Prior to entering into a consumer insurance contract with an insurer, an insured has a present duty pursuant to section 21 of the Insurance Contracts Act 1984 (Cth). This provision stipulates that an insured has a duty to disclose every relevant matter that is known to the insured, or that a reasonable person in the circumstances could expect to be a relevant matter. Although this duty presently stands, changes will be made on 5 October 2021.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has made a number of recommendations, including the abolishment of an insured’s duty to disclosure.
If a contract of general insurance is not a consumer insurance contract, an insured party will still owe a duty of disclosure. For the purposes of the new duty, it is noted that it specifically relates to consumer insurance contracts that are ‘obtained wholly or predominantly for the personal, domestic or household purposes of the insured’, unless a policy is nominated to be a consumer insurance contract.
After 5 October 2021, an insured entering into a consumer insurance contract will be obliged to ‘take reasonable care not to make a misrepresentation’. Although this duty is subjective and largely depends on the circumstances of the case on its merits, considerations may be given to the following matters in determining whether the duty has been fulfilled by an insured:
- The type of consumer insurance contract entered into and its target market.
- The explanatory materials produced by an authorised insurer.
- The specific questions asked by an authorised insurer.
- Whether an agent was acting for the insured.
- How clear the insurer communicates the importance of answering certain questions.
The new duty places a more stringent requirement on insurers to ensure that they are taking all steps necessary to ensure that the correct questions are being asked, and noting the consequences of failing to answer those questions. This places a higher threshold on insurance companies to ensure that all questions asked of the insured are not ambiguous or unclear.
Impact of changes
The Government has noted that the new duty is substantially less complex than the current duty in place, and will place the burden on the insurer to ask the correct questions in providing a policy of insurance to an insured as opposed to the current duty which requires an insured to assume what information may or may not be of importance to an insurer in entering into a consumer insurance contract.
These new changes, although placing a higher standard on insurers, is a great opportunity for insurers to amend their policies and ensure clarity on the issues of disclosure. This will largely ensure that the expectations of both an insured and insurer in the claim’s assessment process are clear and unambiguous.