Fair call on amendments still lacking

Insurance contracts were ushered into the 21st century in late June, when Federal Parliament passed the Insurance Contracts Amendment Bill 2013, billed as the most significant change to the Act since its introduction in 1984.

Along with giving ASIC increased powers to act on breaches of the duty of good faith by insurers and simplifying the duty of disclosure, it allows insurance documents to be emailed.Insurance Council of Australia CEO Rob Whelan says consumers expect to be able to conduct their business using a computer or smartphone.

“The changes mean consumers will benefit from new ways to understand and interpret their policies, while insurers will benefit from the increased speed of which electronic notices are delivered compared to traditional measures,” he says.“It will mean insurers can develop interactive Product Disclosure Statements so consumers can quickly navigate to the parts of their PDS they want to read.”

Unfair terms in focus

However, more controversial amendments aimed at introducing unfair contract terms protection to insurance are still in the works.In their current form, the new amendments would provide insureds with similar protections to those covering mobile phone and credit card contracts, allowing consumers or ASIC to challenge terms as unfair in the courts; if a term is found to be unfair, the insurer would be in breach of the duty of utmost good faith.An unfair term is defined as one that:

 Would cause a significant imbalance in the parties rights and obligations under the contract,

• Would cause detriment to a party if relied on, and

• Is not reasonably necessary to protect the legitimate interests of the party advantaged by the term (to be reasonably necessary it must reflect the underwriting task accepted by the insurer

Radford Lawyers principal lawyer Mark Radford says in its current form the legislation puts more responsibility on insurers.

“This is yet another step in setting an extremely high bar for insurers in the drafting of their policy documentation,” he says.“It’s good news for insurance brokers and their insured clients who will be better protected going forward.”Life insurance contracts would not be covered.

Uncertain terms

However, Allianz Corporate Affairs General Manager Nicholas Scofield says the reform is unnecessary, given the policyholder protections already enshrined in the Insurance Contracts Act.

This legislation imposes the specific obligation that insurance contracts are based on ‘utmost good faith’ (s13) and prevents insurers from relying on a provision of a policy if in doing so they would “fail to act with the utmost good faith” (s14),” he says.

“Previous court decisions in relation to insurers’ ‘utmost good faith’ obligations have referred to it encompassing notions of fairness.“The proposed unfair terms law is an unnecessary duplication and additional regulatory burden on insurers that provides no discernible extra protection for policyholders.

The proposed laws are more than just unnecessary, they create unacceptable levels of uncertainty in terms of the potential financial stability of insurers.”

Scofield says a key fear regarding the proposed reforms is the uncertainty they would create around the scope of cover in any given contract.

Using the example of home insurance policies, Scofield says insurers who exclude riverine flood cover price their policies on that basis.

In such circumstances, the insurer collects no premium, keeps no claims reserves and obtains no reinsurance cover for the purpose of paying flood claims because the policy has been offered and priced, and accepted by the customer, on the basis that damage caused by excluded flood events will not be covered,” he says.“It creates an absolutely unacceptable level of uncertainty for insurers for their to be laws on the books that would allow a court, or more likely the Financial Ombudsman Service, to decide that a flood exclusion is ‘unfair’ and hence such claims should be paid.

“Given the scale on which large flooding events can occur, such as the 2011 Brisbane flood, such an outcome could result in an insurer having to use claims and capital reserves for events that were never contemplated. “Such a legislative regime poses the risk of causing insurers to go broke.”

Change on horizon

Although the unfair terms amendments have been introduced to Parliament, they will not be passed before the election, meaning whichever side takes government will be required to decide on the reform’s future.

Opposition spokesman on Financial Services Mathias Cormann told IRP the Coalition would not proceed with the current reforms if elected.

“Instead we will re-engage in discussions with all relevant stakeholders about the best way forward,” he says.

“The legislation was clearly not ready for introduction. There are a whole series of problems and unresolved issues with the current draft of the Bill.”

Assistant Treasurer David Bradbury has defended the legislation, saying it will insure a level playing field for consumers when they enter into insurance contracts.