Rights and Interests Under Contracts of Insurance

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The Insurance Contract Act 1984 (the Act) protects and safeguards the rights of the consumers. Under a contract of insurance, each party to the contract owes to the other party a duty of utmost good faith regarding any matter arising out of the contract. If there is a breach of such duty by the insurer, the insured has a right to claim for the damages. Duty of utmost good faith is the basis of all insurance contracts.

The insured also has an obligation to disclose all material facts to the insurer. However, the insured is under no obligation to disclose facts of common knowledge or facts known to the insurer in course of business or facts that diminish the risks assumed by the insurer. In case of any fraud or misrepresentation or breach of duty to disclose, the insurer has a right to cancel the contract in its entirety. Fraud or misrepresentation by the insured, if it is not intentional but an innocent act, the insurer can reduce the liability to what it would had been, if there were correct disclosure of facts. The insured is under an obligation to disclose true and material facts till the policy commences.

Under the Act, third party beneficiaries enjoy the same right as that of an insured and they also have recourse to Dispute Resolution bodies.

Proposed Amendments

A draft of the Insurance Contracts Amendment Bill 2013 (Cth) (2013 Bill) has been published. The 2013 Bill intends to reintroduce the reforms put forward by the Insurance Contracts Amendment Bill 2010 (Cth) (2010 Bill) to the Insurance Contracts Act 1984 (Cth) (the Act).

The major factors included in 2013 Bill are:

Removing impediments to the use of electronic communication;

Giving powers to the Australian Securities and Investments Commission, to take action to address breaches of the duty of utmost good faith by insurers, including in respect of claims handling; and

Making the duty of disclosure easier for consumers to understand and comply with.

The Insured’s Duty of Disclosure

The insured is under an obligation to disclose all material facts to the insurer which would affect the decision of the insurer to undertake the risk and being a reasonable person the insured knows the facts to be disclosed to be relevant. The 2010 Bill proposed the extent of the insurance cover to be provided in the insurance contract. To add more on it, the 2013 Bill added another consideration as to the class of persons that would ordinarily be expected to apply for insurance cover of that kind.

The Remedies Applicable to Life Insurance Non-Disclosure and Misrepresentation

Under the Act, in cases of misrepresentations and non-disclosure of facts under general and life insurance, the insurer has a right to cancel the insurance contract. When there is fraud or misrepresentation in cases of general insurance, the insurer can reduce the liability to what it would had been, if there were correct disclosure of facts. Life insurers have the right to cancel an insurance contract within the first three years of the policy. If the insurer fails to cancel the contract, the only option left is to vary the sum insured following a formula prescribed in the Act. The 2013 Bill tries to remove the segregation that is prevailing in the Act with regard to general insurer and life insurer. The sum insured under life insurance policies can be varied at any time or the terms of the contract can be varied generally which would place the insurer in a position as if full disclosure had taken place.

The Commencement of the ‘Eligible Contracts’ Duty of Disclosure Amendments

Under the Act in cases of ‘eligible contracts’ of insurance the insured is not under any obligation to disclose all material factsthat are expected to be known, but to answer certain definite questions asked by the insurer. The 2010 Bill did not allow ‘exceptional circumstances questions’. Under the 2010 Bill, the insurer could ask specific questions and was required to provide a copy of the answers and the insured was required to disclose any future changes. Under the Act, the insurers are duty bound to inform the insured, the effect of duty of disclosure and any changes made to the terms of the insurance policies. The 2013 Bill provides for a transitional period of 30 months from the date of Royal Assent allowing insurers to make such changes in the policies.

The Unbundling of Life Insurance Policies

Generally an insurance contract provides for more than one cover that is, it may cover death and also permanent impairment – this is known as bundled policies. It was later proposed in cases where a policy covers more than one kind of insurance; such insurances would be segregated for the purposes of disclosure and misrepresentation of facts. Under the 2013 Bill, while deciding about what would be the ‘kind of insurance’, it has been held that the provision would apply in circumstances where a policy would contain two or more ‘groups of provisions’ which could form a standalone policy.

This article is aimed to give you an insight on insurance contracts. If you need any kind of assistance while applying for any insurance policies, contact our team of experts at Owen Hodge Lawyers.

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