Final Report on second stage: provision other than section 54
10.1 There are a number of issues regarding persons who are not party to an insurance contract, but are beneficiaries of the insurance cover provided in it (third party beneficiaries).
10.2 The Consumers’ Federation of Australia believes that third party beneficiaries should have the same access to the IC Act as an insured, as well as access to dispute resolution bodies such as Insurance Enquiries & Complaints Limited.174
10.3 Others, however, submit that a third party should be able to access some but not all provisions of the IC Act. For example, Phillips Fox submitted that where an insurer has an obligation to inform an insured of some matter under sections 22, 35, 37, 39 and 44, for example, ‘the insurer’s obligations should be treated as discharged if the notice is given to the insured without it being given to any third party beneficiaries. On the other hand, where the IC Act requires the insured to give a notice, for example notice of facts that might give rise to a claim pursuant to section 40(3), it is submitted that third party beneficiaries should be treated as though they were insured for the purposes of sections 65, 66 and 67’ (which deal with subrogation).175
10.4 Extending the IC Act to third party beneficiaries has received support, see for example, the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd;176 Mahoney JA in C E Heath Casualty & General Insurance Ltd v Grey in relation to the obligation of good faith;177 and Bryson J in Sayseng v Kellogg Superannuation P/L where his Honour held that ‘a person other than a contracting party to the policy may have standing to challenge the effectiveness of an opinion formed by an insurer’.178
10.5 The Review Panel agrees with the view that third party beneficiaries should have access to the IC Act to the following extent:
- the same rights and obligations as an insured for the purposes of subrogation;
- the duty of utmost good faith (but not pre-contractually);179 and
- where the IC Act allows the insured to give notice, for example, pursuant to subsection 40(3) or section 74.
10.6 Further, third party beneficiaries should have recourse to dispute resolution bodies. It is not necessary for most purposes to amend the IC Act to achieve this. This is because it can be implemented by other means, for example, through a code.180 The exception may be the possible need to amend the Superannuation (Resolution of Complaints) Act 1993 so as to allow third parties access to the Superannuation Complaints Tribunal).
10.7 Pursuant to section 48 of the IC Act, a person who is not a party to a contract of general insurance, but who is specified as being covered by the policy, has the right to recover from the insurer an amount for loss suffered. Subsection 48(2) provides, inter alia, that such a person has the same obligations to the insurer as if they were the insured,181 and pursuant to subsection 48(3) ’the insurer has the same defences to an action under this section as the insurer would have in an action by the insured’.
10.8 There is a divergence of judicial interpretation as to the meaning of subsection 48(3) and this is causing concern for some stakeholders.182
‘The competing views are that the words “the same defences” in the subsection mean (a) that the identical defences available against the assured can be used against the third party; or (b) that defences similar in kind to that which can be used against the assured are available against the third party, provided that they have arisen out of the conduct of the third party and not out of the conduct of the assured.’183
10.9 In other words, under one view the non-party claimants are not tainted by the actions of the insured while under the other view they are. It has been suggested that the obligations of third party beneficiaries need to be clarified.
10.10 Further, the courts have also distinguished between pre-contractual breaches and post contractual breaches in interpreting section 48. Giles J. in Commonwealth Bank of Australia v Baltica General Insurance Co Limited held that an insurer can rely on non-disclosure by the insured as a defence to a non-party’s claim.184
10.11 The Explanatory Memorandum to the Insurance Contracts Bill 1984 does not resolve this point merely saying ‘… the insurer has the same defences as if that person were the insured.’185
10.12 Muir J in General Motors Acceptance Corporation Australia v RACQ Insurance Limited held that the right of a third party to recover under a contract of insurance is ‘in accordance with the contract’.186 This being so, Phillips Fox submits that:
‘… it is for the drafter of the insurance policy to make it clear in the policy what those rights are and in particular what is the position of the third party beneficiary when there has been a breach by the insured and what is the position of the third party beneficiary when there has been a breach by the third party beneficiary by himself or herself. Any clarification should reinforce this interpretation.
We submit that there should be a provision that in the absence of a provision to the contrary there should be a presumption that a wilful act or breach by the insured shall prejudice the rights of an innocent third party beneficiary. This will emphasise the difference between being a co-insured and being a third party beneficiary.’187
10.13 The Review Panel considers that a third party should be in no better position than the insured. It would be odd if a third party could be in a better position than the insured when making a claim given that the insurer has contracted on the basis of the insured’s disclosure and the terms of the insurance contract entered into with the insured. If the insurer has genuine grounds for relief for non-disclosure, for misrepresentation or a breach of the insurance contract, its rights should not be reduced because the claim under the policy is being made by a third party, unless there is specific recognition of this in the contract.
