On 12 February 2007, the Parliamentary Secretary to the Treasurer released for public comment draft legislation

amending the Insurance Contracts Act 1984.

This marks the next stage in the process of reform of the Act which commenced in 2003 with the announcement

of an expert committee to review and comment on its operation.

The Review Committee prepared an initial report in November 2003 solely concerned with s54 and a larger report

dealing with the balance of the Act in May 2004.

The draft legislation just released addresses the issues identified by the Review Committee in its reports and is the

product of their recommendations and an extensive process of consultation between Treasury and stakeholders.

In this paper we set out a condensed version of some issues raised in the explanatory memorandum and provide

some commentary about the proposals. The exposure draft of the Bill is open for comment until 27 March 2007.

Scope and Application of the Act

DUTY OF UTMOST GOOD FAITH

The failure to comply with the duty of utmost good faith imposed by s13 will become a breach of the Act and third

party beneficiaries to the policy will acquire the right to enforce that obligation as well as be subject to it.

This will be effected by the addition of the following subsections to s13 and other consequential amendments:

2. A failure by a party to a contract of insurance to comply with the provision implied in the contract by

subsection (1) is a breach of the requirements of this Act.

3. A reference in this section to a party to a contract of insurance includes a reference to a third party beneficiary

under the contract.

4. This section applies in relation to a third party beneficiary under a contract of insurance only after the contract

is entered into.

These amendments implement the Review Committee’s recommendation 1.2 that a breach of the duty of utmost

good faith should be both a breach of an implied contractual term and a breach of the Act, although the breach

of the Act would not be an offence and would attract no penalty.

Whilst this may be the case, the explanatory memorandum points out that the proposed amendment may

potentially have significant consequences for insurers. It will, for instance, permit ASIC to commence representative

actions on behalf of an insured against an insurer pursuant to s55A of the Act.

It will also mean that breaches of the duty of utmost good faith by an insurer will enable ASIC to access a range of

remedies under the Corporations Act 2001 in relation to the insurer’s Australian Financial Services Licence including

Insurance Contracts Amendment Bill 2007

by John Myatt | February 2007

1 TURKSLEGAL

cancellation or the imposition of an enforceable undertaking.

It is also implicit that a breach of the duty of utmost good faith by the insurer will also become notifiable under the

breach reporting requirements of AFS licensees under s912 of the Corporations Act 2001.

The extension of the benefits and obligations created by the duty of utmost good faith in s13 was in the Review

Committee’s opinion a logical extension of the fact that the contract to third party beneficiaries is intended to

benefit them.

This will have a helpful effect in clarifying the rights and duties of third parties, which have been put in doubt in

recent case law and would appear to undermine the basis for the conclusion that the insurer can also owe the

insured a duty of utmost good faith in tort as outlined in last year’s decision in Garcia v CGU in the District Court

of NSW.

The draft Bill currently does not include a provision extending the scope of s14 to third parties in a similar way.

Section 14 prevents reliance on a term of the policy other than in accordance with utmost good faith. The failure to

extend s14 seems odd as the rationale which dictated the expansion of s13 seems to apply equally to it.

The explanatory memorandum seeks public comment on whether s14 should be included in the third party

extensions.

APPLICATION OF THE INSURANCE CONTRACTS ACT – “UNBUNDLING” OF CONTRACTS

Workers’ compensation policies will continue to be exempt from the Act and the exemption will extend to any part

of the policy that also provides employers common liability cover.

This provision reflects the Review Committee’s recommendation that the Act be amended to resolve uncertainty

arising from the High Court’s decision in Moltoni Corporation Pty Ltd v QBE Insurance Ltd (2001) 205 CLR.

Outside the area of workers’ compensation a general provision to “unbundle” contracts to which the ICA applies

from those to which it does not is proposed so that the ICA will continue to apply to the non-exempt parts.

ACT TO COVER WATER TRANSPORTATION OF PERSONAL OR DOMESTIC GOODS

In accordance with the Review Committee’s recommendation 1.6 the Bill inserts a new s9A(1A), that provides that

the ICA will apply to a policy which covers water transportation of property that is wholly or substantially used for

personal, domestic or household purposes by the insured, or by a relative of the insured or any person with whom

the insured resides.

This will mean the regulatory treatment of those products will be consistent with the treatment of other comparable

products covering the land transport of personal and domestic goods.

