New ‘duty of disclosure’ requirements for life insurance contracts, passed by the Parliament last week, will mean insurers must provide clients with a copy of their previous disclosures, or ask the same questions as they did at application, for each contract renewal.
The measures relating to the duty of disclosure (an obligation which is applied to a client entering a contract of insurance) are part of new legislation to amend the Insurance Contracts Act (ICA), which was passed by the Senate last week.
… ‘catch all’ questions are no longer permissible
The Insurance Contracts Amendment Bill 2013 introduces a range of measures to streamline the operation of the ICA, and to clarify judicial interpretation. The majority of the changes relate to the duty of disclosure, and the remedies available to insurers when this duty is breached.
One of the key changes impacting life insurance providers is the extension of the duty of disclosure to the renewal of insurance contracts. Under the new legislation, an insurer issuing a renewal contract of insurance will be required to:
- Ask specific questions of the insured, just as they may on the original entering into of a contract; and/or
- Provide the insured, prior to renewing the contract, with a copy of any matters previously disclosed by the insured in relation to the contract, and request the insured to disclose any changes to those matters or to indicate if there are no such changes
According to the Government, the intention of this reform is to ‘…permit insurers to continue to rely on the accuracy, as at the time of inception or the previous renewal, of matters disclosed on inception and previous renewals’.
Other amendments relating to the duty of disclosure include:
- The removal of ‘catch all’ questions from disclosures. Previously, insurers were permitted to ask questions designed to capture any other items relevant to its decision whether to enter the contract of insurance. A review of this element of the ICA found that this imposed an unreasonable burden on the insured to know what the insurer regarded as relevant, and the legislation has been amended so that ‘catch all’ questions are no longer permissible.
- A requirement on the insurer to remind the insured that their duty applies from the time the application is submitted until the contract is entered into. This will protect insurers from non-disclosure issues which may occur while the client is undergoing underwriting.
- A further requirement that insurers must give a potential life insured, who is not the insured under the relevant contract of insurance, notice of their duty of disclosure
- Clarification of when the duty of disclosure applies to a member of a superannuation or other group scheme and when the life insurance cover takes effect
Further changes are summarised below.
Responding to the passage of the Bill, the Financial Services Council’s Director of Policy and International Markets, Martin Codina, said: “After nearly a decade of reviews and delays, we congratulate the government on achieving passage of this legislation. Following extensive consultation with all parties, this legislation finally provides certainty to the insurance industry and consumers alike.”
Electronic communications
The legislation delivers an improved framework for insurers to be able to issue electronic communications, such as statutory notices and documents. The amendments to the electronic communication allow insurers to deliver notices, other documents and information to customers electronically, this may be done directly or indirectly, through an intermediary site such as the insurer’s internet banking site.
… this legislation finally provides certainty to the insurance industry and consumers alike
Increased ASIC powers
Greater powers granted to the Australian Securities and Investments Commission (ASIC) to take action to address breaches of the duty of utmost good faith by insurers, including in respect of claims handling. Previously only private legal action could be taken to address a breach of the duty of utmost good faith.
ASIC can now issue a ban under the Corporations Act, suspend or cancel the insurers financial services license, or impose additional license conditions.
Improved rights and obligations for third party beneficiaries
New rights and obligations for third party beneficiaries who are not the insured have been brought about by the legislation. These include:
- A new definition of ‘third party beneficiary’
- The ability for third parties with damages claims against an insured or third party beneficiary who has died or cannot be found, to recover them directly from the insurer
- New remedies for misrepresentation and non-disclosure in relation to contracts of life insurance that are offered as part of a group scheme that is unrelated to superannuation and
- New remedies are available in respect of any misrepresentation or non-disclosure that occurs between the time an insured became a member of a superannuation or other group scheme and when the life insurance cover takes effect
- ASIC also has the power to bring action against representative parties on behalf of a third party beneficiary
New remedies for insurers in the event of a breach of disclosure
The legislation introduces a new remedy for life insurers when an insured does not comply with the duty of disclosure; the new remedy will enable an insurer to be put in a position that they would have been if a misrepresentation had not occurred.
Remedies for misrepresentation and non-disclosure are also available in relation to contracts of life insurance that are offered as part of a group scheme unrelated to superannuation.
Life insurance contracts that combine more than one type of cover and more than one life insured are to be ‘unbundled’ for the purpose of applying the relevant remedies for non-disclosure or misrepresentation.
Background
The Bill arose from the recommendations of a review panel appointed to look into the workings of the ICA. The measures were first introduced into Parliament in early 2010, by then Minister for Financial Services and Superannuation, Chris Bowen. The 2010 Bill was passed by the House of Representatives, but lapsed before it could be passed in the Senate, due to the timing of the federal election in August 2010. Last year, the new Minister for Financial Services, Bill Shorten, flagged his intentions to reintroduce the Bill (see: Minister Flags Insurance Reforms).
The Bill in its current form was first introduced to Parliament on 14 March 2013. It was passed by the House of Representatives on 19 March, and was introduced to the Senate on 20 March.
I for one agree that after answering specifically between 25 and 40 clear questions – catch all questions such as… ‘apart from investigating any condition already disclosed have you had any medical tests’ or… ‘have you had any other disorder or impairment, taken any medication or undergone any medical tests not mentioned above’ are too ambiguous and create a feeling of uneasiness to applicants, so getting rid of them is a good idea.
However I also fear that providing an annual statement of disclosures given at the time of application could also confuse holders of guaranteed renewable contracts into thinking that there is a requirement to continually disclose new investigations, conditions and treatments post the acceptance of the applicant’s initial appplication.
We have clients occasionally calling us to ask if they have to disclose new conditions / investigations even though there is no suggestion of that anywhere in the renewal paperwork to lead them to this conclsion – I suggest these calls may increase when this comes into play (unless I have misunderstood something – if so I am pleased to be corrected). Cheers.
I have only read a brief summary so also stand to be corrected but this appears to have nothing to do with ‘guaranteed renewable” policies. This is about yearly renewable contracts.
I agree with Tim Ross, we have to make sure the ongoing cost involved with yearly disclosure won’t push up the premiums, and also disadvantage clients through not having access to automatic increases to the sum insured.
I understand that this ongoing disclosure only applies to eligible insurance contracts such as home, contents, car and travel, and not to ‘life insurance contracts’. I would guess it would capture general insurance Accident & Sickness contracts.
Can we get some clarification on what Life policies are affected.
The new disclosure requirements on renewal of insurance contracts in section 21B will only apply to eligible contracts of insurance.
There are no types of life insurance contracts that are currently presribed as eligible contracts of insurance under the Insurance Contracts Act Regulations so I would agree with Mark’s comment.
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