10.14 Another question raised in the Issues Paper was whether ‘persons’ referred to in section 48 should be limited to existing beneficiaries at the time the contract was entered into. Submissions received on this issue said that section 48 should not be limited as to do so would severely limit the ability of new third party beneficiaries to bring an action directly against an insurer. And there are few avenues open to such beneficiaries, for example under agency or trust law, or in limited cases under State legislation such as section 55 of the Property Law Act 1974 (Qld) (which is about contracts for the benefit of third parties).
10.15 Further, it was submitted that to limit section 48 to existing beneficiaries at the time the contract was entered into would ‘undermine the efficacy of many forms of policy. For example, when contract work insurance is taken out either by a principal or by a head contractor, it is usually not known who the subcontractors will be. It is important that it be made clear at the outset that those will be entitled to the benefits of section 48’.188 Further, this would cause hardship where the class was closed off.189
10.16 The Review Panel agree with these comments but also agree with the view that this issue can be resolved by ensuring that a contract of insurance is drawn sufficiently widely so that it is not limited to existing beneficiaries at the time the contract is entered into.190
10.17 Section 48A of the IC Act is very similar to section 48 except that it applies to contracts of life insurance rather than contracts of general insurance and the wording used is a little different. However, there are differences, for example, section 48A is not as wide as section 48. This is because section 48A refers to third parties that are ‘specified in the contract’ whereas section 48 refers to persons who are ‘not a party to the contract.’191
10.18 Under section 48A of the IC Act the third party has the right to any money that ‘becomes payable.’ Concern was raised in the preliminary submissions prior to the release of the Issues Paper that, if the insurer decides not to pay a benefit, there is no statutory right available to the third party to recover the proceeds payable in accordance with the contract.192
10.19 Submissions received following the release of the Issues Paper have supported the view that third parties should have a right to proceed directly against the insurer and that it should not be the case that due to technicalities in the law the third party must obtain an order that the policy owner enforce the payment on their behalf.193
10.20 The late Professor Sutton believed that a beneficiary ‘has a direct right of action against the insurer to enforce her or his entitlement under the contract, for the money is said to be payable even though the beneficiary is not a party to the contract, but there is no specific reference to this right of action as there was in the former s48(2)’.194
10.21 The Investment & Financial Services Association Limited (IFSA) further submits that section 48A of the IC Act should be expanded so that a life insured can be nominated as a third party beneficiary. This ‘would be consistent with section 48 and give clients maximum flexibility to nominate third party beneficiaries without restriction of it having to be someone other than the life insured’.195 Currently section 48A excludes the life insured from being a beneficiary. IFSA also argues that it would be preferable for the nominated beneficiary to be able to give a legally binding discharge on the payment of the policy proceeds. Thus, the life insurer would be entitled to pay the proceeds of a life policy to a beneficiary direct as it has become legally entitled to the benefit and can discharge the policy.
10.22 The Review Panel accepts these propositions and agrees that a third party who is entitled under a life insurance policy can bring such an action,196 and that section 48A of the IC Act should be expanded so that the life insured can be nominated as a third party beneficiary and any third party beneficiary is able to provide a valid discharge to the insurer.
10.23 Under section 51 of the IC Act, a third party to a contract of insurance has the right to recover against an insurer where the insured has died or cannot, after reasonable enquiry, be found.
10.24 A number of submissions concerning different aspects of section 51 were received from stakeholders. In relation to where the insured has died or cannot be found, the following views were put.
- Section 51 should be expanded to give rights against an insurer under a claims made policy when the claim is made after the insured has died or cannot be found.197
- Section 51 ‘needs to be extended to cover the case where the insured is alive and can be found but where the third party cannot recover under execution of a judgment obtained against the insured, that is, when execution is returned with a nulla bona endorsement.198 In support of that, the insured should be required by the statute to provide details of relevant policies held’.199
- Section 51 should be expanded so that it applies when a section 48 party is liable and cannot after reasonable inquiry be found. Currently, section 51 only refers to the right to recover against an insurer when it is the insured who is liable in damages to a third party. It does not give a remedy when the liability is that of a person entitled to the benefit of the policy by application of section 48 of the IC Act.200
- Section 51 does not need expanding so that its remedies are available to claimants in other situations. This is because section 51 ‘reflects similar provisions in the area of third party motor vehicle insurance legislation across the States and Territories. Payment by the insurer to the third party discharges its liability under the contract as well as the insured’s liability to the third party.’ And further, with the enactment of section 601AG of the of the Corporations Act 2001 the rights of third parties has been sufficiently extended where the insured is a company.201 Section 601AG provides that in certain circumstances a person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract.202
10.25 It has also been suggested that section 51 of the IC Act should expressly override section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and its State and Territory equivalents.203 Section 6 concerns insurance and provides for:
- funds payable under indemnity policies to be subject to a statutory charge; and
- third party claimants to enforce the charge directly against insurers.