As a result of this amendment an insurer offering these policies will in the future need to comply with the disclosure

provisions of Chapter 7 of the Corporations Act 2001. The provision will not take effect until 12 months after the date

of assent to enable phasing in. Transportation of commercial goods will continue to be regulated under the Marine

Insurance Act 1909.

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FOREIGN INSURERS – NO EXCLUSION OF THE ICA THROUGH CHOICE OF LAW

A new Subsection 8(1A) will be added to the Act to provide that irrespective of any choice of law provision to the

contrary the ICA will apply to policies:

• entered into with Australian domiciled persons, irrespective of where the risk that is the subject of the

contract is located; and

• that cover risks of loss or damage occurring in Australia.

Electronic Communications

The Review Committee expressed support for the idea of updating the Act to allow for communication with insureds

by electronic means. This clearly promises mutual benefits to consumers and insurers through cost savings and is

in line with the changing pattern of communications preferences in society.

Schedule 2 of the Bill amends the Act to allow for certain notices to be given in electronic format if pre-conditions

are met. The amendments also allow regulations to be made that require certain notices to be given in hard copy

format.

An amendment will be made to Electronic Transactions Act 1999 to remove the current exemption in relation to the

insurance contracts in that legislation.

APPROPRIATE ADDRESS

One of the important new concepts will be that of an “appropriate address”, which will enable a natural person to

nominate an address to which they would like communications sent, which may be an electronic address.

Notices and other documents that are required to be given to natural persons under the Act can then be given via

their ‘appropriate address’.

However, while it may create some tantalizing opportunities for insurers to reduce mail out costs, the legislation

will create some communications conundrums. The proposed new s77(1C) requires anyone sending an electronic

communication for the purposes of the Act to have, at the time of sending it, reasonable grounds to expect that the

intended recipient will be readily able to save the notice and subsequently print copies of it.

The provision in the Electronic Transactions Act 1999 is more workable in that the person issuing the communication

only need have a reasonable expectation the information would be accessible for subsequent reference if the

recipient had consented to receiving information electronically.

The explanatory memorandum seeks public comment on the additional requirements of the proposed s 77(1C),

which clearly needs modification to be workable from an insurer’s point of view.

Curiously, the Bill currently envisages that an “appropriate address” can only be changed by a hard copy

communication, which seems inconsistent with the main objectives of the proposed changes. The explanatory

memorandum also seeks public comment on this issue.

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Powers of ASIC

INTERVENTION IN LEGAL PROCEEDINGS

Schedule 3 of the Bill inserts a new s11F into the Act that gives ASIC powers to intervene and acquire the status of

a party in any legal proceedings “relating to a matter arising under this Act.”

The provision gives ASIC the opportunity to be heard in legal disputes that raise matters of importance to it and is

similar to the existing power that ASIC has to intervene in matters arising under the Corporations Act 2001.

It is proposed that ASIC may be represented by a staff member, a delegate, a solicitor or counsel and the provisions

will apply to all proceedings commenced after the Bill is assented to.

Disclosure and Representation

SECTION 21 CLARIFICATION OF THE SUBJECTIVE/OBJECTIVE TEST

Schedule 4 of the Bill proposes to amend the mixed objective/subjective test of the duty of disclosure in paragraph

(b) of s21 (1) to give examples of the types of matters that should be taken into account in determining what “a

reasonable person in the circumstances” could be expected to know was relevant to the insurer’s consideration of

the risk. The amended provision will read:

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard

to factors including, but not limited to:

i. the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and

ii. the class of persons for whom that kind of insurance cover is provided in the ordinary course of the insurer’s

business; and

iii. the circumstances in which the relevant contract of insurance is entered into, including the nature and

extent of any questions asked by the insurer.

The proposal is a clear indication that the Review Committee felt there remains a valid role for the operation of

a broad duty of disclosure and not just a duty to disclose matters that are the subject of specific questions in

the application. In this respect the Review Committee specifically rejected submissions that the existing s21 be

replaced by a provision modelled on the limited disclosure requirements in the present s21A.

The addition of the three non-exclusive factors that should be taken into account in determining the basis of what

“a reasonable person in the circumstances” could be expected to know is intended to resolve some uncertainties

arising from previous case law. In particular the different streams of authority concerning whether the enquiry was

limited to matters specific to the transaction or whether the court should also look at the individual idiosyncrasies

of the insured.

