Common problems with insurance claims
Averaging (under insurance)
Policyholders should insure property and risks at their full value. Property insurance premiums are assessed on the assumption that property is insured for full value. If property is under-insured (the loss claimed exceeds the sum insured under the policy), then effectively the policyholder is assuming the risk of the uninsured portion of the loss.
A number of insurance policies deal with this uninsured portion by reducing or averaging the insurer’s liability under the policy, thereby reducing the cover available to the policyholder under the insurance contract. An averaging clause is only effective if the policyholder has been clearly informed in writing of its nature and effect before entering into the contract (s 44 Insurance Contracts Act 1984 (Cth) (‘IC Act’)).
The IC Act also limits the effect of such a clause if the property insured is either the principal place of residence for the policyholder or their family, or the contents of such a residence. In such cases, the averaging clause will have no effect if the sum insured is more than 80 per cent of the value of the property.
If the property is insured for less than 80 per cent of its value, then the sum insured shall be averaged in accordance with the following formula:
A x S / P
A = the amount of loss;
S = sum insured; and
P = 80% of value of the property.
A and B have a new-for-old insurance policy for the contents of their home. The contents are valued at $60 000 but they have only insured them for $40 000 (less than 80 per cent of their value). A stereo worth $2000 is stolen.
Even if the relevant insurance contract contained an average clause, section 44 of the IC Act would provide the following basis for averaging:
$2000 x $40 000
80% x $60 000
This means the policyholder would only receive $1666 (less any excess) towards the replacement of the stereo and would need to pay at least $334 of the loss themselves.
Before an insurance contract is entered into, the insurer must clearly inform the consumer in writing of any unusual provision and its effect (s 37 IC Act).
If the insurer does not do so, it cannot rely on an unusual provision in the contract (not a prescribed contract.
An example of an unusual term is a requirement that a policyholder immediately notify the insurer of a claim.
Some policies seek to limit the liability of the insurer if the policyholder has entered into another insurance contract covering the same claim.
An example of this would be a provision in a policy that cover under the policy is only available for amounts not paid by any other valid and collectable insurance.
Under section 45 of the IC Act, such ‘other insurance’ provisions are void, unless the other insurance policy is identified and specified.
A person entitled to cover under an insurance contract cannot have a claim denied simply because they are not named in the policy (ss 20, 48 IC Act). For example, a home contents insurance policy that extends coverage to a policyholder’s family and their belongings will cover the policyholder’s spouse and children even though they are not named in the insurance documents.
A third-party beneficiary is a person who is not a party to an insurance policy. The June 2013 reforms to the IC Act introduced a new term to the IC Act: ‘a third-party beneficiary’.
A ‘third-party beneficiary’ is defined as a person who is not a party to an insurance policy, but who is specified or referred to in the policy and who is entitled to benefit from the policy (s 11(1)).
The Australian Securities & Investments Commission (ASIC) is entitled to bring an action against an insurer on behalf of third-party beneficiaries – if ASIC thinks that an insurer has breached the terms of a policy or the IC Act (s 55A, as amended).
Direct claims against insurers
Where an insured person or third-party beneficiary has died or cannot be found (after reasonable inquiry) and you have a claim for damages against that person, you may recover the amount payable under their insurance contract directly from their insurer (s 51 IC Act).
Section 601AG of the Corporations Act 2001 (Cth) permits a direct claim against an insurer of an insured and liable company, if that company is subsequently deregistered.
Where an insurer may not refuse to pay a claim
Prior to the IC Act, the breaching of a condition in an insurance contract (regardless of how minor) normally entitled an insurer to avoid the policy altogether. This common law right of insurers has been severely restricted by section 54 of the IC Act.
Section 54 of the IC Act is a much litigated and very important provision of the IC Act. It provides that an insurer cannot refuse to pay a claim in whole or in part by reason of some act or omission by the policyholder that occurred after the commencement of the policy, but the insurer may reduce its liability under the policy by an amount that fairly represents the extent to which the insurer’s interests have been prejudiced by the policyholder’s act or omission.
