Mr Hayne recommends that the duty of disclosure in the Insurance Contracts Act be changed to a duty on the customer to ‘take reasonable care not to make a misrepresentation’ (Rec 4.5). The recommendation relates only to consumer contracts.
We also consider that this recommendation is an example of where general insurance has been (somewhat superfluously) swept up in an attempt to address the ‘serious questions’ raised by a life insurance case study at the Commission.
The initial reaction of insurance traditionalists was strong – “oh no, there goes two hundred years of common law”. Finity’s assessment is that this reaction is a bit overblown. We expect that changes to the duty of disclosure will have only a minor impact on personal lines of general insurance.
Why do we say this?
Because the current law, in its letter and application, is already pretty close to the proposed law.
The letter of the law
In the Insurance Contracts Act the duty of disclosure is set out in Section 21 and is strong. The only ‘let-out’ for the consumer is that if a question in a proposal form is unanswered or has an obviously incomplete or irrelevant answer then the insurer cannot rely on non-disclosure.
BUT, there are currently different rules for consumer products. Section 21A applies to new business for consumer contracts and Section 21B to renewals. In essence, the consumer only needs to answer specific questions asked by the insurer. ‘Any other matter?’ is not a valid question for this purpose.
If an answer is missing or vague, that is the insurer’s problem unless the insurer follows it up.
So, if you don’t ask a relevant question you can’t use the duty of disclosure to reduce or deny a claim. Only if you asked and the consumer’s answer was not truthful can you go down this path.
Section 54 of the Insurance Contracts Act is not directly relevant to the duty of disclosure but has parallels in fair dealing with consumers. As lawyers Holman Webb said in a 2017 blog:
Application of the law
We expect that denial of claims on the grounds of non-disclosure (apart from those regarded as ‘deliberate or fraudulent’) is relatively uncommon. To the extent they occur, most disputes would go to FOS (now AFCA) and possibly then to court.
While we do not have specific evidence, our expectation is that the combination of the insurer’s own review, FOS/AFCA and the court deals tolerantly with most ‘innocent misrepresentations’ by a consumer.
So, if this analysis of the current law and its application is fair, then the impact of the recommended change to the duty of disclosure laws might be close to nil.
What is the downside risk?
We think that the main risk that could make our assessment wrong is the approach of AFCA.
If AFCA decisions are based on the view that the new law is fundamentally different, and that claims that would currently be denied based on non-disclosure would in future be regarded as ‘innocent misrepresentation’ then it might become materially more difficult for an insurer to deny a claim for non-disclosure.
This risk is an example of the importance of ‘how the law is applied in practice’ as distinct from the importance of what the law says.
Relevance of UK law
There is similar legislation in the UK, which Mr Hayne used as a model in making his recommendation. The change in the UK was recommended by Law Commission inquiries in 2009 and passed into law in 2012.
It is likely, therefore, that implementation will be based on the UK approach. It also means that experience in the UK since 2012 may be helpful in understanding legal responses and insurer strategies.
If you accept our analysis of this recommendation, the conclusion would be that it is a relatively low priority for action. Colloquially, there are bigger fish to fry.
Hayne also explicitly addressed the argument that a consequence of this change is that premiums may increase, stating that ‘the benefits of having more persons with effective insurance outweigh the detriments of increased pricing.’
The Fold Legal, subject matter experts in insurance and financial services, helped Finity by discussing the issues with us and challenging our views. We greatly appreciate the input from The Fold, but Finity is fully responsible for this communication which is not legal advice.
We hope to work more with The Fold Legal in developing our Royal Commission Response initiative.
 S21A and S21B apply to ‘eligible contracts of insurance’ defined in the Insurance Contracts Regulations (Reg 6) as Motor, Home building and contents, Sickness and accident, Consumer credit and Travel insurance.
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