Final Report on second stage: provision other than section 54
6.1 This Chapter discusses the remedies available to an insured party for a breach by an insurer, in particular:
- remedies for unfair contractual terms; and
- remedies if payment of a claim is unreasonably delayed.
6.2 Section 13 of the IC Act implies into insurance contracts a duty of the utmost good faith, owed by each party to the other, in respect of any matter arising under or in relation to the contract.
6.3 If there is a breach of the duty by the insurer that causes loss to the insured, that could found a claim for damages for a contractual breach. Further, section 14 provides that a party may not rely on a contractual term if to do so would be to fail to act with the utmost good faith.
6.4 Section 15 of the IC Act expressly excludes insurance contracts from the operation of any Act (Commonwealth, State or Territory) that provides relief in the form of judicial review of harsh or unfair contracts. It also excludes relief under other Acts for insureds from the consequences in law of making a misrepresentation, except for relief in the form of compensatory damages.
6.5 In the review that led to the introduction of the IC Act, the ALRC considered that the prospect of facing an action for breach of duty under section 14 was sufficient to encourage insurers to draft policies carefully and to act fairly in strictly enforcing policy terms. The ALRC reported that, in light of the proposed section 14, it was unnecessary for insurance contracts to be subject to a facility for judicial review of unfair contractual terms.98 The risk of differences in such laws between jurisdictions causing difficulties was noted.99
6.6 The Issues Paper included an invitation to comment on whether it was appropriate for the restriction in section 15 of the IC Act to be retained and, if so, whether there were any remedies under other laws whose use should be similarly restricted in the context of insurance contracts.
6.7 Submissions were starkly divided on the ongoing need for section 15 with strongly held views being expressed both in favour and against its retention.
6.8 Those against its retention argue that:
- insurance contracts are not so different from all other contracts that they should be immune from the general law regarding unfair contracts;
- the duty of utmost good faith in sections 13 and 14 has not been sufficient to encourage insurers to act fairly in drafting policies and enforcing their terms; and
- the provisions in sections 13 and 14 and the dispute resolution bodies interpreting them can only assist individual consumers — they cannot address systemic issues and indications are that there are systemic problems with unfair terms in insurance contracts.
6.9 Those in favour of its retention unaltered argue that:
- insurance contracts are not ‘immune’ from general consumer protection avenues — rather they are dealt with under specific legislation which takes account of the complexities of insurance contracts and the fact that liability is reinsured, often on an overseas market, and re-insurers will not necessarily be bound by Australian judicial review;
- insureds have adequate protection arising from the duty of utmost good faith in sections 13 and 14 and although the use of those provisions has been limited, the response should be to encourage their use, not make available a multitude of other remedies;
- external dispute resolution bodies provide a low cost and speedy means of resolving disputes in the insurance contracts framework — it is undesirable to encourage use of litigation.
6.10 One submission strongly opposed alteration of section 15 but noted that, if any change were to be made, it should be confined to mass personal (consumer) risks. The submission argued that allowing a court to re–write commercial insurance contracts would ‘wreak utter havoc’ in the commercial insurance environment.
6.11 One of the dispute resolution bodies suggested that this is a complex issue that should be deferred.
6.12 Following the release of the Proposals Paper the Consumers’ Federation of Australia questioned the argument that section 15 be retained because of concerns about re-insurance and complexity:
‘With respect, in relation to consumer contracts, this is a matter to be resolved between insurers and their re-insurers. What is of concern to individual consumers is the right to remedies in the event of unfair or unconscionable conduct by insurers.
Similar issues arise in the context of consumer mortgages, however, the financial services industry has not sought, (and nor would it obtain) exemption from such basic consumer protection principles as statutory unconscionability etc.
The Proposals Paper also notes that the complexities of insurance contracts have been suggested as a reason for the retention of section 15. However, it might equally be argued that other products (for example, superannuation products) have the same level of complexity or otherwise of insurance products does not seem to be an adequate reason to retain section 15.’ 100
6.13 The Standing Committee of Officials of Consumer Affairs (SCOCA) has appointed a Working Party to review the issue of unfair contract terms generally. The Working Party’s comprehensive discussion paper101 has been developed with a view to investigating the need for nationally consistent regulation of unfair contract terms. It includes consideration of such issues as whether business to business transactions, including insurance contracts, should be excluded from the scope of any national model.