The section includes special provisions dealing with insolvent companies and there are carve outs for compulsory insurance schemes.
10.26 The Review Panel notes that rules in section 51 of the IC Act, section 46 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and its State and Territory equivalents, sections 562 and 601AG of the Corporations Act 2001 and section 117 of the Bankruptcy Act 1966 all deal with similar issues in different contexts and they may, in some cases, overlap with each other.
10.27 The Review Panel considers the interaction of section 51 of the IC Act and the related provisions should be revised and any necessary amendments made to ensure consistent operation. Further, it should address situations in which:
- the insured under a liability policy is alive and can be found but where the third party cannot recover under execution of a judgment obtained against the insured, that is, when execution is returned with a nulla bona endorsement; and
- a section 48 party (that is, a person who is not the insured but is specified or referred to in the contract as being covered under section 48 of the IC Act) liable and cannot after reasonable inquiry be found.
10.28 The Review Panel does not propose that section 51 is expanded to give rights against an insurer under a claims made policy when the claim is made after the insured has died or cannot be found. This is because it already applies to liability insurance and thus claims made policies.
10.29 Section 32 of the IC Act extends the remedies available to an insurer under Division 3 of Part IV to situations where there has been a failure to comply with the duty of disclosure or where there has been a misrepresentation to an insurer under a blanket superannuation contract in respect of a proposed member of the relevant superannuation or retirement scheme.
10.30 Paragraph 32(b) is designed to overcome the difficulty that group contracts are usually entered into before the member joins them, so remedies that deal with non-disclosure and misrepresentation before the contract is entered into, such as subsection 29(1), would not operate in the usual way. Paragraph 32(b) addresses that problem by providing that the disclosure and misrepresentation provisions in such cases operate as if the contract had been entered into when the member joins the scheme.
10.31 Comment has been made that it is unclear how section 32 applies to non-disclosure and misrepresentation that occurs after the person has joined the superannuation scheme but before cover is effected on their life. It has been suggested that the operation of paragraph 32(b), which deems the insurance contract to come into effect when the member joins the scheme, might have the outcome that no disclosure or misrepresentation made after joining the scheme could be relied upon because the remedies under subsection 29(1) only apply to statements made ‘before the contract is entered into’. It has been suggested that the remedies for non-disclosure and misrepresentation should be available regardless of whether a person is a member of the scheme when they apply for the cover. In submissions on the Issues Paper there was some support, and no opposition, in relation to this proposal.
10.32 It has also been suggested that section 32 should be extended to encompass non-superannuation group scheme arrangements, such as employer and industry schemes. A number of submissions noted there has been a growth in the Australian market of non-superannuation group scheme products which had not been in contemplation when the IC Act was devised. Most stakeholders submitted that there does not appear to be a logical reason to treat non-superannuation group schemes differently from superannuation group schemes in this respect.
174 See submission on the Issues Paper by Consumers’ Federation of Australia.
175 Submission on the Issues Paper from Phillips Fox dated 21 April 2004 at page 26.
176 (1988) 165 CLR 107, applied in Tanevski v Trenwick International Limited (2004) 13 ANZ Ins Cas 61-587.
177 CE Heath Casualty & General Insurance ltd v Grey (1993) 32 NSWLR 25.
178 Sayseng v Kellogg Superannuation P/L  NSWSC 945 (13 November 2003) at paragraph 79.
179 In its submission on the Proposals Paper, the National Insurance Brokers Association of Australia (NIBA) submitted that the duty of utmost good faith should be limited to the management of claims. It was concerned that the duty might be intended to cover pre-contractual matters, most especially non-disclosure. The Review Panel believes that in these circumstances the duty of utmost good faith should commence once the contract takes effect.
In relation to the question of whether section 13 of the IC Act should apply to third parties, many of the submissions on the Issues Paper answered it in the positive... NIBA considered that ‘the application of section 13 to post contractual matters is already contemplated by s48 and could usefully be made explicit. It is impractical to seek to apply it to pre-contractual matters including, in particular, the duty of disclosure’. The Insurance Council of Australia stated that ‘since there is no contract between the third party and the insurer, the duty of utmost good faith must be expressed as a statutory duty rather than an implied contractual duty’ (see ICA submission on the Issues Paper at page 36).
180 For example the Insurance Council of Australia Limited state in their June 2004 submission that ‘recourse to dispute resolution bodies is not provided by the IC Act. The dispute resolution scheme for insureds involves systems of internal dispute resolution and external dispute resolution (for example through Insurance Enquiries and Complaints Limited)’.
