On 28 November 2012, the government released a further exposure draft of the Insurance Contracts Amendment Bill 2012 (Cth) (the Bill). Aside from four proposed refinements, the proposed legislation remains unchanged from the Insurance Contracts Amendment Bill 2010 (the 2010 Bill) (previously discussed here). Consequently, in this update we only address the four changes to the 2010 Bill.
Insured’s duty of disclosure
The 2010 Bill included only one factor (as opposed to the three factors appearing in the 2007 exposure draft) that a court should give consideration to when assessing an insured’s duty of disclosure (pursuant to the mixed subjective/objective test in section 21). This was the nature and extent of cover provided by the contract of insurance. The Bill has reinstated another consideration, namely the class of persons who would ordinarily be expected to apply for cover of that type.
Remedies of the insurer: life insurance contracts
The 2010 Bill restricted the operation of section 29 of the Insurance Contracts Act 1984 (Cth) (ICA) to traditional life insurance contracts (eg investment contracts with a surrender value). In contrast, the Bill adopts a new approach whereby both traditional and non-traditional life insurance will continue to be subject to the remedies provided in section 29 of the ICA. However, there have been some minor refinements in order to provide insurers with more flexibility in respect of available remedies for misrepresentation and breach of duty of disclosure.
The new section 29 provides that a life insurer cannot avoid a life contract after three years (consistent with current law). However, the insurer can at any time vary a life insurance contract in accordance with a prescribed formula. Additionally, if the insurer does not avoid the contract in the first three years, the insurer may vary the contract to place it in the position it would have been had the misrepresentation or breach of the duty of disclosure not occurred.
This is similar to section 28 of the ICA so the departure from the 2010 Bill may be one of form over substance.
Transitional period for changes to duty of disclosure
The 2010 Bill changes to duty of disclosure obligations on insurers were to take effect 18 months following assent. This delay was intended to allow insurers to amend their business practices in response to the new rules. However, given that many contracts of insurance are renewed every 12 months, the 18 month timeframe meant that insurers effectively only had six months to become compliant with the new rules.
Therefore, the Bill provides for a transitional period of 30 months to allow insurers to amend business practices to accommodate the new obligations.
The 2010 Bill allowed for the unbundling of contracts when they contained provisions that, when separated into groups, could form standalone contracts of insurance. However, in relation to life insurance, it provided for a process that assessed the ‘kind of insurance’ provided.
A number of key stakeholders made submissions that this approach created uncertainty as to the extent that bundled contracts could be unbundled. Consequently, the recent exposure draft removes the reference to ‘kind of insurance’ in favour of an assessment as to whether the policies can stand alone.
Make a submission
The Treasury has invited interested parties to make submissions on the exposure draft no later than Wednesday, 12 December 2012. Submissions can be lodged by post or electronically here