The insurance industry operates under a General Insurance Code of Practice directed at standards and consumer protection and other legislation covering the contents of insurance policies and standard cover for some domestic insurance policyholders. Insurance marketing and selling practices have been reformed by financial services legislation.

Contributor

Mark Attard

Partner, Clyde & Co.

Insurance contracts

Last updated

1 July 2021

Do your research

Selecting an insurer and an insurance policy is an important decision.

Most insurers publish their policies online. Download a policy and read it to make sure that it is suitable for your needs.

In particular, check the exclusions in the policy and ensure none of them apply to your situation. 

Application for insurance

Normally, an insurer will require a consumer to complete a proposal form or application before offering insurance to the consumer.

These forms/applications are completed over the phone or online. Insurers use these forms/applications to collect information from the consumer. Consumers should answer the insurer’s questions accurately and honestly.

If a consumer accepts the policy and terms offered by the insurer, the consumer will then be asked for their bank or credit card details. The policy will come into effect at that time or on an agreed future date. 

Cooling-off

A cooling-off period is the time allowed for a purchaser to change their mind and legally withdraw from a contract after signing it. All policies have a cooling-off period that commences on the date that the policy was issued to the consumer or the start date agreed with the consumer.

Insurance schedule

An insurer will then give the insurance policyholder an insurance or policy schedule. The insurance schedule contains important information about the insurance contract, such as the details of the insured person or parties, the period of insurance, the amount of cover, the type or class of risk insured, the premium (i.e. the price of the insurance policy), the excess, any additional risks covered by the insurance policy, and special conditions applying to that policyholder and/or to that policy, and any specific risks excluded by the policy.

Often accompanying the insurance schedule is a record of the information/answers supplied by the policyholder at the time the policy was purchased. It is important that policyholders carefully read this information and ensure it is accurate.

Product disclosure statement

Insurers should give the policyholder a copy of the‘policy wording’ or ‘product disclosurestatement’. Usually, this is a document or booklet containing the terms and conditions of the insurance policy. This statement also contains more specific information about what is covered and not covered by the particular insurance contract. 

The product disclosure statement also outlines how policyholders can make a claim under the contract and their rights and responsibilities in respect of claims.

Certificate of currency

Insurers should also give the policyholder a certificate of currency.

This is a short summary of the insurance cover that the policyholder can provide to their financier (e.g. their bank) or landlord.

Insurance premium

The insurance premium is the price paid by the policyholder for the insurance policy.

The premium may be payable in a lump sum or by instalments.

Typically, the insurance contract will state that an insurer is not liable to cover any loss until the premium is paid.

Depending on the wording in the product disclosure statement, failure to pay a premium may entitle an insurer to cancel the insurance policy.

Excess

The excess (sometimes referred to as the ‘deductible’) is the contribution a policyholder is required to make towards the settlement or payment of any claim made under the insurance contract. 

Some insurers allow policyholders to choose the level of their excess where a higher excess results in a reduced premium. Never choose an excess that you cannot afford, even if this means you pay a higher premium.

Some insurance contracts contain different excesses depending on the circumstances of the claim. For example, in motor vehicle insurance, a greater excess may be payable if the driver is below a certain age or inexperienced. Policyholders need to carefully read the insurance documents to clarify whether an excess other than the basic excess is payable towards a claim.

In some policies, no excess is payable. An example of this is where a policyholder has pre-paid to remove the excess. Some insurers will not require a policyholder to pay an excess if the driver of the insured vehicle is not at fault and the policyholder can provide details of the other driver.

Some insurers will not act on or pay a claim until the excess is paid. Policyholders need to read the policy documentation to confirm this requirement.

If insurers have recovered payments made under a policy from a third party (the person at fault), a policyholder may be entitled to a partial refund of any excess paid in respect of the claim.

Insurance policy renewal

Insurers are obliged to contact policyholders and inform them when their policy is due for renewal.

Policyholders will receive a renewal statement that sets out the same information contained in the insurance schedule with details of the new premium. Check to ensure the cover is still suitable for your situation. 

If your premium is automatically paid from your account, your policy will renew automatically. Otherwise, you need to pay the premium to renew your cover.

General advice

Buying insurance over the phone or internet may be quick and convenient; however, consumers need to ensure that the cover meets their needs. Cheap premiums mean reduced cover. 

Also, before you submit any personal information to an insurer, look for a security policy to ensure that any communications between you and the insurer are reasonably protected from third parties.

Also, set your internet browser to notify you when you leave a secure connection.

The Insurance Code (pt 6) requires insurers to ensure communications are in plain language. Pressure selling is prohibited. If an insurer cannot provide cover, they are required to give reasons and to tell the consumer the information they relied on when assessing the application.

It is important that policyholders read and retain all correspondence and documentation provided to them by insurers. Policyholders should also keep copies of any paperwork they complete.