181 However, the duty of disclosure obligations under section 21 of the IC Act do not apply to third party beneficiaries as they are not a party to the contract, see Carden v CE Heath Casualty and General Insurance Ltd (1992) 32 NSWLR 25.
182 See for example, VL Credits Pty Ltd v Switzerland General Insurance Co Ltd  VR 938; CE Heath Casualty & General Insurance Limited v Grey (1993) 32 NSWLR 25; Commonwealth Bank of Australia v Baltica General Insurance Co Ltd (1992) 28 NSWLR 579; Barroora Pty Ltd v Provincial Insurance (Australia) Limited (1992) 26 NSWLR 170; General Motors Acceptance Corporation Australia v RACQ Insurance Ltd (2003) 12 ANZ Ins Cas 61-574.
183 Sutton, K. 1999, Insurance Law in Australia, 3rd edn, LBC Information Services, Sydney, page 113. See also Fotheringham, Michael, ‘The insurance contract — time for reform of section 48’ (2000) 11 Insurance Law Journal 127.
184 (1992) 28 NSWLR 579.
185 Australia, Parliament, 1984, House of Representatives, Insurance Contracts Bill 1984, Explanatory Memorandum at page 71.
186 General Motors Acceptance Corporation Australia v RACQ Insurance Ltd (2003) 12 ANZ Ins Cas 61-574 at .
187 See submission by Phillips Fox dated 21 April 2004.
188 See submission by Phillips Fox dated 21 April 2004.
189 See submission by Insurance Enquiries and Complaints Limited Panel dated 21 April 2004.
190 See submissions on the Issues Paper from the Insurance Council of Australia Limited dated April 2004, and from the National Insurance Brokers Association of Australia.
191 See submission by the Consumers’ Federation of Australia dated June 2004.
192 This was said to be because the life insured must bring an action against the policy owner seeking an order that the policy owner enforces the payment of the policy proceeds on behalf of the insured. A life insured might then be deprived of access to external dispute resolution schemes on the basis that the dispute is not with the member of the scheme (that is, the insurer) but with the owner of the policy. In practice, however, it has been said that the real issue is with the insurer not the policy owner and it may be that the technicalities of the right to bring an action to enforce the contract directly against the insurer are not considered in any great depth: see preliminary submission by Banking and Financial Services Ombudsman Limited, dated 5 February 2004.
193 See submissions by Phillips Fox dated 21 April 2004; and the Law Council of Australia dated 27 April 2004.
194 Sutton, K. 1999, Insurance Law in Australia, 3rd edn, LBC Information Services, Sydney, page 125. Section 48A of the IC Act was added to the IC Act by the Life Insurance (Consequential Amendment) Act 1995 (No 5 of 1995) replacing subsections 48(4) and (5) (whose operation was narrower). See also submission by Investment & Financial Services Association Limited, dated 19 April 2004.
195 See submission by Investment & Financial Services Association Limited dated 19 April 2004.
196 In its June 2004 submission on the Proposals Paper, the Consumers’ Federation of Australia argued that section 48A of the IC Act should be amended so that it would extend to beneficiaries under policies like group life. Recommendation 10.3 could read: ‘section 48A of the IC Act should be amended so that it a third party specified or referred to in the contract, whether by name or otherwise, can bring an action against an insurer without the intervention of the policy owner.’
197 See submission by Phillips Fox dated 21 April 2004.
198 A nulla bona endorsement literally means “no goods” and refers to the return made by the sheriff when he has not found any goods of a defendant in the jurisdiction from which a judgment could be satisfied.
199 See submission on the Issues Paper by The Hon Dr D. Derrington QC.
200 See submission by Phillips Fox dated 21 April 2004. relying on Ripper v Gattenby (2002) 10 Tas R 435; (2002) 12 ANZ Ins Cas 61-532. See also Sutton, K. ‘Section 51 of the Insurance Contracts Act’ (2002) 30 Australia Business Law Review 453.
201 See submission by the Insurance Council of Australia Limited dated April 2004.
202 It has also been argued that section 601AG of the Corporations Act 2001 should be incorporated into section 51 of the IC Act. See for example, Drummond, S. ‘Direct claims against liability insurers – section 601AG and ideas for further reform’ (1999) 10 Insurance Law Journal 186. However, the Review Panel believes that this issue is beyond the scope of its terms of reference, it being a Corporations Act issue.
203 The object of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) is to, amongst other things, make certain provisions in relation to actions of tort and in relation to rights against third parties and to make certain provisions in relation to changes upon insurance moneys payable as indemnity for liability to pay damages or compensation. See Drummond, S.W. and P Mann, ‘Abolish section 6’ (1997) Insurance Law Journal 76.
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