Embarking upon the latter enquiry was of course opening a Pandora’s Box from the insurer’s point of view. The

addition of a list of circumstances, albeit no exclusive ones, which are clearly focused upon the circumstance of the

transaction will certainly strengthen the current mainstream view that the individual idiosyncrasies of the insured

do not form part of the test.

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SECTION 21A THE CATCHALL OPTION REMOVED

Section 21A of the Act sets out the terms of the disclosure obligations that apply to the personal lines such as

motor vehicle, home contents and travel insurance that are classified as “eligible contracts of insurance”.

The Section currently requires the insurer to ask specific questions or forfeit the right to disclose by the insured.

However, it is also currently permissible for the insurer to ask the insured a ‘catch all’ question, which requires an

insured to disclose ‘exceptional circumstances’ that a reasonable person could be expected to know would be

relevant to the insurer’s decision whether to accept the risk, and which would be unreasonable for the insurer to

ask a specific question about.

The Review Committee recommended that this confusing exception be removed and the Bill proposes its

deletion.

SECTION 21A TO APPLY TO RENEWALS

Section 21A currently also only applies when a contract is initially entered into and does not apply to renewals that

trigger the general duty of disclosure provisions under s21.

The Bill proposes to expand s21A to renewals. This change will mean that any insurer wishing to rely on the duty

of disclosure in relation to eligible contracts of insurance on renewal must ask the insured specific questions again

at the time of renewal.

NEW FORM OF NOTIFICATION OF THE DUTY OF DISCLOSURE

Under the present s22 of the Act an insurer that wishes to seek a remedy for a failure to comply with the duty of

disclosure must have given the insured a notice of that duty ‘before the contract is entered into’.

Item 5 of Schedule 4 of the Bill repeals the former s22 entirely and substitutes a new set of provisions with

substantially the same effect but which make it clear that any notification given should explain that the duty of

disclosure applies right up until the time that the proposed contract is entered into.

Consistently with this the Bill replaces the current s22(3) with a new subsection which provides that where the

insurer’s acceptance, or offer of terms in relation to the proposed policy is made more than two months after most

recent disclosure, then along with the acceptance or counter-offer the insurer must also provide a reminder that

the duty of disclosure applies until the contract is entered into.

As is currently the case the failure to comply with all the relevant notice provisions of s22 will prevent the insurer

from obtaining a remedy for a breach of the duty of disclosure, unless the breach is fraudulent.

LIFE INSURED TO HAVE DUTY OF DISCLOSURE

The life insured is not necessarily also the policy owner under a policy of life insurance but the policy owner is the

only relevant insured for the purposes of the Act. This means that while a misrepresentation by a life insured may

be actionable under s25 the life insured currently has no positive duty of disclosure under the Act if they are not

the owner of the policy.

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Part 4 of Schedule 4, of the Bill will add a new s31A to the Act, which will provide:

If:

(a) during the negotiations for a contract of life insurance but before it was entered into, a person (other

than the insured) who would become a life insured under the contract failed to disclose a matter to the

insurer; and

(b) the matter was of a kind that the insured would have been required to disclose to the insurer to comply

with the duty of disclosure;

this Act has effect as if the failure to disclose the matter had been a failure by the insured to comply with the

duty of disclosure.

The duty to disclose only those matters which the policy owner “would have been required to disclose” may not,

however, fully express the objectives of the Review Committee.

Taken at face value the language of the proposed Section seems to be capable of supporting the argument that

the life insured is not required to disclose anything the policy owner was not bound to disclose themselves.

While this was clearly not the intention an amended provision which clarifies that the life insured has their own

version of the duty under s21 may avert future disputes.

DUTY OF DISCLOSURE NOTICE TO BE GIVEN TO LIFE INSURED

The new s31A comes with consequential amendments to s22, which requires the insurer to give the life insured

notice of the following matters before the contract is entered into:

• The general nature and effect of the duty of disclosure.

• The effect of the new s31A.

• The fact the duty of disclosure continues until the time the policy is entered into.

However, the new provisions, which require reminders of the duty of disclosure to be given where the insurer’s

acceptance or offer of terms is made more than two months after most recent disclosure, do not apply to the life

insured if they are not also the policy owner.

The amendments will apply from 12 months after the date of assent to allow time for phasing in.

NOTIFICATION OF TERMS

Insurers are currently obliged to “clearly inform” insureds of the terms of “prescribed contracts” (defined by the

regulations as motor vehicle property damage policies) under s35 and of unusual terms in policies generally

under s37.

