Review of the Insurance Contracts Act , Australian Government, Department of the Treasury

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Final Report on second stage: provision other than section 54

Chapter 5: Standard cover

5.1 Part V, Division 1 of the IC Act creates a standard insurance cover regime for certain prescribed contracts. Where a contract is not prescribed, section 37 of the IC Act applies generally to require insurers to notify insureds of unusual policy terms before the insured enters the contract.

The operation of the standard cover provisions

5.2 Section 35 of the IC Act requires an insurer to bring to the attention of an insured, before the contract is entered into, the terms of the insurance contract that differ from the standard terms of a prescribed contract.68

5.3 The regulations made under the IC Act currently prescribe motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance, consumer credit insurance and travel insurance.

5.4 It was claimed during consultation that the practical effect of the current standard cover regime has diverged from that which was originally intended. Stakeholders have suggested that:

  • disclosure should occur in a document separate to the policy (either through a product disclosure statement (PDS) or otherwise);
  • section 35 (and the associated regulations) are no longer relevant and could be replaced by a broader section 37; and
  • sections 35 and 37 duplicate the product disclosure statement (PDS) regime and are thus no longer necessary.

Disclosure through the policy document

5.5 In its report on ‘Insurance Contracts,’ the ALRC recommended a standard cover regime be introduced into Australian insurance law. The ALRC stated that:

    ‘Under such a regime, it would be possible for an insurer to derogate from the standard prescribed, but it could only do so if it specifically drew to the insured’s attention the relevant limit on cover.’69

5.6 The ALRC also considered a scheme of standard contracts in Australia. However, it rejected that notion for several reasons, including that it would inhibit product development in response ‘to the demands and needs of the public’.70

5.7 While the ALRC found that many misunderstandings in insurance arose because policy documents were often unavailable to an insured before they entered the insurance contract,71 the ALRC did not recommend the introduction of standard cover as a means of ensuring that insureds received a copy of the policy. Rather, the ALRC discussed disclosure under the standard cover provisions as being in a document separate to the policy:

    ‘If policies remain unread, might not the same be true of lengthy warnings concerning the limits on standard cover? Such an objection is defective for two main reasons. First, the standards concerning legibility and comprehensibility of notices required by this report would reduce the factors which inhibit reading and comprehension of existing policies. Secondly, the length of the notification which would be required would bear no resemblance to a full policy document.’72

5.8 Nevertheless, on introduction of the Insurance Contracts Bill, a substantial change was made to the original ALRC recommended regime. That change had the effect that unusual terms under section 37 could be notified by providing a copy of the policy document.

5.9 Section 37 of the IC Act originally stated:

    ‘An insurer may not rely on a provision included in a contract of insurance (not being a prescribed contract) of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the loss occurred —

    (a) the insurer gave to the insured a copy of the policy document or of the provision; or

    (b) the insurer clearly informed the insured in writing of the effect of the provision.’73

5.10 The Parliament made three further amendments to sections 35 and 37 of the IC Act over the course of 1985 and 1986. These amendments ensured that disclosure, for the purposes of sections 35 and 37, could be satisfied by providing the insured with a copy of the policy document (so long as the policy contained the relevant non-standard or unusual terms).

5.11 The Explanatory Memoranda to the amending Bills provide:

    ‘The proposed amendment of sub-section 35(2) derives from the existence of some degree of uncertainty on the part of insurers as to whether they need to provide a special notice, which specifies the extent of any deviation from the standard cover to be prescribed by regulation, in addition to the policy document itself. The amendment makes it clear that an insurer’s requirement to notify the insured can be satisfied by providing a copy of the policy document itself, subject to that document clearly informing the insured of the extent of the cover provided.’74

    ‘Proposed amendment to section 37 is designed to bring the wording regarding ways in which an insurer can satisfy the requirement to clearly inform the insured in writing of any unusual term of an insurance contract into line with sub-section 35(2).’75

5.12 These amendments allowed insurers more flexibility in deciding how non-standard or unusual policy terms should be disclosed.

5.13 The Review Panel is not convinced that reducing this flexibility, such as by requiring disclosure of non-standard and unusual policy terms in a separate document to the policy, would necessarily lead to insureds better understanding the limitations of their insurance policy.

