Insurance contract law reform firmly back on the agenda

Insurer uncertainty about the new Government’s prioritisation of insurance law reform came to an end recently following the introduction of not one, but two, Bills into Parliament. The Insurance Contracts Bill, a member’s Bill, was drawn at the end of March, while the Government’s Contracts of Insurance Bill received its first reading in early May. We focus on the provisions in the Government Bill in this article.

The Government Bill proposes many of the changes which have been the subject of multiple consultations over recent years. Insurers will be familiar with many of these proposals.

Duty of disclosure

The Bill introduces a new dual duty of disclosure depending on whether the contract is a consumer insurance contract. The duties proposed mirror those introduced in the UK about ten years ago, while the consumer duty was also adopted in Australia in 2021 following a recommendation of the Financial Services Royal Commission.

For consumer insurance contracts, the duty proposed is to take reasonable care not to make a misrepresentation. A consumer policyholder is not required to offer up information, but merely to answer questions correctly. The standard of care is an objective one (that of a reasonable policyholder), but with a subjective overlay: where the insurer is or ought to be aware of particular characteristics of the insured, these must be taken into account.

The following material can be considered in relation to the consumer policyholder’s reasonable care:

• The clarity and specificity of questions asked of the policyholder.

• How clearly the insurer explained the importance of answering questions accurately and the consequences of not doing so.

• Whether the policyholder received financial advice.

For non-consumer contracts, the duty is to make a fair presentation of the risk. This duty is closer to the existing law. It requires the policyholder to disclose every material circumstance that the policyholder knows or ought to know. Non-consumer policyholders will satisfy the duty if they disclose sufficient information to put a prudent insurer on notice. Materiality has a similar definition to that which is currently contained within the Insurance Law Reform Act 1977.

Curtailing the duty of utmost good faith

If the Bill is passed into law, the duty of utmost good faith will be significantly curtailed. Pre-contractual disclosure obligations and its remedies will be limited to those codified in the Bill. The duty of utmost good faith will not be abolished. It will continue to apply to insurers, and to policyholders after the contract has been entered into. This leaves open the possibility for the duty to continue to develop under the common law (such as seen more recently in relation to claims handling).

Remedies

The Bill also proposes changes to the remedies available for pre-contractual non-disclosure. Avoidance of an insurance contract for pre-contractual non-disclosure is limited to:

• scenarios where the policyholder’s misrepresentation was deliberate or reckless, or

• where the insurer would not have entered into the contract if they had accurate information.

• Otherwise, for misrepresentations which are neither deliberate nor reckless, a proportionate remedy will apply.

The proportionate remedy allows the insurer to apply the terms, including the premium, which would have been applied had they received accurate disclosure. Typically, this will involve reducing a claim payment by the amount of additional premium that would have been charged, or applying an exclusion or other term that would have been applied. Proportionate remedies are already utilised by some insurers (particularly life insurers) as an alternative to avoidance (though at present, they require the policyholder to agree).

Unfair contract terms – consumer contracts

The Bill removes the insurance specific carve out for terms which cannot be considered to be unfair in a standard form consumer insurance contract. However, insurers will be pleased to see that the Bill adopts the broader approach to the definition of the main subject matter of an insurance policy. This is the part of the policy which cannot be declared to be unfair. The main subject matter of the policy will include terms which identify the subject matter of the insurance, the sum insured, the excess, the basis of settlement and exclusions. The adoption of a broader subject matter ensures greater certainty for insurers that terms fundamental to the assessment and pricing of the risk remain outside the unfair contract terms regime.

The terms of consumer insurance contracts which do not relate to the main subject matter of the insurance, such as termination provisions or premium payment provisions, will still be capable of being declared unfair.

Unfair contract terms – non-consumer contracts

From 1 April 2021, the extension of the unfair contract terms regime was to include standard form small trade insurance contracts. The Bill reduces the threshold for small trade insurance contracts to $20,000.  This means that unfair contract terms provisions will apply to standard form insurance policies with an annual premium of less than $20,000. While this is a lower threshold than that which applies to non-insurance trade contracts, many insurers will need to review any standard form policy wordings where the annual premium is ever below $20,000. This change has a much broader scope and could now include material damage, business interruption, general liability, financial lines and professional lines wordings.

Information

The Bill also introduces an obligation on insurers to inform policyholders about the duty of disclosure before contract or variation. It also requires insurers to inform policyholders of any third party information that the insurer intends to access before entering into the contract or varying it. This could include medical records or information on the Insurance Claims Register.

Breaches of the information requirements by insurers can be taken into account in assessing whether the policyholder has breached their duty of disclosure but can also give rise to a civil liability under the Financial Markets Conduct Act.

Other matters

The Bill also provides for:

• Intermediaries: a statutory duty on intermediaries to pass on representations made by policyholders during the negotiation of the contract of insurance. Insurers can seek compensation from an intermediary who has breached the statutory duty. Intermediaries cannot seek indemnities from policyholders for this potential liability.

• Implied term to pay claims: the Bill cements more recent common law development by introducing an implied term to pay claims within a reasonable time, including the time to investigate and assess claims. There is a list of circumstances to take into account to determine what is reasonable including the type of insurance, size and complexity of the claim, where there are reasonable grounds to dispute the claim, and factors outside of the insurer’s control.

• A new regime for third party claims against insurers: The Bill introduces a regime to replace the charge regime currently available under the Law Reform Act. The new regime is modelled on the scheme in New South Wales.

• The presentation of insurance contracts: The Bill amends the FCA to require insurance contracts to be worded and presented in a clear, concise and effective manner.

• Allowance of certain increased risk exclusions: The Bill reduces the scope of the equivalent of s11 of the Insurance Law Reform Act in relation to increased risk exclusions. Certain exclusions will apply, even if the insurer cannot show that the subject matter of the exclusion has caused or contributed to the event. These include exclusions regarding the age, qualifications and experience of drivers, and the geographical area where a loss must occur.

What should insurers be thinking about now?

Some of the changes set out in the Bill will coincide with requirements under industry codes, and insurers may already be making changes as part of their fair conduct programmes. However, these are some of the things that insurers could be doing now to get a head start on the changes:

• Identifying policy wordings which will now be subject to the unfair contract terms regime, and incorporating a review of potentially unfair terms during the product review cycle. This is particularly important for any of the non-consumer policy wordings which were previously outside the regime.

• The onus is shifted firmly to insurers to ensure that they ask consumer policyholders the questions necessary to assess the risks being written. In an increasingly digital consumer insurance world, many insurers will already have made progress in this area. However, wherever insurers are making changes to digital platforms or to written proposal forms, there should also be a focus on clear and easy-to-understand questions, and explanations about the importance of providing accurate answers.

• Decisions in England and Wales on the equivalent consumer duty show that it will be important for insurers to evidence the questions that customers are asked when they enter into the contract, for example by keeping copies of website wordings.

• Underwriting information will continue to be important evidence for insurers to produce to support remedies for non-disclosure. This includes not just avoidance, but where a proportionate remedy will be applied. Underwriting guidelines and the underwriting file will be key evidence in this regard, and insurers can ensure their materials and practices in this area are ready to support the change.

Melissa Bell is a Special Counsel at fee langstone

 If you are considering making a submission or would like to discuss any aspect of the Bill please contact the writer Melissa Bell on +64 9 220 6362 or any of our Regulatory Team, Craig Langstone, Cecily Brick, Virginia Wethey or Shikha Kishun on +64 9 373 0050.