The Law Handbook 2024

Chapter 10.4: Insurance 957 be expected to know – that is relevant to the insurer’s decision to accept the risk. In assessing what a reasonable person could be expected to know as being relevant to insurers, the factors to be considered are the nature and extent of the insurance cover and the class of persons expected to apply for insurance of this kind. What is relevant to disclose is often determined by the questions in the application for insurance. For instance, if the application questions an insured person about previous criminal convictions, then the insured knows that this issue is relevant to the insurer’s decision to accept the risk. Insurers have the responsibility of proving what information is relevant to their decision to accept the risk. An insurer may prove this by reference to its underwriting guidelines, which usually set out risks that will be accepted and the relevant premium and conditions attaching to that risk. The undisclosed matter must be relevant to that insurer as distinct from insurers generally. An insurer cannot rely on non-disclosure to reduce its liability under the insurance contract where the policyholder failed to answer or has given an obviously incomplete or irrelevant answer to a question on an application form and the insurer has not followed up the matter (s 21(3) IC Act). An ambiguous question asked in relation to a proposed insurance contract will be resolved in favour of the policyholder (s 23). Section 33 of the IC Act prevents an insurer from imposing a more onerous duty of disclosure on any insured than is required by the IC Act. A consumer’s duty to take reasonable care to not make a misrepresentation The Hayne Royal Commission has replaced the duty of disclosure in consumer insurance contracts with the duty to take reasonable care to not make a misrepresentation (s 20B IC Act). This is a new provision and it will take time to understand how it will be applied to everyday situations. Whether a consumer has taken reasonable care to not make a misrepresentation is to be determined with regard to all relevant circumstances, including the type of consumer insurance contract, the explanatory material provided by the insurer, the questions asked by the insurer, and the particular characteristics and circumstances of the consumer. A consumer is not to be taken to have made a misrepresentation because they failed to answer a question or gave an obviously incomplete or irrelevant answer. It will now be difficult for insurers to deny or limit cover because of information provided or not providedby consumers before the policy commenced. Reasonable care suggests that a consumer’s actionswill be assessed against the actions of a reasonable person in the same circumstances. For misrepresentation to be established, the consumer must provide false or misleading information. Note that to knowingly provide false or misleading information is fraudulent conduct and may result in your insurer avoiding the policy. If a consumer makes an incorrect statement in connection with a proposed insurance policy, it shall not be taken to be amisrepresentation if the statement was based on a belief held by that policyholder – and if a reasonable person in the same circumstances would also have held that belief (s 26(1)). Any statement made by a consumer in connection with a proposed insurance contract shall not be taken to be a misrepresentation unless the consumer knew, or could reasonably be expected to have known, that the statement was relevant to the insurer’s decision to accept the risk (s 26(2)). Relevant failures The reforms of the Hayne Royal Commission have introduced the concept of ‘relevant failure’ to the IC Act. Section 27AA defines a ‘relevant failure’ in a consumer insurance contract to be a breach of the duty to take reasonable care to not make a misrepresentation. In all other policies, it is a failure to comply with the duty of disclosure. An insurer’s remedies for a relevant failure are set out in section 28 of the IC Act. This provides that where a relevant failure occurs, an insurer cannot avoid the contract or deny the claim, but is entitled to reduce its liability for a claim to the extent that would place it in the position it would have adopted had there been no relevant failure. The courts have interpreted this section to allow insurers to reduce their liability to nil in circumstances where they would not have accepted the risk but for the relevant failure. This means that an insurer may not avoid the policy or reduce its liability if it