Policyholders should keep their insurer informed of changes to their situation. For example, if you are proposing to renovate your home, notify your home insurer. Modifications to your motor vehicle should be disclosed to your car insurer. Also, tell your insurer if you change bank accounts or contact details.

Cover note

It is not unusual for consumers to require insurance at short notice. A common example is the purchase of motor vehicle insurance where the consumer wishes to take delivery of the motor vehicle before any insurance paperwork can be completed.

In these circumstances, insurers will issue a cover note. Cover notes are usually issued over the telephone and despite the absence of any paperwork or documentation, they represent legally binding insurance policies. The IC Act refers to cover notes as ‘interim contracts of insurance’.

Section 38 of the IC Act provides that if before the cover note has expired the policyholder has submitted a proposal, then the insurer shall remain liable under the cover note until either the insurer or some other insurer issues insurance cover (or another cover note), or the cover note is cancelled, or a consumer withdraws their proposal, whichever occurs first.

It follows that consumers arranging a cover note should make written notes of the cover note details provided by the insurer. You may need to rely on these notes if you wish to claim on the cover note before the cover note is confirmed in writing by the insurer.

Extent of cover

With the exception of life and accident policies, insurance policies are generally contracts of indemnity. In other words, they cover policyholders for losses sustained by them upon the happening of an insured event. A policyholder cannot recover more than they have lost.

The nature of an indemnity or cover under an insurance policy depends on the terms of the policy and may include one or more of the following:

  • payment of market value;
  • replacement;
  • new for old replacement;
  • repair;
  • reinstatement; or
  • payment of an agreed value.

All of the above are normally subject to the policy limit, which is the maximum sum payable by insurers under the policy.

The nature of the indemnity provided under an insurance contract depends on the terms of the contract and the nature of the claim. In most cases, under an insurance contract, the insurer will cover the policyholder against loss or damage as a result of an insured event subject to the insurer’s right, as far as circumstances permit, to either repair, reinstate or replace the item the subject of the insurance claim.

If the policy permits the insurer to choose to pay the value of the property at the time of the loss, that value is calculated on the basis of the amount of money required to restore the policyholder to their position at the time of the loss.

Where repair is permitted under the policy, this may mean either actual repair or paying the cost of repair. Sometimes the indemnity principle works to a policyholder’s disadvantage. An insurer is normally not required to repair a vehicle if the cost of repairs exceeds the value of the vehicle less any excess under the policy. In such circumstances, the policyholder receives the ‘write-off’ value of the vehicle, which is calculated as the pre-accident value of the motor vehicle less any salvage value, less any excess. Where the insured vehicle is relatively old, this may mean very little return to the policyholder, and it may not be enough to purchase a replacement vehicle.

If an insurer chooses to reinstate or repair damaged property these repairs must be carried out to the policyholder’s reasonable satisfaction and within a reasonable time. The insurer is responsible for the damaged property while it is being reinstated or repaired. Any further damage to the property during this period is normally the insurer’s responsibility.

Under the Insurance Code, an insurer offering a cash settlement under a home building policy is required to provide a written statement explaining the cash settlement. This requirement has now been legislated and section 948C of the Corporations Act 2001 (Cth)requries an insurer to provide a policyholder with a ‘cash settlement fact sheet’ when offering to settle all or part of an insurance claim by a cash payment. The information that must be included in this fact sheet is set out in section 948F.

Consumer insurance contracts

One of the Hayne Royal Commission reforms is the introduction of a class of insurance policies called ‘consumer insurance contracts’. These policies are defined in section 11A of the IC Act to mean ‘insurance obtained wholly or predominantly for personal, domestic or household purposes of the insured’.

Consumer insurance contracts receive special attention under the IC Act.These policies are distinguished from policies obtained for business purposes (e.g. professional indemnity insurance and industrial special risk policies).

If a consumer asserts that a policy is a consumer insurance contract, the insurer is responsible for establishing otherwise.

At the time of writing  (1 July 2021), this class of insurance policy is new. It is intended to cover a range of policies and to extend the definition of prescribed contracts. 

Consumer insurance contracts include:

  • motor vehicle insurance;
  • home buildings insurance;
  • home contents insurance;
  • sickness and accident insurance;
  • consumer credit insurance; and
  • travel insurance.

The provisions about prescribed contracts remain in the IC Act. Prescribed contracts are those included in the list above. The IC Regulations set out the minimum requirements for these policies such as minimum policy limits and the required risks or insured events to be covered by the prescribed contract.

If the policy under consideration is a prescribed contract, it is important to check the IC Regulations to ensure that your policy conforms with the minimum requirements.

If an insurer seeks to reduce or decline cover under a prescribed contract, you should confirm that the term relied on by the insurer is permitted by the IC Regulations.

There is significant overlap between consumer insurance contracts and prescribed contracts. It is likely that future reforms will roll the two concepts into one.

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