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

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Consultation Draft - Section 54


Insurance Contracts Amendment Bill 2004
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Dear Stakeholder

INSURANCE CONTRACTS AMENDMENT BILL

We refer to the report of the review of section 54 of the Insurance Contracts Act 1984 (IC Act), which was delivered to the Government on 31 October 2003 and released publicly on 18 November 2003. The Government has now accepted the recommendations made in the report.

The report recommended that amendments be made to the IC Act to address problems that judicial interpretation of section 54 has caused for indemnity insurance classes. The recommendations aim to maintain a balance between the interests of insureds, insurers and third party claimants.

Given the complexity of the issues surrounding section 54, which are not confined to that section alone, we are seeking your comments on the proposed legislative amendments set out in the attached draft Insurance Contracts Amendment Bill (a brief commentary on the draft law is also attached). This consultation process provides you, or your organisation, as a stakeholder in the review of the IC Act process, with an opportunity to express your views on how the proposed amendments to the IC Act will affect the interests of insureds, insurers and third party claimants. While the result of consultation will not always be a consensus position, we will consider the views of all participants in attempting to balance these interests. Ultimately, however, Parliament will decide the wording of the law.

In considering the draft Bill, you may wish to address the following questions.

  • Is the draft Bill consistent with the recommendations made in the report into section 54?
  • Do you think there is a need to define what a ‘claim’ is? If so, how should it be defined?
  • Is there a need for greater prescription in regard to the disclosure obligations under section 40?
  • Should the amended section 54A extend to any other types of policies? If so, why?

We ask that you provide your comments on the draft Bill to the ICA Review Secretariat by no later than 16 April 2004. All comments will be treated as public unless the author indicates to the contrary. Public comments will be published on the review’s website at icareview.treasury.gov.au.

Would you please send comments to:

The Secretary
Insurance Contracts Act Review Secretariat
Department of Treasury
Langton Crescent
CANBERRA ACT 2600

or e-mail: icareview@treasury.gov.au

Alan Cameron A.M. Nancy Milne

 


COMMENTARY ON THE POSSIBLE AMENDMENTS TO SECTIONS 54 AND 40 OF THE INSURANCE CONTRACTS ACT 1984 (IC ACT)

Background

1.1 In light of suggestions that the operation of section 54 of the IC Act was having a negative impact upon the affordability and availability of indemnity insurance in Australia, the Government commissioned a Review of that section (see the Minister for Revenue and Assistant Treasurer and Parliamentary Secretary to the Treasurer’s joint press release No C087/03 of 10 September 2003).

1.2 A report into the operation of section 54 of the IC Act was provided to the Government on 31 October 2003 and released publicly on 18 November 2003. Based on the recommendations of the report, draft amendments to section 54 and section 40 have now been prepared.

Possible Amendments

1.3 Possible amendments to subsection 40(2) of the IC Act are as follows.

  • Insurers would be required to notify insureds (both at the start of a policy and upon renewal) of the effect of subsection 40(3) of the IC Act.
    • Subsection 40(3) provides a statutory right for insureds in relation to liability contracts. If an insured notifies their insurer of facts that might give rise to a claim before the liability policy expires, subsection 40(3) ensures that the insurer must cover the insured for any claims that arise from those notified facts.
  • To satisfy this proposed requirement, the notification must occur no earlier then 30 days before the contract expires and no later then 7 days before the contract expires.

1.4 Possible amendments to subsection 40(3) of the IC Act are as follows.

  • When notifying facts that might give rise to a claim, an insured would be allowed an extended reporting period.
    • That is, so long as the insured notified their insurer of facts within 45 days after the contract expired (on the condition that the facts actually occurred within the policy period) then the insurer would be obliged to cover the insured for any claim that arose from those facts.
    • The requirement that the notification of facts occur as soon as reasonably practicable after the insured became aware of them, still applies in relation to the extended reporting period.

1.5 It is proposed that a new section 54A, applying only to claims made and notified policies, could be created which would:

  • ensure that section 54 no longer applies where an insured notifies their insurer of facts which might give rise to a claim outside the period of cover provided for in the contract, or in the IC Act;
  • essentially overcome the judicial interpretation in FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; and
  • still provide relief to an insured in respect of a claim made against them during the period of cover, but notified to the insurer outside that period.