09
Sep

The Duty Of Disclosure Rules Are Changing For Some New Insurance Policies From 5th Oct 2021

What is the current Duty Of Disclosure for insurance policies prior to 5th October 2021 ?

For many types of insurance policies, before you enter into an insurance contract, you have a duty to tell the insurer anything that you know, or could reasonably be expected to know, may affect their decision to insure you and on what terms.

A burden is current placed on the insured who may not know what is relevant to the insurer’s decision.

This is called your “Duty Of Disclosure” and, where applicable, is contained in the Product Disclosure Statement of any insurance product you apply for. These include items that may increase your chance of making a claim.  You have this duty until the insurer agrees to insure you and issues your contract of insurance.

Some types of insurance policies currently have a Modified duty of disclosure

A modified duty of disclosure currently applies to ‘Eligible Contracts Of Insurance’ These contracts are prescribed in Regulations and include contracts relating to :

  1. motor vehicle insurance,
  2. home buildings insurance,
  3. home contents insurance,
  4. sickness and accident insurance, and
  5. travel insurance.

The modified duty does Not currently include life insurance.

Under this modified duty of disclosure, the insurer must ask Specific and Relevant questions.  The insured’s duty does not extend beyond responding to those questions.   When the insured renews their contract, the insurer may ask the insured specific questions or ask them to confirm or update the information they previously gave the insurer.

Insurers must inform the applicant

Insurers must inform the insured clearly, in writing, of their duty of disclosure. Otherwise the insurer cannot rely on the duty of disclosure.

Consequences of breach

If an insured breaches their duty of disclosure the insurer may access the remedies outlined in the Insurance Contracts Act.  Broadly, depending on the circumstances of the failure to comply with the duty of disclosure, these remedies can allow the insurer toreject a claim, reduce a payout, increase a premium; or avoid the contract.

What is changing from 5th October 2021 and why ?

For many types of insurance products, the current duty of disclosure requires consumers to tell their insurer every matter that may be relevant for their application to be properly assessed.  But how would an insured always know what is relevant for the insurer ?

A change in this regard was one of the recommendations made in the Financial Services Royal Commission to strengthen consumer protections by placing a greater burden on insurers to extract the necessary information from consumers for some products.

The changes removes the onus on applicants to decide what may or may not be relevant to an insurer – for some types of insurance only.

Like the duty of disclosure, if applicants misrepresent their situation, their cover can be voided, terms varied or cover reduced so it is still critically important that they understand their responsibilities.

The Changes

The Insurance Contracts Act has been amended to :

  1. Replace the duty of disclosure for some insurance products,

with

  1. A duty to take reasonable care not to make a misrepresentation when entering into, varying, extending or renewing a consumer insurance contract.

When will this happen and to what product types ?

This will apply to the category of insurance products known as Consumer Insurance Contracts from 5th October 2021.

Which products are affected ?

  1. A contract of insurance is a consumer insurance contract if the insurance is obtained wholly or predominantly for the personal, domestic or household purposes of the insured.
  2. Consumer insurance contracts include both general and life contracts of insurance.
  3. Therefore, for a contract of life insurance that is a Consumer insurance contracts, a person who is a life insured must take reasonable care not to make a misrepresentation. This replaces the current obligation on the life insured to comply with the duty of disclosure.
  4. Consumer insurance contracts are likely to include contracts that were previously classified as ‘Eligible Contracts Of Insurance”– such as contracts relating to motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance and travel insurance.
  5. The definition also captures other insurance contracts which are not currently ‘eligible contracts of insurance’, such as pet insurance.

 The new duty to take reasonable care not to make a misrepresentation

The new duty is that an insured must take reasonable care not to make a misrepresentation to the insurer. It applies when a Consumer insurance contract is ‘entered into’. A reference to the entering into of a contract of insurance also includes a reference to:

  1. for life insurance contracts – the making of an agreement by the parties to the contract to extend or vary the contract;
  2. for other contracts of insurance – the making of an agreement by the parties to the contract to renew, extend or vary the contract; or
  3. the reinstatement of any previous contract of insurance.

Failure to answer a question

Consistent with the current law, the insured is not to be taken to make a misrepresentation in respect of the new duty merely because they failed to answer a question or gave an obviously incomplete or irrelevant answer to a question.  This ensures that an insurer is not complicit in allowing information that is obviously incomplete or irrelevant to be a misrepresentation. The insurer should bear the onus to follow up in such cases.

Fraudulent misrepresentation

Consistent with the current law, any misrepresentation made fraudulently is taken to be a breach of the new duty, with the corresponding remedies of the Insurance Contracts Act available to the insurer.

Remedies for breach of the new duty

The amendments do not alter the remedies available under the existing law for non-disclosure and misrepresentations by the insured.

However, separate amendments are being made so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.

Factors may influence what is regarded as a misrepresentation

Consumer insurance contracts can vary widely. For instance, they can have different pricing mechanisms, payment arrangements, subject-matter and terms.

They can be negotiated, standard-form, written, verbal, online, or a mix of these. New, renewed, varied and extended contracts also have different circumstances attached to them.

Therefore, the type of insurance contract may affect what the insured is required to do to discharge their duty of disclosure. See the examples below to illustrate :

Example 1 :

Eleanor enters into a consumer insurance contract for life insurance online. In the online questionnaire, the insurer asks questions about her medical history without any reference to a relevant time period. The long duration of the open time period may be considered relevant as Eleanor may have had many medical appointments over the course of her life.  This circumstance would generally lower the standard of care required on Eleanor’s behalf to discharge her duty.

Example 2 :

Dee entered into a consumer insurance contract. The insurer provides Dee with easily understood material, including written materials and a short video. In the application form, the questions asked are accompanied by relevant examples of the types of information that the insurer considers relevant.   This circumstance would generally raise the standard of care required on Dee’s behalf to discharge her duty.

Please contact your adviser directly or call 1300 796 577 if you have any questions.

The above is a summary prepared by Experien Insurance Services and not a complete list of all information relevant to the topic.

Life insurance and Financial Advice services are provided by Experien Insurance Services Pty Ltd (EIS) ABN 99 128 678 937 and Experien Financial Services Pty Ltd (EFS) ABN 32 631 346 757. EIS and EFS are a Corporate Authorised Representative (No. 320626 and No. 1274354) of Affinia Financial Advisers Limited ABN 13 085 335 397 AFSL No. 237857. This is general information and you should not act on it, or rely on it, without obtaining personal advice. Always read the product disclosure statement (PDS) issued by an insurer before considering to take out insurance. See our website for our Financial Services Guide.