5.14 Rather, the Review Panel believes that it is more important that disclosure of non-standard and unusual policy terms be disclosed in a manner an average insured will be aware of and understand.

‘Clearly inform’

5.15 Generally the words ‘clearly inform’, as used throughout the IC Act, mean ‘to make known with some precision’ and merely giving the insured a document containing the relevant provisions among a host of other provisions may well fail to clearly inform the insured of his or her rights and obligations.76

5.16 Despite that, it has been held that subsection 35(2) of the IC Act means that giving the insured a document containing the relevant provisions will usually be enough for the insurer to satisfy this requirement. There may be, however, ‘special circumstances in which the complexity of or confusions within the document’ prevent this from being so.77

5.17 The reason that ‘clearly inform’ leads to a different result in different contexts is because of the additional wording found in subsection 35(2) (and section 37) after the requirement to ‘clearly inform’. Subsection 35(2) provides, inter alia, that ‘the insurer clearly informed the insured in writing (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise).’ The words in parentheses are not used elsewhere in the Act in conjunction with the requirement to ‘clearly inform’.

5.18 Einstein J. in Hams v CGU Insurance Ltd found that the words contained in the parenthesis in subsection 35(2) appear:

    ‘… in most circumstances to result in the provision of such a document in and of itself satisfying the requirement to clearly inform. There may however be special circumstances in which the complexity of or confusions within the document containing the relevant provisions (which one would expect would usually be the Insurance Policy itself) could be such that the mere provision of the Policy did not establish that the insurer had effectively informed the insured of relevant limitations.

    Hence I accept as correct the proposition that the words in parenthesis mean that providing a document containing the provisions is one of a number of mechanisms by which an insurer may clearly inform the insured. In each case the content of the document and all of the circumstances of its provision would need to be considered in order to determine if the insurer had effectively informed the insured of the limitation.’78

5.19 Hams case was recently considered by the Northern Territory Court of Appeal in Marsh v CGU Insurance Limited t/as Commercial Union Insurance.79 Mildren J (Thomas J agreeing) held that:

    ‘In Hams v Anor v CGU Insurance Limited (2002) 12 ANZ Insurance cases 61-525, Einstein J held that the provisions of s35(2) of the Insurance Contracts Act (Cth) could be met if the insurer provided to the proposed insured a document such as the proposed policy, which contained the relevant wording. I agree. Plainly, the words in parenthesis in s35(2) clearly contemplate such a possibility. Whether the policy wording in fact “clearly informed” the insured that there was no cover for flood is a question of fact to be determined by an examination of the document in question. I do not consider that it is necessary for the relevant exclusion to be predominantly displayed in bold capitals over the front cover in order for the insurer to succeed on this question … Furthermore, the language of s35(2) suggests that the proposed insured can be clearly informed merely by providing the insured with a copy of the policy that shows the exclusion in clear and unambiguous terms … Even though s35 is plainly beneficial legislation, a fair reading of s35(2) does not warrant the conclusion that the result need go further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question.’80

5.20 Judicial interpretation of the term ‘clearly inform’ in section 35 shows that the term has become a test of the clarity of the drafting for the required disclosure. It should also be noted that the clarity test in section 35 is the same as the test in section 37.

5.21 A number of submissions claimed that insurers do not disclose non-standard and unusual policy terms in an effective or meaningful manner.81

5.22 We rejected above the suggestion of some stakeholders that an insurer should be required to clearly make known to the insured the limitations of an insurance policy by providing a separate document explaining the non-standard and unusual policy terms, or by highlighting the non-standard or unusual terms.82 Nevertheless, the Review Panel believes these proposed solutions may assist consumers more easily identify non-standard policy terms. The Review Panel encourages the insurance industry, in consultation with consumers and consumer advocates, to seek to improve the ways in which they make known to insureds non-standard policy terms. The Review Panel does not propose limiting the documents through which disclosure may occur.83

5.23 The Review Panel does not believe that these suggestions, even if implemented, would adequately address the principal problem, being that certain non-standard and unusual terms are lengthy, complex and often have to be read in conjunction with the policy to be fully understood.

5.24 The Panel concludes that the difficulty insureds have in understanding the effect of such terms demonstrates the shortcomings of the present requirement, namely ‘clearly inform’.