The Bill now replaces this requirement with one to present the information in a “clear, concise and effective”

manner. The amendment brings the Act in line with the PDS requirements of Chapter 7 of the Corporations Act

2001.

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Many insurers already use a PDS to provide the relevant notice under the Act and recent changes to the Corporations

Regulations will in any event require general insurers to disclose non-standard or unusual policy terms in their PDS

from 20 June 2007.

Remedies

PRIMACY OF THE DUTY OF UTMOST GOOD FAITH

The Review Committee concluded that the duty of utmost good faith principle should prevail over not only express

terms of the contract, as it presently does by virtue of s14, but that it should also prevail over other terms, including

those arising by implication or by operation of the law.

The Bill consequently provides for s4 (1) to be amended so that it will read:

If reliance by a party to a contract of insurance on a provision of the contract or a provision of this Act would

be to fail to act with the utmost good faith, the party may not rely on the provision.

The Review Committee considered that the amendment may have direct application to insurers under claims

made liability policies where the insurer, having failed to give a notice to the insured under s40(2), then seeks to

rely on other provisions of the Act to support a denial or limitation of its liability under a policy.

The explanatory memorandum seeks public comment regarding whether the introduction of a broad overriding

good faith principle will create uncertainty.

Remedies of Insurer: Life Insurance Contracts

“UNBUNDLING” OF CONTRACTS

The Bill proposes the introduction of a new s27A that will enable life insurance products to be “unbundled” into the

respective covers for the purposes of exercising remedies in relation to each type of cover.

The fact that various types of life insurance benefits are sold “bundled” in the one policy has created significant legal

issues for companies seeking to enforce remedies under s29 of the Act since the 2003 decision of the Queensland

Court of Appeal in Schaffer v. Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182.

In Schaffer the Court examined the insurer’s obligation under s29(3) of the Act to demonstrate that it would not

have issued a policy of life insurance on any terms before it can obtain the remedy of avoidance that the sub-

section provides.

Differing underwriting criteria will apply to the various parts of the bundled product so that insurers have been

placed in a difficult situation where they would have been prepared to offer some but not all of the types of

benefits provided by the policy if the true position was known.

One widely held view is that in these circumstances the insurer has to demonstrate that none of the various types

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of benefit available under the policy would have been offered in order to demonstrate that it would not have

issued a policy of life insurance on any terms and consequently access the remedy under s29(3).

This of course significantly reduces the availability of the remedy for insurers and may produce unfair outcomes in

practice as the insured may be able to enforce a claim for a benefit the insurer would never have been prepared to

offer if the insured had complied with their duty of disclosure.

The Bill contains a new s27A, which aims to overcome this deficiency by splitting the policy into its component

benefit types for the purposes of obtaining remedies for non-disclosure and misrepresentation.

This has dual advantages. Firstly, it enables the insurer to make a proportionate response to a non-disclosure or

misrepresentation, as it enables it to seek to avoid only those parts of the cover it would not have issued if the true

position had been known.

Secondly, the new provision also facilitates policies being split into their traditional life cover components and

“living insurance” benefit components. The latter will now be the subject of a new form of remedy under the Act

described under the next heading.

The draft provision is in the following terms:

27A

Application of Division to contracts of life insurance that provide 2 or more kinds of insurance

cover.

If a contract of life insurance provides 2 or more kinds of insurance cover, this Division applies, in relation

to ech of those kinds of insurance cover, as if the contract provided only that kind of insurance cover.

The explanatory memorandum seeks further public input on the drafting of the “kind of cover” distinction between

the various components of the bundle, which is clearly hard to define and presently lacks sufficient certainty.

A NEW “PROPORTIONAL” REMEDY FOR NON DISCLOSURE OR MISREPRESENTATION IN RELATION TO LIVING INSURANCE PRODUCTS

A proposed new s28A to be introduced in relation to life insurance contracts will mirror the remedies currently

available to general insurers for pre- contractual non disclosure or misrepresentation.

The remedy will only apply to life products that are not primarily for the purpose of providing “insurance cover

in respect of the death of a life insured”. In other words, so called “living insurance” products, such as disability,

trauma and total and permanent disablement. The existing s29 regime will continue only for life cover or policies

with a surrender value. Modern risk only polices generally have no surrender value.

