Final Report on second stage: provision other than section 54
2.1 This Chapter deals with:
- the definition of entering into a contract of insurance in section 11 of the IC Act; and
- the types of communication methods allowed under the IC Act.
2.2 Throughout the IC Act there are references to the entering into a contract of insurance. Some examples are:
- section 21 — insured’s duty of disclosure before entering into a contract;
- section 22 — insurer’s duty to inform insured of duty of disclosure before a contract is entered into;
- section 25 — misrepresentation by life insured before a contract is entered into;
- sections 28 and 29 — remedies of insurer for non-disclosure and misrepresentation prior to a contract being entered into;
- sections 35 and 37 — notification by insurer of certain provisions and unusual terms before a contract is entered into; and
- section 68 — insurers must clearly notify subrogation provisions before a contract was entered into.
2.3 In the IC Act as originally enacted,32 subsection 11(9) stated that a reference to the entering into of a contract of insurance should be read as including a reference to an agreement to renew, vary or extend a contract, or the reinstatement of a contract. Accordingly, on each renewal or variation of a contract (whether life or general) all the rights and obligations that arise on entering into a contract (such as duty of disclosure, duty of insurer to inform insured of certain matters) applied as if the parties were entering a contract afresh.
2.4 An amendment made in 1986 altered the definition provisions in section 11 so that references to ‘entering into a contract of insurance’ now include:
- in the case of life insurance, an agreement to extend or vary a contract (but not to renew);
- in the case of general insurance, an agreement to renew, extend or vary a contract; and
- in either case, the reinstatement of a contract of insurance.33
2.5 The same amending Act34 also added new subsection 11(10) which has the effect that an insurer does not need to comply with various obligations to provide information to the insured on renewal, extension or reinstatement, nor variations (in some cases). Some stakeholders have commented that it is undesirable that the obligations of an insurer to inform an insured of the duty of disclosure under section 22 do not apply to renewals. That issue is dealt with below in Chapter 4 — ‘Disclosures and misrepresentations’.
2.6 The Issues Paper invited submissions on whether, aside from the application of the provisions regarding duty of disclosure to renewals, the provisions of the IC Act as they apply to renewals, extensions, variations and reinstatements of insurance contracts were appropriate.
2.7 A number of submissions on this point were made. Most were along the lines that the operation of subsections 11(9) and (10) were appropriate.
2.8 One issue was identified regarding the operation of subsection 11(9) in circumstances where an insured takes an original life insurance policy and then increases that cover at a later point, where a material change to the risk, which occurs in that interval, is not disclosed at the time of the increase application. In the event of a claim in such circumstances, arguably the life insurer could avoid the entire policy, because the increase in cover is to be treated, under section 11(9), as the entering into of a new contract of insurance.
2.9 To address this issue, the Investment & Financial Services Association Ltd suggested that the IC Act could be amended so that life insurers’ rights relating to non-disclosure/misrepresentation in such circumstances are restricted to the part of the cover affected by the non-disclosure or misrepresentation (similar to how subsection 28(3) operates in respect of general insurance). The Review Panel agrees that this issue is best dealt with by addressing the remedies of life insurers in those circumstances, rather than a change to the operation of subsections 11(9) and (10). Remedies of life insurers are dealt with in detail below at Chapter 7.
2.10 The IC Act specifies that some communications must be in writing. Most of these provisions impose obligations on the insurer to advise the insured of something in writing, often within set time limits.35 Examples are:
- section 22 — insurer to inform insured of duty of disclosure; and
- section 40 — insurer to inform insured of the nature of certain policies.
2.11 Those requirements are modified by the operation of section 69, which permits some information to be given to insureds outside the limits imposed in certain circumstances. Section 69 allows insurers to provide information orally in some instances, provided it is given later in writing.36 There are also provisions that require an insured to notify an insurer in writing of some occurrences.37
2.12 Section 77 provides that notices and other documents must be given personally or by post.
2.13 In a number of other contexts, steps have been taken to remove legal barriers to the use of new communications methodologies. The Electronic Transactions Act 1999 provides that, in general, where a Commonwealth law requires a notice to be given in writing, it may be given by electronic communication provided that the recipient consents. However, the Electronic Transactions Regulations 1999 exclude the IC Act from the scope of those provisions.
2.14 The Issues Paper noted that, in line with law reform elsewhere, it seems desirable to recognise the increasing use of electronic communications in the context of the IC Act and to facilitate electronic communication where possible, so long as any consumer protection issues arising in the context of insurance contracts can be satisfactorily dealt with. Comments and suggestions were invited on that proposition and suggestions for any exceptions and/or necessary safeguards.
