As is often the case, contracts of life insurance, income protection and total and permanent disability (TPD) are usually entered into many, many years before something occurs whereby the insured person will need to access their policy benefits.
It would be fair to say that in the vast majority of cases, a person’s life will have changed significantly, and their circumstances and health may be totally different between when they first filled out their insurance application and the time of making a claim. Some of the policies may be so old that paper-based applications were in fact made, compared to the more recent trend of ‘low document’ or online applications. Many insurers don’t want or require detailed health and medical records when an application is made.
If a claim become necessary, it will be for the insured person to establish that they meet the requirements (the terms and conditions) of the policy so they can access the income protection or TPD payments. The insurer will, undoubtedly, look at the insurance policy history to see if, before entering into the policy or becoming insured under a contract of insurance, the insured person has met and complied with the “duty of disclosure”.
The ‘duty of disclosure’ is usually at the front of an application form, or in the documents sent to you by your insurer, and would read something like:
“You have a duty under the Insurance Contracts Act 1984 to provide details of what you know, or could be reasonably expected to know, is relevant to the insurer’s decision to accept the risk of insurance and to issue you a policy and on what terms that policy should be provided. This duty of disclosure will equally apply should you wish to renew the policy, vary it or extend it for any period of time. A duty of disclosure does not require you to provide details of what is common knowledge, information that the insurer knows or ought to reasonably know in the ordinary course of its business or that the insurer does not require you to tell them”.
The above wording reflects what is set out in section 21 of the Insurance Contracts Act 1984 (ISCA).
The Hayne Royal Commission
Following the Hayne Royal Commission, there were some amendments to the ISCA. Those amendments came into effect on 5 October 2021.
The amendments changed the ‘duty of disclosure’, but only so far as the provisions apply to consumer insurance contracts. Consumer insurance contracts are those that are for personal, domestic or household purposes and would include such things as life insurance or insurance for income protection and TPD purposes.
All other insurance contracts, perhaps of a more commercial nature, remain subject to what might be described as the previous or traditional ‘duty of disclosure’ under the ISCA.
Section 20B of the ISCA provides that the person taking out the insurance policy has a duty to take ‘reasonable care not to make a misrepresentation to the insurer before the relevant contract of insurance is entered into’.
It is probably safe to say that the emphasis has now been placed on the insurer to make sure it asks relevant questions and obtains relevant information necessary for it to determine whether or not to insure someone. I am not sure we will see the end of low document insurance applications – time will tell.
It is said that the new provisions, if they are to be relied on by an insurer to avoid a contract, will require the insurer to demonstrate that any misrepresentation was a: result of a failure by the applicant for the insurance to exercise reasonable care when responding to questions or providing information.
The crossover is that, and with respect to fraudulent misrepresentations, Section 28 of the ISCA still applies. So, if the relevant failure to disclose by the insured person was fraudulent, the insurer can avoid the contract. If the insurer cannot avoid the contract, then the extent of their liability (what they have to pay) can be reduced to an amount which would have put them in the place they had of been had the relevant failure not occurred.
So, what is a ‘relevant failure’. A relevant failure is defined as a misrepresentation made by the insured person in breach of the duty to take reasonable care not to make a misrepresentation, or otherwise a failure by the insured person to comply with the duty of disclosure or a misrepresentation made by the insured person to the insurer before the contract was entered into.
The duty to “take reasonable care not to make a misrepresentation”, is one that considers all of the relevant circumstances. The emphasis is on the insured person to take reasonable care not to make a misrepresentation to the insurer before the relevant contract of insurance is entered into. Whether or not there has been reasonable care taken will depend on various factors, including:
- The type of contract in question and its target market;
- Explanatory material publicly produced and authorised by the insurer;
- How clear and how specific any question asked by the insurer was;
- How clearly the insurer communicated with the insured the importance of answering the questions and the possible consequences of failing to do so;
- Whether or not an agent was acting for the insured;
- Whether the contract was a new contract or was being renewed, extended, varied or reinstated.
Furthermore, what also must be taken into account is any particular characteristic or circumstance of the insured person of which the insurer was aware, or ought reasonably to have been aware and an insured person is not considered to have misrepresented simply because they failed to answer a question or gave an obviously incomplete or irrelevant answer to a question.
What has been preserved, and to avoid any doubt, a misrepresentation that was made “fraudulently” is a breach of the duty to take reasonable care not to make a misrepresentation.
The insurer can only avoid the contract entirely (decline to pay anything under the policy) if there is a fraudulent misrepresentation or non-disclosure.
A word of warning…
The message appears to be clear that when taking out personal insurance (e.g. life, TPD or income protection insurance) you must take your time to answer the questions posed by the insurer truthfully, and if necessary, do a bit of digging into your medical history to ensure those answers are accurate. It may not be for many years down the track, when you most need the insurance benefits, that previous vague, incomplete or inaccurate answers in a policy application will come back to haunt you.
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