The intention of the amendment is once again to achieve a proportionate response to the insured’s failure to

comply with their duty of disclosure. Consequently, the provision will enable insurers to reduce their liability in

the event of non-disclosure or misrepresentation proportionately to the amount that “would place the insurer in

a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not

been made”.

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In practice this will mean that if the insurer would not have been prepared to provide this benefit its liability in

relation to a claim for that benefit will be reduced to nil.

Similarly, the remedy will apply, for example, if the insurer would have issued an endorsement by way of exclusion

had it known the true position. If the insurer would have excluded the medical condition or hazardous pastime

that gave rise to the claim, the insurer will, under the new s28A, be able to reduce its liability in relation to that

claim to nil.

Presently, the Act places insurers in the position of having to find grounds to avoid the whole of an insured’s

contract in these situations. However, if an insurer would have been prepared to underwrite a policy subject to

exclusion and it cannot therefore establish it would not have issued a life policy on any terms, it leaves the insurer

without any form of redress. In other words, the Act as currently framed may provide too much remedy or none at

all. The proposal to add a new proportionate remedy is consequently very welcome.

AMENDMENTS TO SECTION 29

The issues raised by the Schaffer decision in 2003 have already been raised in the context of the new s27A and

unbundling. In Schaffer the Court focused on the requirement that an insurer seeking to avoid a policy for “innocent”

non-disclosure or misrepresentation under s29(3) had the onus of proving that it would not have entered into “a

contract of life insurance … on any terms” if it had known the true position.

The judgment equated “a contract of life insurance” to any form of contract that satisfied the definition in the Act.

Commentators have consequently taken the view that it was not sufficient for the company to prove that it would

have issued a modified form of cover or only issued some parts of the cover applied for.

The Bill proposes to amend s29(3) by removing the reference to “a contract” and replacing it with “the contract”

with the result that the insurer will only need to demonstrate it would not have issued the same cover on the same

terms. This is consistent with the current position in relation to general insurance contracts under s28.

However, this liberalisation has to be viewed in the context of the narrower scope of s29 under the Bill, which will

only apply to life cover and any policies with a surrender value. The insurer’s ability to exercise the remedy for

innocent misrepresentation will also become subject to the scrutiny of a court, which may choose to set it aside

under the proposed amendments to s31 discussed below.

MISSTATEMENTS OF AGE

Section 30 of the Act currently provides for the sum insured or the premium charged to be appropriately adjusted

to reflect the correct age of the life insured if their age was misstated when the policy was entered into.

This is not always a sufficient remedy where the policy will remain in force or benefits will continue to remain

payable during a period which has been determined on the basis of the incorrect age.

In response to this deficiency the Bill proposes a new s30 (3A), which will offer insurers an alternative

remedy of varying the contract period.

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DATES OF IMPLEMENTATION

Curiously, the new remedies are only proposed to come into effect in respect of contracts entered into after these

provisions commence. In relation to the proposed s28A, this is not until twelve months after the Bill is assented

to. As life insurance contracts are not renewed from year to year but are continuous contracts which often remain

in force for long periods, the proposed commencement will effectively grandfather the current problems with

existing remedies for a long time.

The amendments regarding unbundling of life insurance contracts and entitlement of insurers to change expiration

dates apply from the date the Bill is assented to, but once again, only to contracts entered into after that date.

Restrictions on Insurers’ Contractual Rights and Remedies

Section 31 of the Act currently gives courts the power to disregard an insurer’s decision to avoid a contract of

insurance on the grounds of fraudulent non disclosure or misrepresentation if the court considers it would be

harsh and unfair not to do so and provided the prejudice suffered by the insurer is no more than minimal or

insignificant.

Schedule 8 of the Bill amends s31 so that relief can be given in the court’s discretion not only in cases of avoidance

for fraudulent non-disclosure or misrepresentation, but also in cases of reduction of liability by insurers on the

grounds of innocent failure to disclose or innocent misrepresentation.

It is a little difficult to see why this was thought necessary considering the proportional reduction of liability

envisaged by s28 and the new s28A would only occur in circumstances in which the insurer had suffered

substantial prejudice with the result that it is difficult to see much scope for the courts’ further intervention under

the enlarged new s31.

Expiration and Renewal of Contracts

The Act currently provides for a statutory extension of a contract of insurance if the insurer does not notify the

insured that their policy was due to expire. Schedule 8 of the Bill will amend the Act so that an insured who makes

a claim against a policy that has been extended under the Act must pay the full premium due under the original

contract, irrespective of whether there is a total loss of insured property or when during the statutory extension

the claim is made.