2.15 Without exception, submissions supported the proposition that the IC Act should be updated to take advantage of electronic communication methods.
2.16 As to safeguards, some support was expressed for the requirements suggested in the Issues Paper. In particular, submissions supported the inclusion of requirements that the recipient must consent to electronic communication, that the communication must be able to be printed and retained, and that there are suitable rules regarding time of receipt. A number of submissions noted that, so far as possible, the scheme in the Electronic Transactions Act 1999 should be used as the model.
2.17 It was suggested that, if an insurer is going to impose any sanction on an insured in reliance on a document or notice, then they should first either dispatch a hard copy of the communication and/or have received an acknowledgement of the electronic receipt of the document. This proposal may be appropriate in relation to a notice of variation of a life insurance contract under section 29, and notice of a proposed cancellation under section 59.38 It would not seem feasible to apply in respect of other notices required to be given to the insured in writing, as other notices are given prior to the contract being entered into. At the time of providing such a notice, the insurer would not usually know whether it will seek to rely upon the notice in connection with imposition of a sanction or not, because any sanction would usually not arise until there was a disputed claim.
2.18 There are two possible approaches to give effect to the proposal that communications under the IC Act be made electronically. The exemption from the scope of the Electronic Transactions Act 1999 could be retained, and a free-standing scheme for electronic communication included in the IC Act itself. Alternatively, the IC Act could be brought within the scope of the Electronic Transactions Act, with consequential changes made to the IC Act to ensure consistency and to include any safeguards either generally or in respect of particular communications. The Review Panel considers that the latter approach is preferable, and notes that this is consistent with the approach being considered by the Uniform Consumer Credit Code Management Committee’s consideration of the parallel issue in the context of the Uniform Consumer Credit Code.39 The relevant provisions in the Corporations Act 2001 and regulations made under it could be considered as models for the safeguards.
2.19 In response to the Issues Paper, some other suggestions were directed at aligning and harmonising communication methods under the IC Act with the communication methods in the Corporations Act 2001. The particular suggestions were in relation to:
- giving documents to agents of insureds; and
- giving information orally.
Giving documents to agents of insureds
2.20 Subsection 71(1) of the IC Act relieves an insurer from certain disclosure obligations where an insurance broker (other than an insurance broker acting under a binder) arranges the insurance contract. However, there is no specific statutory obligation on insurance brokers to pass on to the insured the relevant disclosures (for example, the broker does not have a specific statutory obligation to notify the insured of the duty of disclosure or unusual terms of the contract).
2.21 Since the enactment of the IC Act, the Insurance (Agents and Brokers) Act 1984 has been repealed and replaced with provisions in the Corporations Act. The equivalent provisions in the Corporations Act, however, do not make a significant distinction between ‘insurance agent’ and ‘insurance broker’.
2.22 It was suggested the IC Act should be amended so that:
- in general, giving a document or information to an agent for the intending insured (where the agent is an insurance broker or Australian Financial Services licensee) does not automatically satisfy the insurer’s disclosure obligations under the IC Act; but
- as an exception to the general rule, giving a document or information to such an agent will satisfy the insurer’s disclosure obligations where the insurer is satisfied, on reasonable grounds, that the insurance agent (or Australian Financial Services licensee) will provide the required disclosure to the insured within the relevant time period.
2.23 Such a requirement would put the onus on the insurer to ‘look behind’ the arrangement between an insured and their agent and, unless the insurer is satisfied on reasonable grounds that the information will be passed on in a timely way, they would be required to provide the disclosure directly to the insured in addition to, or instead of, the agent. Most insurers dealing with agents (for example, authorized representatives) would have a written agreement with them and it would be usual to incorporate in such an agreement a term requiring the agent to convey mandatory disclosure information to the insured in a timely way.
2.24 The Review Panel considers that insurers satisfying themselves in this way could be a reasonable and appropriate safeguard to protect insureds against the failure on the part of intermediaries of forwarding on information in a timely way.
2.25 Subsection 69(1) of the IC Act provides that, where it is not reasonably practicable for an insurer to give information on a contract of insurance in writing before a contract is entered into, the insurer may instead comply with the IC Act disclosure obligations by giving the information:
- orally prior to entering into the contract; and
- in writing within 14 days after the date on which the contract was entered into.