6.14 The Review Panel considers that the arguments are finely balanced. The ALRC’s concerns about the application of the laws of different jurisdictions are still valid. Similarly, the concerns about the potential for judicial review of insurance contracts to re-open carefully negotiated commercial arrangements after the event are well-founded. If a nationally consistent model for review of consumer unfair contracts is developed, the balance of consideration may shift and the issue should be revisited.
6.15 The Review Panel considers that the consequences of repealing section 15 are too uncertain to warrant taking that step. However, the Review Panel believes section 14 warrants consideration. Section 14 applies where reliance ‘on a provision of the contract of insurance would be to fail to act with the utmost good faith …’ (emphasis added). The Review Panel considers that section 14 should be amplified so that it applies in other circumstances. For example, it could provide relief where an insurer has failed to provide notice as required under subsection 40(2) or the proposed amendments to section 40. The section should also reflect clearly the fact that the rights and obligations of the parties are subject to a range of ‘provisions’ in the IC Act, whether they be by way of express terms of the contract or otherwise. This would include implied terms of the contract, or by way of operation of law.
6.16 The Review Panel believes that sections 13 and 14 of the IC Act, relating to the duty of utmost good faith, have potential to be utilised by insureds in connection with insurer conduct that might otherwise be dealt with under statutes dealing with unfair contracts or unconscionable conduct. This capacity will be enhanced further if the Review Panel’s proposal for treating a breach of the duty of utmost good faith in Chapter 1 is adopted.
6.17 Under section 57 of the IC Act, an insurer who has unreasonably withheld payment of money to a person under a contract of insurance may be liable to pay interest to that person at the rate prescribed in the regulations (currently calculated under a formula that is based on 3 per cent above the Treasury 10 year bond rate).102
6.18 The Issues Paper noted the following comments about interest:
- the interest rate should be increased as currently there is no incentive to insurers to finalise claims; and
- the application of section 57 is difficult because it is only payable to a person where there has been an ‘unreasonable’ withholding of moneys.
6.19 One suggestion is that the allowable delay should be 21 days, subject to adjustment for:
- any consumer induced delay; or
- a delay which the insurer could establish was reasonable in the particular circumstances.
6.20 Unreasonable delay on the part of an insurer in paying claims could amount to a breach of the duty of utmost good faith in section 13 of the IC Act. In such a case it may be that the insured, in addition to receiving statutory interest under section 57, could seek to claim for compound interest for the period the insured was denied access to the monies, pursuant to principles in Hungerfords case.103 However, the law on whether such a claim is permissible under the IC Act is not finally settled.104
6.21 Another possible measure to address issues of unreasonable delay is the award of punitive or exemplary damages in tort, which has occurred in some jurisdictions, in cases where insurers act unreasonably in settling claims. The ALRC in its review of insurance contracts expressly rejected introducing a tort of bad faith in Australia. The ALRC considered that assessment of damages for breaching the duty of good faith should be based on ordinary contractual principles. This would encompass the recovery of damages for losses suffered as a result of the breach of duty — but not punitive or exemplary damages.105
6.22 The Issues Paper included a request for submissions on whether the current interest rate in section 57 was appropriate. Further submissions were sought on whether the IC Act should expressly make available, in addition to the section 57 interest, compound interest and/or punitive or exemplary damages or damages in tort for consequential loss arising from unreasonably late payment.
6.23 In respect of the first issue, some submissions in favour of a rate rise for unreasonably withheld payments noted that it would encourage prompt payment by insurers. Some submissions opposed a rate rise, noting that the issue is not one of incentive — often payments are delayed for reasons beyond the control of the insurer. One submission included an observation that insurers do not generally charge interest on late premiums, but also noted that in this area there could be different considerations between commercial and mass market risks.