Third Party Beneficiaries

DEFINITION OF THIRD PARTY BENEFICIARY

The operation of the Act in relation to third party beneficiaries is one of the largest areas of reform in the Bill.

Central to the reforms in this area is the proposal to introduce a new definition of a third party beneficiary, who is:

“a person who is not a party to the contract but is specified or referred to in the contract, whether by name or

otherwise, as a person to whom the insurance cover provided by the contract extends”.

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This expression seems to satisfactorily encompass the inventory of those whose third party interests are frequently

indemnified under contracts of general insurance.

However, the proposed definition seems more problematic in the context of lives insured or members of

superannuation plans. They are parties who do not fall under any mantle of indemnity under the policy but

are merely the end beneficiaries through other legal structures of the payments made under the policy to the

respective policy owners or trustees.

As the Review Committee clearly expected that people in these categories would be included in the intended

reforms the proposed definition may need some adjustment.

THIRD PARTY BENEFICIARIES TO HAVE EXPANDED RIGHTS

The Bill gives effect to the Review Committee’s recommendations that third party beneficiaries should have access

to the following privileges currently reserved to the insured under the Act:

• The same rights and obligations as an insured for the purposes of subrogation.

• The power to enforce (and to be subject to) the duty of utmost good faith (but not pre-contractually).

• Where the Act presently allows the insured to give certain notices to the insurer, a third party beneficiary

should be equally able to give such a notice.

The notices in question are:

• a notice of circumstances that may give rise to a claim under s40(3)

a notice to elect to indemnify and take over the conduct of proceedings under s41; and

• a request for a copy of the policy document under s74.

The Bill also reflects the desire of the Review Committee that s48(3) of the Act should spell out that a third party

beneficiary is in no better position to enforce the policy than the insured, and confirm that insurers will be able

to raise both the pre and post-contractual conduct of the insured in defence to a claim brought by a third party

beneficiary.

LIFE INSURED – RIGHT OF ACTION AS THIRD PARTY BENEFICIARY

The Bill proposes amendments to s48A to provide that where a contract of life insurance is expressed to be for the

benefit of a third party beneficiary that person may commence proceedings to enforce the policy.

The amended provision largely reflects the existing s48A, however, to the extent that the rights set out in it depend

upon the beneficiary showing they satisfy the definition of a third party beneficiary proposed by the Bill, the

deficiencies in that definition touched upon earlier may endanger the provision having its intended effect.

Amendments to s48AA carry across the same changes to policies in connection with Retirement Savings Accounts

(“RSAs”).

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LIFE INSURED – POWER TO GIVE POLICY DISCHARGE

Amendments to s48(2) will provide that a third party beneficiary:

“may discharge the insured’s obligations in relation to any money paid to the third party beneficiary under the

contract. (sic) ”

The draft provision may contain a typographical error as the discharge the insurer will require is in respect of the

insurer’s obligations not the insured’s.

The validity of the discharge will also depend upon the standing of the releasor as third party beneficiary within

the meaning of the Act. Consequently any deficiencies in the definition of “third party beneficiary” will result in

uncertainties about the efficacy of the discharge granted.

LIABILITY POLICIES – RIGHT OF INJURED PARTY TO RECOVER DIRECTLY AGAINST INSURER

The Bill proposes to expand the rights of claimants to recover directly against an insurer under a liability policy

under s51 to claims against the third party beneficiaries.

Consequently, a right of direct action will now arise under the Act whenever the insured or a third party beneficiary

has:

• died,

• cannot, after reasonable inquiry be found; or

• the person has obtained a judgment respect of the liability which is unsatisfied.

From the way this provision is drafted it appears that it will only be necessary to prove that one of the above events

has occurred in relation to any insured or person who is a third party beneficiary under the relevant policy, not

necessarily the insured or the third party beneficiary the person has the claim against.

Non-Disclosure or Misrepresentation By a Member Of a Group Life Insurance Scheme

Section 32 of the Act has been out of step with the practical realities of group insurance cover for some time. In

particular the fact that the Section deemed the duty of disclosure to apply from the date the life insured joined

their superannuation fund rather than the date they actually obtained cover under the fund’s policy could produce

absurd results.

The Bill will remedy these problems by bringing the timing of the life insured’s disclosure obligations into line with

the application for cover under the policy.

