Insurance Contracts Act 1984
The Insurance Contracts Act 1984 aims to ensure the interests of insurers, insured parties and other members of the public are protected, and that provisions in contracts and the practices of insurers are fair. The Act provides standards for insurance contracts generally, and imposes duties on an insurer and an insured party. Its operation is regulated by the Insurance Contract Regulations 2017.
Key legal obligations under the Act
The Insurance Contracts Act 1984 imposes statutory obligations on both the insurer and the insured party.
Section 13 mandates that both parties to an insurance contract must act with “the utmost good faith”. This duty requires an insurer to:
- assess claims promptly;
- not delay paying a claim without proper cause;
- not refuse to pay a claim without proper cause;
- in some situations, advise a consumer of specific risks the policy covers.
If an insurer breaches the provision, it can be fined $1,110,000.
The duty requires the insured party to:
- disclose all information pertinent to the insurer’s decision to accept the risk (duty of disclosure);
- not make a false or exaggerated claim;
- co-operate with the insurer when making a claim.
Duty of disclosure – insured party
It is critical that a party applying for insurance understands what is required of them under the duty of disclosure, because if they do not comply, they may find themselves uninsured in the event of a claim. For most types of insurance, it is sufficient for a person to complete questions on an application form. Under Section 21 of the Insurance Contracts Act 1984, if a person fails to answer or provides an “obviously incomplete or irrelevant answer” to a question, the insurer is considered to have waived compliance with the duty. That is, an insurer cannot later rely on a missing or irrelevant answer to refuse a claim.
If there is non-disclosure, it must be determined whether the non-disclosure was innocent or fraudulent because the consequences differ. Non-disclosure is innocent if a person fails to disclose a fact because they thought the fact was irrelevant. If the insurer would have accepted the risk, a claim cannot be rejected. If the insurer would not have accepted the risk, it can reject the claim. Non-disclosure is fraudulent if the person knew a fact was relevant and chose not to disclose it. The insurer carries the burden of proving that the insured party knew, or a reasonable person in the circumstances would have known, that the fact was relevant. If non-disclosure is proven fraudulent, the insurer can cancel the policy but must refund the premium paid.
Duty of disclosure – insurer
Under Section 22 of the Act, the insurer must clearly inform the insured party of the nature and effect of non-compliance with the duty of disclosure. Under Section 35 an insurer must inform an insured party of any restriction in a policy before a contract is made. If there is a dispute, the onus is on the insurer to prove it clearly informed the insured party of a restriction.
Preventing denial of claims
Section 54 of the Insurance Contracts Act 1984 protects an insured party whose acts or omissions entitle the insurer to avoid paying a claim. It prevents an insurer from denying a claim based on technical exclusion clauses by requiring the insurer to show the act or omission caused a loss. An insurer must pay the whole of a claim unless it can show the claim has been “prejudiced”, in which case the insurer can reduce its indemnity by a percentage corresponding to the prejudice. An insurer can completely deny a claim where it can show the act or omission caused the entire loss.
Administration of the Act
Section 11A appoints the Australian Securities and Investments Commission (ASIC) as the body responsible for administering the Act.
Section 11B grants ASIC the power to:
- promote proper handling of insurance matters;
- monitor complaints;
- liaise with other people or bodies responsible for dealing with inquiries, complaints and disputes;
- review documents issued by insurers;
- monitor legal judgments, industry trends and community expectations relevant to efficient operation of the Act;
- promote education of insurers, the legal professional and consumers about the requirements of the Act.
Other bodies tasked with monitoring compliance with insurance laws include the Australian Prudential Regulation Authority, the Australian Financial Complaints Authority and the Private Health Insurance Ombudsman.
There are several specific pieces of legislation which can apply to one specific type of insurance. For instance, health insurance is regulated by the National Health Act 1953, Health Insurance Act 1973, Private Health Insurance Act 2007, Medicare Levy Act 1986, and A New Tax System (Medicare Levy Surcharge – Fringe Benefits) Act 1999.
There is also a General Insurance Code of Practice which is not legally binding but which contains service standards for general insurance.
If you require advice or representation in any legal matter, please contact Armstrong Legal.