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.

Insurers’ and consumers’ duty of disclosure

Last updated

1 July 2021

The following information does not apply to consumer insurance contracts entered into or renewed after 5 October 2021.

After 5 October 2021, the duty of disclosure described in this section only applies to business policies.

Insurers’ responsibility to inform

Under section 22 of the Insurance Contracts Act 1984 (Cth) (‘IC Act’), before a contract of insurance is entered into, the insurer must clearly inform a consumer, in writing, of the general nature and effect of the duty of disclosure, including the consequences of non-disclosure.

An insurer that has not complied with section 22 may not exercise any rights in respect of a non-disclosure unless the non-disclosure was fraudulent.

The insurer is responsible for proving that it has complied with section 22.

Consumers’ duty to disclose

Under section 21 of the IC Act, a consumer is required to disclose every matter known to them – or that a reasonable person in the circumstances could 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 a consumer about previous criminal convictions, then the consumer 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 a proposal 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 IC Act).

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.

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).

It will take time to understand how this new provision 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 provided by consumers before the policy commenced. Reasonable care suggests that a consumer’s actions will 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 a misrepresentation 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) IC Act).

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) IC Act).

Relevant failures

The reforms of the Hayne Royal Commission have introduced the concept of ‘relevant failure’ to the IC Act. Section 27AA of the IC Act 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 would have accepted the risk for the same premium and on the same terms and conditions despite the relevant failure. An insurer may avoid the contract if a relevant failure is fraudulent.

An insurer proposing to rely on section 28 of the IC Act has to prove it is entitled to reduce its liability.

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