2.26 It was suggested that this requirement should be aligned with the Corporations Act provisions for giving disclosure documents (such as Financial Service Guides and Product Disclosure Statements) in time critical cases. Under those rules, provision of oral information is only permitted if a client expressly instructs that they require a financial service either immediately or within a fixed time period and it is not reasonably practical for the information to be provided in writing within the available time period. It was also suggested that the 14 day period under the IC Act is too long and this should be reduced to five days for consistency with comparable periods under the Corporations Act 2001.
2.27 The Review Panel considers that, in the majority of ‘consumer’ types of insurance (such as motor vehicle, home contents and so on), it will often be the case that the insured will wish the contract to commence either immediately or within a short period. However, the Review Panel also notes that, with the use of electronic communication methods, documents or information can be transmitted in writing much faster than using traditional written methods. Oral communication of mandatory disclosures prior to the entering into of a contract is ‘second best’ because providing information in writing overcomes difficulties of proof and gives insureds a better opportunity to examine and reflect upon the information provided.40 The Review Panel considers that pre-contractual mandatory disclosures should be permitted to be given orally only in circumstances where, due to the requirements of the insured, there is no reasonably practicable other method.
Time critical situations where it is not reasonably practicable to give information orally
2.28 Subsection 69(2) provides that, where it is not reasonably practicable to give the information in writing or orally prior to entering into the contract of insurance, the insurer can instead give the information in writing within 14 days from the date the contract is entered into.
2.29 It was suggested that subsection 69(2) is potentially inconsistent with the rationale of underlying provisions such as section 35 and 37 of the IC Act, being to give intending insureds adequate information to make an informed decision about whether to enter into the contract. If, after receiving the mandatory disclosures, the insured decides that they do not want the product, they would need to rely on terms of the contract (if any) that allow the insured to cancel the contract. This would typically require the insured to pay all or part of the premium.
2.30 Accordingly, it was suggested that section 69(2) should therefore be restricted in its operation to:
- interim contracts; or
- situations where there is a statutory cooling off period or similar contractual cooling off rights.
2.31 It was noted that, in such situations, the risk of an insured being disadvantaged due to the lack of disclosure before entering into the contract is substantially reduced. The cooling off period could be the cooling-off regime under Division 5 of Part 7.9 of the Corporations Act or similar contractual cooling-off rights and would enable an insured to obtain a refund of premium if, on receipt of the relevant disclosures, they realise that the insurance is not suitable.
2.32 Most of the requirements in the IC Act that require an insurer to provide an insured with certain information in writing, especially prior to entering into an insurance contract, are designed to ensure the prospective insured party is sufficiently informed about the nature of the contract and may determine whether the contract is suitable for their purposes. The Review Panel believes that there is merit in harmonizing provisions in the IC Act that relieve insurers from the usual requirements under the IC Act for written disclosures to insureds (through use of agents or alternative disclosure methods in cases of urgency) with equivalent provisions under the Corporations Act 2001.
2.33 The Review Panel considers that further consideration and consultation regarding the details of the harmonization is necessary in order to ensure that an appropriate system is developed for all kinds of insurance, insurers and agents, including insurers that do not deal with retail clients. It is possible that not all provisions can or should be harmonized. For example, we doubt whether the five day rule for providing notices prescribed by the Corporations Act 2001 is appropriate for the IC Act.41 The requirements under the Corporations Act have only recently taken effect and it would be desirable to take into account the practical experience of application of those rules.
32 Act No. 80, 1984.
33 Sutton, K. 1999, Insurance Law in Australia, 3rd edn, LBC Information Services, Sydney, paragraph 3.37.
34 Sections 2, 3 and Schedule 1 of the Statute Law (Miscellaneous Provisions) Act (No. 2) 1986.
35 Those provisions are sections 22, 35, 37, 39, 40, 44, 49, 58, 59, 62, 68 and 74 of the IC Act.
36 Issues surrounding the provision of oral information regarding the duty of disclosure are dealt with below in Part 4 — ‘Disclosures and misrepresentations’.
37 Sections 41 and 75 of the IC Act.
38 For example, Investment & Financial Services Association Limited suggests cancellations and variations require traditional means of communication.
39 Clyde, I. 2003, Click here for details: e-commerce and consumer credit, available at http://www.consumer.vic.gov.au/cbav/fairattach.nsf/Images/ ecommerce_consumercredit/$File/ecommerce_consumercredit.pdf.
40 Australian Law Reform Commission 1982, Insurance Contracts, ALRC 20, AGPS, Canberra, paragraph 44.
41 See submission by the Insurance Council of Australia Limited, dated June 2004.
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