For example, a motor vehicle insurance policy that excludes cover if the driver of the vehicle is unlicensed. If the insurer cannot demonstrate prejudice caused by the vehicle being driven by an unlicensed driver, it may be liable for the full amount of the claim.
However, if the relevant act or omission by the policyholder is the cause of the loss claimed under the policy (e.g. drink-driving), then section 54 does not assist the policyholder.
Most insurance policies require policyholders not to admit liability to the other party or attempt to resolve claims without the agreement of the insurer. Sometimes a claim can be resolved on reasonable terms, but the insurer has not yet decided to cover or pay the claim. In these circumstances, policyholders must be careful not to act in a manner that may jeopardise their insurance cover.
Section 41 of the IC Act provides the policyholder with some protection in these circumstances. If an insurer does not respond within a reasonable time to a notice from the policyholder requiring the insurer to cover the claim, the policyholder may proceed to resolve the claim and an insurer may not refuse to pay the claim because the settlement was reached without the insurer’s consent. If an insurer agrees to cover a claim, it must decide whether it will assume conduct of any legal proceedings.
A property claim arising from a catastrophe should be finalised within one month (pt 8 Insurance Code).
Claim delays and interest
Section 57 of the IC Act requires an insurer to pay interest to cover any delay in payment under an insurance contract. The period for which an insurer is required to pay interest commences on the day from which it was unreasonable for the insurer to withhold payment.
The right to interest does not depend on the commencement of legal proceedings. The rate of interest is prescribed in the IC Regulations and is calculated on the basis of the 10-year treasury bond yield plus three per cent.
Duty of utmost good faith
Sections 13 and 14 of the IC Act have always implied in all insurance contracts a duty of utmost good faith; this requires both policyholders and insurers to act towards each other with utmost good faith. However, this implied duty has sat moribund (that is, on the verge of extinction) for several decades until the Hayne Royal Commission.
Section 14A of the IC Act empowers ASIC to investigate an insurer that has failed to comply with the duty of utmost good faith in the handling or settlement of a claim or a potential claim under an insurance policy.
Already in two cases – ASIC v Youi  FCA 1701 and ASIC v TAL Life Limited  FCA 193 – the Federal Court has found insurers guilty of a breach of the duty of utmost good faith in their management of claims under their insurance policies.
It is important for policyholders and legal practitioners to remember the following when dealing with a difficult insurer who is refusing to pay a claim.
Courts generally interpret ambiguous terms in an insurance contract in favour of the policyholder. This is the ‘contra proferentem rule’.
By regulation 7.1.33 of the Corporations Regulations 2001 (Cth), the handling and settlement of insurance claims or potential claims has been carved out of the definition of ‘financial service’ in the Corporations Act 2001 (Cth). This exemption ends on 30 June 2021.
After 30 June 2021, insurance companies and their representatives will be accountable for their management of claims and ASIC will not be restrained from deploying regulatory interventions if claims are not managed efficiently, honestly and fairly.
From 5 April 2021, the unfair contract terms laws in the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’) will apply to insurance contracts. Unfair terms in a ‘consumer contract’ or a ‘small business contract’ will be void if the term is unfair and the contract is a standard form contract. Section 12BG of the ASIC Act defines when a contract term is unfair.
Part 8 of the Insurance Code requires an insurer – within 10 business days of receiving a claim – to tell the policyholder how it will manage the claim. If this timeframe is not practical, they are required to agree to a reasonable timeframe with the policyholder. If an insurer appoints a loss assessor or adjuster, the Insurance Code requires an insurer to notify a policyholder within five business days of the appointment. Insurers are required to keep policyholders informed of the progress of their claim, at least every 20 business days.
When a claim is rejected, an insurer is required to properly advise the policyholder in writing of that decision and their reasons. A policyholder can ask for the information relied on by the insurer in reaching its decision. The insurer must advise the insured about their review or complaint procedure.