5.25 The Review Panel believes that many consumer concerns would be addressed if insurers were to draft documents (or the relevant parts) disclosing non-standard and unusual terms in a ‘clear, concise and effective manner’. These words already describe the obligations of insurers under the FSRA in relation to disclosure documents for ‘retail clients’.

5.26 Given that Hams case has already found the term ‘clearly inform’ in section 35 to require clear and effective disclosure, the Panel does not consider such an amendment to be onerous for insurers. However, the Panel does believe that the additional requirement of ‘concise’ disclosure will simplify disclosure documents and greatly enhance the readability of non-standard and unusual policy terms.

5.27 Such a change to the clarity test of sections 35 and 37 will also more easily allow a rationalisation of the standard cover regime and the PDS regime, which is considered later in this Chapter.84

5.28 We recognise that a revision of this kind imposes a burden on insurers who will need to reconsider the drafting of many policies and possibly other documents. We suggest, therefore, that consideration be given to a transitional period of approximately two years, during which insurers would be held to the present test rather then any revised test.

Recommendation

5.1 The clarity test of ‘clearly inform’ in sections 35 and 37 of the IC Act should be replaced by a requirement that the information be presented in a ‘clear, concise and effective manner’.

Should section 35 be removed and section 37 be expanded?

5.29 Some stakeholders have suggested that disclosure required by section 35 could be incorporated into section 37 of the IC Act. This has been suggested as a preferred approach to that of modernising the standard cover regulations.85

5.30 Both sections 35 and 37 require insurer disclosure, if the insurer wishes to be able to rely upon all terms (including non-standard and unusual) of the insurance contract.

5.31 Under section 37, if the insurer does not disclose the unusual terms of a policy before the contract is entered into, then the unusual terms become void.

5.32 However, under section 35, if an insurer does not disclose the non-standard terms of a policy before the contract is entered into, the insured will instead be allowed standard cover.

5.33 This difference in outcomes between sections 35 and 37 must be borne in mind when considering a rationalisation of the two sections.

5.34 The Review Panel considers that an expansion of section 37 to apply to what is currently a prescribed contract,86 would reduce the protection available to insureds under prescribed contracts.

5.35 The Review Panel believes that the additional protection offered by section 35 is clearly a better remedy for consumers, in relation to prescribed contracts, than that provided by section 37. It allows an insured an ‘expected’ level of insurance coverage in the event that non-standard contract terms are not disclosed to the insured, and in this regard remains a relevant and important provision of the IC Act.

5.36 Further, the Panel cannot see any way to amend section 37 to afford similar protection to that provided by section 35, without prescribing standard cover.

Standard cover regulations

5.37 Through the course of this Review it has become evident that the standard cover regulations have not kept pace with market developments.

5.38 A number of stakeholders have suggested that the standard cover regulations require modernising and updating.87

5.39 The Review Panel considers that, even though the regulations have in part become outdated, generally the standard cover regime has operated satisfactorily.

5.40 However, the Review Panel recommends that the regulations be modernised where necessary. This should be considered carefully, as hasty amendments may result in the emergence of deficiencies in the standard cover regime. It may be appropriate to establish a process, such as a consultative committee, for this purpose, which would include representatives from the insurance industry and consumer representative bodies.

Recommendation

5.2 The standard cover regulations should be updated and modernised following a suitable process of consultation with stakeholders including the insurance industry and consumer representatives.

Standard Cover and the Financial Services Reform Act 2001 (FSRA)

5.41 The FSRA amended the Corporations Act 2001 to introduce a uniform licensing, conduct and disclosure regime for financial service providers, including insurers, which took full effect on 11 March 2004.

