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 Legal responsibility, enforced by civil or criminal courts. under the policy, thereby reducing the cover available to the policyholder under the insurance An agreement that the law will enforce.. 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 IC A written law made by parliament. Also called an ‘Act of parliament’, ‘statute’ or legislation.).
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 A document that sets out what a person wants to happen to their money and other property after they die. 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 The amount a person does not get back from the insurer when they make a claim on their insurance. For example, if a car is insured for an agreed value of $10 000 with an excess of $1000, the insurer will pay only $9000 on a claim if the car is written off.) 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 Under the Australian Consumer Law, a person who buys goods or services for less than $40 000 or for personal or home use. 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; see ‘Prescribed contracts’, above). 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 Legally binding or effective. and collectable insurance. Under section 45 of the IC Act, such ‘other insurance’ provisions are Having no legal effect. A void agreement has something wrong with it, so it cannot be a legally binding contract. For example, a verbal agreement to buy land would be void, because the law says those contracts have to be in writing., 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 (1) Someone whose money or property is being looked after for them by someone else (called a trustee). (2) A person who is left something in a will, also sometimes called a legatee. See also trust. is a person who is not a A person or organisation directly involved in a court case. Parties include the plaintiff or applicant, the defendant, and any third party added to the action, but not independent witnesses. 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)).
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 A court order for money to be paid to someone to compensate them for a loss suffered as a result of a civil wrong or breach of contract. For example, a person who caused a serious permanent injury to another person can be ordered by the court to pay damages that compensate the injured person for their loss of income from being unable to work. See also aggravated damages; compensatory damages; general damages; liquidated damages; nominal damages; special 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 In Victoria, a child or young person under 18. See also infant.) normally entitled an insurer to avoid the policy altogether. This (1) The system of law developed by the English courts through precedent and adopted in ‘common law countries’ in the British Commonwealth (as opposed to Roman law (civil law) or ecclesiastical law). (2) The case law made by judges in that system. (3) Case law that is not part of the law of equity. (4) Historically, the rules of law common to all people in England, as distinct from local or customary laws. right of insurers has been severely restricted by section 54 of the IC Act.
Section 54 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 To agree to something being done, to approve an action or arrangement. See also informed 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 (1) An undertaking by someone to do or not do something, especially a good behaviour bond, which can be part of a sentence given by a court. (2) A tenant’s payment of money to a landlord at the start of a tenancy. The bond is held in case there is any damage to the property or the tenant fails to pay rent. yield plus three per cent.
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.
First, insurers have a duty of utmost good faith towards policyholders (and vice versa). This duty is confirmed by sections 13 and 14 of the IC Act.
Second, courts generally interpret ambiguous terms in an insurance contract in favour of the policyholder. This is the ‘contra proferentem rule’.
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/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.