[15]Transcript, Gary Dransfield, 20 September 2018, 6286; see also AAI Ltd, Module 6 Case Study Submission, 3 [8].
[16]Transcript, Gary Dransfield, 20 September 2018, 6286–7.
[17]Transcript, Gary Dransfield, 20 September 2018, 6285; Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, Exhibit GCD-4 (Tab 29) [SUN.0760.0300.0464].
[18]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, Exhibit GCD-4 (Tab 29) [SUN.0760.0300.0464].
[19]Transcript, Gary Dransfield, 20 September 2018, 6293.
[20]Transcript, Gary Dransfield, 20 September 2018, 6293–4.
[21]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, Exhibit GCD-4 (Tab 41) [SUN.0760.0302.0500].
[22]Transcript, Gary Dransfield, 20 September 2018, 6301; Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, Exhibit GCD-4 (Tab 41) [SUN.0760.0302.0508]; cf Insurance Contracts Act ss 11B and 14A.
[23]Transcript, Gary Dransfield, 20 September 2018, 6303.
[24]Transcript, Gary Dransfield, 20 September 2018, 6304 (emphasis added).
[25]Transcript, Gary Dransfield, 20 September 2018, 6305.
[26]Transcript, Gary Dransfield, 20 September 2018, 6305 (emphasis added).
[27]Transcript, Gary Dransfield, 20 September 2018, 6305.
[28]Transcript, Gary Dransfield, 20 September 2018, 6306 (emphasis added).
[29]Transcript, Gary Dransfield, 20 September 2018, 6306 (emphasis added).
[30]Transcript, Gary Dransfield, 20 September 2018, 6306–7 (emphasis added).
[31]Transcript, Gary Dransfield, 20 September 2018, 6307.
[32]Transcript, Gary Dransfield, 20 September 2018, 6307.
[33]Transcript, Gary Dransfield, 20 September 2018, 6307.
[34]Transcript, Gary Dransfield, 20 September 2018, 6307.
[35]Transcript, Gary Dransfield, 20 September 2018, 6288; see also AAI Ltd, Module 6 Case Study Submission, 3 [9].
[36]Transcript, Gary Dransfield, 20 September 2018, 6289.
[37]Transcript, Gary Dransfield, 20 September 2018, 6289–90.
[38]Transcript, Gary Dransfield, 20 September 2018, 6309.
[39]Transcript, Gary Dransfield, 20 September 2018, 6309–12.
[40]Transcript, Gary Dransfield, 20 September 2018, 6312–13.
[41]Transcript, Gary Dransfield, 20 September 2018, 6315; Exhibit 6.378, 20–22 February 2017, Emails Between 20 and 22 February ‘17 Between AAI and ASIC Concerning Complete Replacement Cover Marketing Materials.
[42]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 40 [110].
[43]Transcript, Gary Dransfield, 20 September 2018, 6315–16.
[44]Transcript, Gary Dransfield, 20 September 2018, 6316.
[45]Transcript, Gary Dransfield, 20 September 2018, 6316, and more generally at 6317–18.
[46]Transcript, Gary Dransfield, 20 September 2018, 6318.
[47]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 41 [113]; Exhibit GCD-4 (Tab 63) [SUN.0760.0502.0141]; Transcript, Gary Dransfield, 20 September 2018, 6317.
[48]Transcript, Gary Dransfield, 20 September 2018, 6318–19.
[49]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, 44 [127]; Exhibit GCD-4 (Tab 58) [SUN.0760.0302.0656], (Tab 58) [SUN.0760.0302.0660], (Tab 58) [SUN.0760.0302.0653], (Tab 58) [SUN.0760.0302.0650].
[50]Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, Exhibit GCD-4 (Tab 58) [SUN.0760.0302.0650].
[51]Transcript, Gary Dransfield, 20 September 2018, 6321.
[52]Transcript, Gary Dransfield, 20 September 2018, 6321.
[53]Transcript, Gary Dransfield, 20 September 2018, 6321.
[54]Transcript, Gary Dransfield, 20 September 2018, 6321.
[55]Transcript, Gary Dransfield, 20 September 2018, 6321.
[56]AAI Ltd, Module 6 Case Study Submission, 4 [14]; cf Transcript, Gary Dransfield, 20 September 2018, 6322.
[57]Transcript, Gary Dransfield, 20 September 2018, 6323.
[58]Transcript, Gary Dransfield, 20 September 2018, 6323.
[59]Transcript, Gary Dransfield, 20 September 2018, 6323–4.
[60]Transcript, Gary Dransfield, 20 September 2018, 6326.
[61]Transcript, Gary Dransfield, 20 September 2018, 6326.
[62]Transcript, Gary Dransfield, 20 September 2018, 6324.
[63]Transcript, Gary Dransfield, 20 September 2018, 6325.
[64]Exhibit 6.370, Witness statement of Gary Dransfield, 29 August 2018, 8 [30]; Transcript, Gary Dransfield, 20 September 2018, 6326.
[65]Transcript, Gary Dransfield, 20 September 2018, 6327.
[66]Transcript, Gary Dransfield, 20 September 2018, 6327.