The Bill will also clarify that an individual’s cover under a group policy can be separately avoided and expand the

Section to apply to group life arrangements generally and not just to policies issued to superannuation funds.

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Subrogation

The arrangements which currently apply to actions conducted by an insurer in the name of an insured under a

right of subrogation are also to be expanded by the Bill so that they apply to third party beneficiaries.

Section 67 of the Act, which deals with the allocation of monies recovered in subrogated actions, will also be

revised to reflect current proposals canvassed in the Australian Law Reform Commission’s review of the Marine

Insurance Act 1909.

The new mechanism is considerably more complex than the existing arrangements but makes a number of

significant improvements to the existing legislation.

Firstly, the amended s67 will clarify that the insurer has a primary right to retain out of any recovery the “amount

paid …for administrative and legal costs incurred in connection with the recovery” in addition to the “amount paid

by the insurer to the insured in respect of the loss”.

Secondly, the Section makes overall provision for the party that shoulders the financial burden of the recovery

action to reap any resulting benefits after deduction of what is due to the other.

For instance, if the insurer has run the action it will become entitled to retain from the recovery:

• the amount it has paid out in respect of the claim;

• its administrative and legal costs; and

• any amount recovered in excess of the insured’s total loss. The total loss in this context means the loss (if

any) sustained by the insured in excess of the indemnity provided under the policy.

Conversely, where the insured has maintained the action it will be entitled to have its administrative and legal costs

reimbursed and will be entitled retain its total loss and any excess but must refund to the insurer the amount it

has paid out on the claim. Where both parties contribute to the costs of the action they will participate ratably in

the excess.

Where there is an identifiable amount of interest awarded in the recovery action it will also be divided ratably

between the insurer and insured by reference to the amounts that each has recovered and the periods of time for

which they were out of pocket.

As with the current s67, the disposition of funds directed by the Act is subject to variation by any policy terms to

the contrary.

Claims Made and Claims Made and Notified Policies

NOTIFICATION OF FACTS THAT MAY GIVE RISE TO A CLAIM

Under a proposed new s40(3) an insured (or third party beneficiary) will have an additional 28 days after the

termination of a policy to notify their insurer of any claim circumstances occurring during the policy period.

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The new subsection will also require insurers to disclose (to insureds only) the effect of failing to notify such facts

at least 14 days before the policy expires.

If the insured cancels the contract, the notice must be given by the insurer as soon as possible but at least within 14

days of the date of cancellation. This means that in the event of cancellation the insured has at least 14 days after

receiving the insurer’s notice to inform it of facts that may give rise to a claim.

INSURERS MAY REFUSE CLAIMS NOTIFIED OUT OF TIME

Importantly, the Bill also introduces a new s54A that will allow insurers to refuse to pay a claim where the insured

has made a late notification of facts (i.e. more then 28 days after expiration or cancellation).

This change has been flagged for some time and was the subject of a draft Bill made public in 2004. The provision

is intended to cure the problems created by a controversial and well known line of decisions under which s54 was

used to set aside the insurer’s decision to refuse to pay claims as a result of late notifications.

These provisions will take effect 28 days after the date the Bill is assented to. As a result insurers will have at least a

year to put systems in place to give insureds the notice required by the new s40(3) when contracts expire. However,

they will have to be ready much more quickly to deal with an insured who cancels their policy.

The explanatory memorandum seeks further public comments about the proposed regime.

Cancellation of Life Insurance Contracts

The explanatory memorandum asks for further comments in relation to the circumstances in which a life insurer

may cancel a contract of life insurance.

Cancellation of general insurance contracts is expressly dealt with by s60 of the Act but there is nothing in the Act

at present which deals with the position in relation to life policies in this connection.

The Review Committee declined to recommend any alteration to remedy this gap in the Act as it was of the view

that insurer’s rights to cancel were sufficiently clearly established at common law.

Since the Review Committee’s report his Honour Justice Einstein commented in Walton v The Colonial Mutual Life

Assurance Society Limited, [2004] NSWSC 616 that a life insurer did not have a right under the common law to cancel

a contract of life insurance in circumstances where a fraudulent claim had been made upon it. This observation has

since been adopted by alternative dispute resolution bodies and lower courts as expressing the current position

of the law.

The earlier decision not to intervene clearly needs to be reconsidered in the light of these developments.

14 TURKSLEGAL

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