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 9: Innocent co-insureds

9.1 Some stakeholders have expressed concerns about outcomes in cases where a party who has a joint insurance contract with a co-insured is denied a claim because of a wilful act or other breach by their co-insured.

9.2 At common law, a joint insurance policy means the co-insureds are indemnified in respect of a joint loss. Such a policy is different from a composite insurance policy, which is a single contract that embodies insurance in favour of more than one insured, whose interests are different. Under a composite contract each insured can have a separate and distinct claim. Whether a contract of insurance is joint or composite is not always obvious on its face. It is determined by reference to the intentions of the parties as ascertained from the policy terms and surrounding circumstances.165 The IC Act does not distinguish between insureds under joint and composite policies.

9.3 In the case of spouses holding joint tenancy in a dwelling it is usual to be covered under a joint contract of insurance. There have been a number of cases involving wilful acts (for example, arson by one of the parties) which have led courts to consider whether such a policy is joint or composite. Under the ‘traditional’ approach to joint insurance of jointly owned property, the wrongdoing of one co-insured will preclude a claim by the other and no express wording in the policy to that effect is required for that to be the result. A rationale for such an approach is that all parties elected to treat the interests of the co-insureds as one under the contract, so it follows that an act or omission by one of them should affect both. To allow a claim in relation to jointly held property to succeed would allow the party in default to indirectly benefit.166

9.4 Some decisions in other jurisdictions have taken a different approach to the question of joint or composite insurance in such cases. For example, in Maulder v National Insurance Co of New Zealand Ltd,167 a case involving a husband deliberately destroying a house by fire, the court noted that the ‘traditional’ approach which focused on the nature of the property interests at the time the insurance contract was entered into failed to take into account the reality of modern spousal relationships and the fact that they can alter rapidly. The court expressed the view that insurers should be taken to know that the categorisation of property as ‘joint’ in the context of a spousal relationship is meaningless, and if the insurer wished to prevent an innocent party from recovering for loss due to breach by a co-insured, the policy would need to have clear language included to that effect. The court found that the insurance policy was a composite one and each insured had cover for their respective interests in the property. This type of approach to innocent co-insured cases has been coined a ‘socially realistic’ approach, as opposed to the traditional approach.168

9.5 The issue of an innocent co-insured being disadvantaged also arises in the context of misrepresentation or non-disclosure by a co-insured. In these situations, sections 21 and 28 of the IC Act are likely to come into play. In Advance (N.S.W.) Insurance Agencies Pty. Limited v Matthews169 the High Court found that, where there is more than one insured party, the duty of disclosure under the section 21 of the IC Act extends to all of them, and similarly the references to ‘the person who became the insured’ in section 28 also means each of the co-insured. Accordingly, a fraudulent non-disclosure or misrepresentation by one of the co-insureds under section 28 will allow the insurer to avoid the contract, even though another co-insured had no knowledge of the breach. The court rejected the argument that adopting this construction would lead to injustice for the innocent co-insured. Rather, the court noted that it would be inherently unjust to allow a guilty party to compel performance by the insurer. The court also found that whether the contract is joint or composite is irrelevant in this context, noting that even in a composite contract, some obligations are joint.170

9.6 Circumstances involving innocent co-insureds raise some complex issues, including some involving social policy. However, for purposes including the scoping of further work, the Issues Paper included an invitation to comment on:

  • whether the IC Act should expressly refer to joint and composite policies and, if so, whether contracts involving more than one insured should be required to nominate which form they take;
  • whether there should be mandatory disclosure in respect of the risks of entering a contract with co-insureds; and
  • any other measures that should be taken into account in relation to co-insureds.

9.7 A number of submissions were made on these issues. There was not significant comment on the notions of joint and composite insurance, except to note that where there is more than one person covered by life insurance, it is always a joint policy and for practical reasons would be likely to remain so. There was some support for mandating more disclosure about the risks associated with co-insurance but it was noted that further work would be required on what the form of the disclosure should take.

9.8 As to other suggestions, there was some support for a discretion on the part of the court (similar to the discretion where minor fraud is involved) to offer a means of providing justice in those cases. However, others opposed such a measure on the grounds that it is unrealistic to expect an insurance policy to deliver social justice. There was a view that it should be the policy, as negotiated with the insurer, that determines liability and to impose liability through legislation could have a significant impact on premiums in some policy classes because of the difficulty involved in adequately pricing the risk of a deliberate act on the part of one of the insured parties. The Review Panel notes that comparable arguments could be applicable in relation to the court’s power to disregard avoidance under existing section 31.

9.9 Following the release of the Proposals Paper the Women’s Legal Service Victoria suggested that:

    ‘… at a minimum, an overriding discretion on the part of the court to ensure justice is provided in cases where an innocent co-insured seeks to make a claim after deliberate act by the other insured. However, we wonder whether greater clarity could be achieved, by also introducing a legislative provision to the effect that, upon separation, joint insurance policies are deemed to be composite policies. In our view, this would need to be additional to the court’s discretion, rather than in substitution for it, to ensure that insureds parties who had not yet separated or could not prove separation could also be protected where justice so dictated ‘.171

9.10 The Review Panel believes that there is merit in the suggestion of a court discretion to deal with cases of innocent co-insureds. However, it accepts the argument that to introduce such a discretion may affect the insurance risk and the cost and availability of insurance. To determine whether the effect would be significant, and whether the benefits would outweigh the costs, would ideally involve analysis of data concerning claims by innocent co-insureds that are, or could be, denied on the grounds of some default on the part of a ‘guilty’ co-insured. No such data is currently available.172

9.11 The issue of innocent co-insureds raises complex interactions of legal, economic and social policy considerations. Denial of claims by innocent co-insureds will be a recurring source of criticism of insurers and the insurance industry generally unless it is demonstrated that no change to the current position is justified. Although it may take some time to compile sufficient relevant data for analysis, the Review Panel believes that it is in the interests of both insurers and insureds for this to occur. The Review Panel encourages industry peak bodies to assist in organising collection of the data to inform future review of this issue in a suitable forum.173

165 Sutton, K. 1999, Insurance Law in Australia, 3rd edn, LBC Information Services, Sydney at paragraph 3.147.

166 An example of a court applying the traditional approach is found in MMI General Insurance v Baktoo [2000] NSWCA 70.

167 [1993] 2 NZLR 351, discussed in Sutton, K. 1999 Insurance Law in Australia, 3rd edn, LBC Information Services, Sydney at paragraph 3.151.

168 See Holmes v GRE Insurance Ltd [1988] Tas R 147.

169 (1989) 166 CLR 606.

170 (1989) 166 CLR 606 at 619.

171 See submission by the Women’s Legal Service Victoria dated 16 June 2004.

172 The Insurance Council of Australia Limited (ICA) advised that it is ‘presently discussing with APRA the need for publication of underwriting data collected at a unit record level, that does not compromise the commercially sensitive nature of some such data.’ See the ICA submission dated June 2004.

173 Both the Law Council of Australia and the Consumers’ Federation of Australia suggested that the issue of innocent co-insureds should be referred to the Australian Law Reform Commission (see submissions on the Issues Paper).


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