5.42 The FSRA disclosure regime includes specific disclosure requirements for some insurance products.88 In particular, a product disclosure statement (PDS) for insurance must contain ‘information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product.’89

5.43 It has been argued that this requirement (and possibly others) of the PDS is a duplication of the disclosure required to satisfy the standard cover provisions. The Insurance Council of Australia Limited suggested duplication between the two regimes is sufficient reason to repeal the standard cover regime.90

5.44 However, there are a number of important differences between the PDS regime and the standard cover regime (that is, Part V Division 1 of the IC Act). The FSRA disclosure regime does not apply in relation to the issue or sale of every insurance product. Disclosure is only required where a product is sold to a ‘retail client’.91 The application of the standard cover regime is not similarly limited, and potentially applies to the sale of all types of insurance, and to all types of insureds.92

5.45 The remedies available to an insured and the liability of the insurer differ under each regime. Under the IC Act, if the insurer fails to notify the insured of non-standard terms, the contract reverts to that of standard cover. If an insurer fails to notify the insured of unusual policy terms, the insurer cannot rely upon those unusual terms of the contract.

5.46 However, if an insurer fails to fulfil its PDS obligations, the FSRA would, for example, allow ASIC to take action against the PDS issuer, or allow an insured to take civil action for any resultant loss or damage. The standard cover regime seems to provide more effective consumer protection.

5.47 This was reflected in a number of submissions. For example, the Legal Aid Commission of New South Wales submitted:

    ‘… we strongly support the continued existence of the standard cover provisions as an important means to protecting the interests of insureds. PDS has neither the same purpose nor outcomes that standard cover provisions afford consumers today.’ 93

And Australian Associated Motor Insurers Limited (AAMI) stated:

    ‘The purpose of the two regulatory schemes is different. The PDS regime in the Corporations Act is about ensuring comparability and comprehension of product documentation. The standard cover provisions are about providing a baseline set of words that apply where the insurer has failed to provide notice of the actual policy terms.

    The Corporations Law provides that where a consumer has not received proper notice of the PDS provisions, the remedy is damages. In the standard cover regime, the remedy is that the standard cover provisions apply in the event of a claim. That remedy is an effective consumer protection mechanism that should not be removed’.94

5.48 While the Review Panel does not support the repeal of the standard cover provisions, there is clearly benefit in reducing duplication (and hence compliance costs) between the provisions and the PDS regime where such duplication may exist.

5.49 In investigating a rationalisation of these two regimes, the Review Panel has concluded that there is nothing currently restricting IC Act disclosure through a PDS.

5.50 Specifically, the standard cover provisions, and more generally, the IC Act, do not prohibit standard cover disclosure from being included as part of another document (such as a PDS), so long as such disclosure meets the clarity test of ‘clearly inform’ and is provided ‘in writing’.

5.51 To the extent, if any, that an insurer is not already required to include standard cover related disclosures through a PDS,95 the insurer is allowed to include other information in the PDS,96 provided that such information continues to meet all other requirements of the Corporations Act including the need for information to be worded and presented in a clear, concise and effective manner.

5.52 Should the clarity test in the standard cover regime be changed to that of ‘clear, concise and effective’ then rationalisation of the two regimes will be easier. However, even without such a change, it is clearly open to insurers to provide standard cover disclosure through a PDS, in a ‘clear, concise and effective manner’.

5.53 While the Review Panel sees no existing barriers to providing standard cover disclosure through the PDS, to affirm this position the Review Panel recommends that the IC Act be amended to clarify that standard cover disclosure may specifically occur through a PDS.97

5.54 It is also noted that if information required by section 37 of the IC Act was provided through a PDS, this could only occur where an insurance product was sold to a retail client. As such, section 37 disclosure would have to continue to occur through the provision of the policy document or a separate document where a PDS was not required.

Recommendations

5.3 Sections 35 and 37 should be amended so that the product disclosure statement (PDS) is specified as one of the documents through which disclosure of non-standard and unusual policy terms can occur.

  • Such disclosure would need to satisfy both the requirements of the standard cover provisions under the IC Act and the requirements of the PDS regime.

5.4 Consideration should be given to the need for regulations under the Corporations Act 2001 that would clarify:

  • that a PDS may include information that satisfies the disclosure requirements of the standard cover provisions of the IC Act; and
  • that where an insurer fails to fulfil its standard cover disclosure obligations through the provision of a PDS, then the insured may rely upon the remedies of the IC Act as well as the remedies of the Corporations Act 2001.