6.24 In respect of the compound interest issue, views in submissions differ on whether compound interest is currently available and, if the position were clarified, whether it should be ruled in or out. This question turns upon whether section 57 should operate as a complete code for interest in the event of unreasonably withheld payment. It is arguable that subsections 57(4) and (5), to the effect that section 57 prevails over all other laws, show that section 57 is supposed to amount to a code. However, a number of courts have found a distinction between, on the one hand, interest on unpaid monies (which is dealt with in section 57) and damages for the loss of the use of money, which may exceed the opportunity or borrowing costs.106
6.25 As regards the availability of exemplary/punitive damages or damages for consequential loss in tort, the balance of opinion in submissions was that there was no need for any specific provision.
6.26 Other suggestions were that:
- there should be a requirement that insurers notify insureds of their entitlement to interest on unreasonably withheld payments; and
- an increased rate could be made payable only in specified circumstances, for example, where there are consequential losses and dispute resolution bodies could be responsible for determining when the increased rate applies.
6.27 The Review Panel considers that there is a distinction to be made between the right to interest under section 57 that applies in cases of unreasonably late payment and the other forms of compensation that have been discussed. The section 57 interest entitlement would be likely to dissuade insurers denying a claim in bad faith or otherwise engaging in wrongful conduct, such as unreasonably refusing to accept a settlement offer.
6.28 The Review Panel therefore considers that section 57 is appropriate. The alternative of prescribing a certain number of days from the date a claim is made, for example, as the date from which interest is payable is not appropriate because of the wide variation in the types of policies, claims and circumstances. The ‘unreasonable’ formulation in section 57 allows those variations to be considered, including such matters as delay on the part of the insured.
6.29 As to the rate, the Review Panel considers that there is a case for an increase. The rate prescribed under regulation 32 of the Insurance Contracts Regulations is 3 per cent above the 10 year Treasury bond rate, which would not necessarily be sufficient to reimburse insureds for the cost of alternative funds if they needed to be obtained on an unsecured basis. In the view of the Review Panel, a rate slightly above the expected rate an insured would pay for alternative funds would act as the ‘incentive’ for insurers to process claims in a reasonable time frame. The Review Panel suggests that a figure of 5 per cent above the Treasury 10 year bond rate would be more appropriate than the current figure of 3 per cent.
6.30 The Review Panel does not agree with the suggestion that insurers should be required to notify insureds of their statutory rights to interest under section 57. The costs of making a mandatory disclosure to all insureds as part of the pre-contract disclosure, or requiring new mandatory notification to be sent to all persons lodging a claim, outweigh the benefits.
6.31 In relation to the issues of the availability of additional remedies (Hungerford’s type damages, exemplary or punitive damages or damages for consequential loss in tort) against insurers regarding late payment, the Review Panel does not consider that a sufficient case has been made to either expressly make those remedies available, or expressly rule them out. Where there is, for example, consequential loss arising from the failure to pay a claim within a reasonable period, the use of section 13 by an insured in those circumstances may provide a suitable remedy in damages. In light of those considerations, the Review Panel does not make any recommendations concerning those issues.
98 Such as those found in, for example, the Contracts Review Act 1980 (NSW).
99 Australian Law Reform Commission 1982, Insurance Contracts, ALRC 20, AGPS, Canberra, paragraph 51.
100 See submission on the Proposals Paper by the Consumers’ Federation of Australia dated June 2004.
101 Standing Committee
of Officials of Consumer Affairs — Unfair Contract Terms Working Party
2004, Unfair Contract Terms: A Discussion Paper, available at: http://www.fairtrading.qld.gov.au/oft/oftweb.nsf/web+pages/
102 Regulation 32 of the Insurance Contracts Regulations 1985.
103 Hungerfords v Walker (1989) 171 CLR 125.
104 Godfrey, K. ‘The duty of utmost good faith — the great unknown of modern insurance law’, (2002) 14 Insurance Law Journal 56 at 59.
105 Australian Law Reform Commission 1982, Insurance Contracts, ALRC 20, AGPS, Canberra at paragraph 328.
106 Mann, P, Annotated Insurance Contracts Act, 3rd Ed, Law Book Company, 2001, at page 219.
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