 


68 Section 35 of the IC Act.

69 Australian Law Reform Commission 1982, Insurance Contracts, ALRC 20, AGPS, Canberra, paragraph 57.

70 ALRC 20, paragraph 55. The ALRC report contains further discussion about standard contracts at paragraph 54-56.

71 ALRC 20, paragraph 48.

72 ALRC 20, paragraph 72.

73 Original section 37 of the Insurance Contracts Act 1984 No. 80 of 1984.

74 Australia, Parliament 1985, House of Representatives, Statute Law (Miscellaneous Provisions) Bill (No. 1), Explanatory Memorandum at page 55.

75 Australia, Parliament 1986, House of Representatives, Statute Law (Miscellaneous Provisions) Bill (No. 2), Explanatory Memorandum at page 33.

76 Suncorp General Insurance Limited v Chiehk (1999) 10 ANZ Ins Cas 61-442.

77 Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525, Einstein J at [242]

78 (2002) 12 ANZ Ins Cas 61-525 at [242] and [243].

79 Marsh v CGU Insurance Ltd t/as Commercial Union Insurance [2004] NTCA 1.

80 Marsh v CGU, at [11].

81 See submission from the Law Council of Australia dated 27 April 2004, at page 11.
See submission from the Insurance Enquiries and Complaints Limited Panel dated March 2004, at page 2.

82 See submission from the Legal Aid Commission of New South Wales dated April 2004 at page 15.
See submission on the Issues Paper from the Consumers’ Federation of Australia (CFA) at page 17. The CFA suggested that ‘… all non-standard terms [should be] separately collected and disclosed at the front of the contract (using plain language, with a reasonable font size, with an explanation of the purpose of the disclosure and so on).’
See also submission from the CFA dated June 2004. The CFA recommend considering a ‘Schumer box’ for standard cover contracts. The ‘Schumer box’ would, at the front of the policy, alert consumers to any variation from standard cover.

83 Some stakeholders appeared to mistakenly believe that the Review Panel intends to limit the documents through which non-standard and unusual term disclosure may occur.
See submission from the Insurance Council of Australia Limited (ICA) dated June 2004.

84 The Review Panel appreciates that the PDS regime only applies to ‘retail clients.’ General insurance products deemed to be provided to ‘retail clients’ include products to which both sections 35 and 37 apply, for example, section 37 applies to the retail products medical indemnity insurance and personal and domestic property insurance.
The Review Panel does not believe it is onerous for ‘wholesale’ general insurance products to include unusual term disclosure in a ‘clear, concise and effective manner.’

85 See submission by the Insurance Enquiries and Complaints Limited Panel dated March 2004, at page 2.

86 The prescribed contracts of insurance are motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance, consumer credit insurance and travel insurance.

87 See submission from the Legal Aid Commission of New South Wales dated April 2004 at page 18 and submission on the Issues Paper from the Consumers’ Federation of Australia (CFA) at page 16.

88 Disclosure is required where an insurance policy is sold to a retail client, as defined under section 761G of the Corporations Act 2001. Subsection 761G(5) provides that where a general insurance product is sold to a person or small business, the person or business is generally to be treated as a ‘retail client.’ General insurance products specifically include those products prescribed in regulations under the IC Act, that is, motor vehicle insurance, home building insurance, home contents insurance, sickness and accident insurance, consumer credit insurance and travel insurance.

89 Paragraph 1013D(1)(f) of the Corporations Act 2001.

90 See submission from the Insurance Council of Australia Limited dated April 2004 at pages 8 and 21.

91 ‘Retail client’ is defined in section 761G of the Corporations Act 2001.

92 Specifically, section 37 of the IC Act has no restrictions on its application.

93 See submission from the Legal Aid Commission of New South Wales dated April 2004 at page 13.

94 See submission from the Australian Associated Motor Insurers Limited (AAMI), dated 16 April 2004 at page 4.

95 Under section 1013D of the Corporations Act 2001.

96 Paragraph 1013C(1)(b) of the Corporations Act 2001.

97 In its most recent submission, the Insurance Council of Australia Limited (ICA) contended ‘… parts of the IC Act, most notably the standard cover and unusual term provisions have produced an imbalance between the interests of insurers and insureds following the passage of the Financial Services Reform Act (FSRA).’
See submission from the ICA, dated June 2004, at page 6. The Review Panel has addressed this concern of the ICA (and others) by proposing a way that insurers may harmonise the standard cover provisions and the PDS regime.

 

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