Australia: Coming soon: Changes to the Insurance Contracts Act affecting life insurers and third party beneficiaries

The Insurance Contracts Amendment Act 2013 (Amendment Act) will see a number of reforms to the Insurance Contracts Act 1984 (ICA) over the next year and a half. The commencement of the new provisions are being staggered on various dates across the period between 28 June 2013 and 28 December 2015.

A number of the new provisions are due to commence on 28 June 2014. These provisions affect life insurers and third party beneficiaries under general insurance contracts. The Amendment Act seeks to align, as closely as possible, the rights and obligations of the insured with those of a third party beneficiary under a contract of insurance. This article discusses some of the changes taking place at the end of the month, and the impact of these changes.

Life insurers

Expansion of remedies for non-disclosure and misrepresentation

The Amendment Act will significantly extend the remedies available to life insurers in situations of non-disclosure and misrepresentation.

The new provisions permit an insurer to avoid a life insurance contract within three years of its commencement, if it can establish that it would not have entered into the contract if it were aware of the non-disclosure or misrepresentation. This requirement will be less onerous for the insurer than those currently contained in the ICA, which require an insurer to establish that it would not have entered into the contract "on any terms".

The ICA currently permits a life insurer to alter the sum insured within three years of the commencement of the contract, in the event that an insured fails to comply with their duty of the disclosure, or is found to have made a misrepresentation. Insurers may make such an amendment according to the formula specified in the ICA. The Amendment Act provides insurers with the ability to alter the sum insured beyond the current three year period, so that such variations can be made at any time upon discovery of the non-disclosure or misrepresentation.

These amendments are likely to result in a greater risk to insureds who fail to comply with their disclosure obligations. As the formula provided in the ICA reduces the sum insured by reference to the premiums that would have been charged but for the non-compliance, variations to the sum insured may continue for the life of the contract, potentially resulting in significant reductions in payouts.

Insurers may also now vary a contract in a manner other than that provided by the formula specified in the ICA. A variation may be made which places the insurer in the same position as if the duty of disclosure had been complied with, or the misrepresentation had not been made. The Amendment Act does, however, impose some restriction on the extent of any variation, which must not be inconsistent with the position that other reasonable and prudent insurers would have been in, had they entered into a similar contract for life insurance.

It should be noted that contracts with a surrender value (an amount payable to an insured upon cancellation of a contract for life insurance), or that provide a death benefit will be largely exempt from these changes. Life insurers will only be able to amend these contracts according to the scale, within the existing three year period.

Insurer's defences in actions by third parties

The Amendment Act specifically permits an insurer, when defending an action bought by a third party beneficiary, to raise defences relating to the conduct of the insured. This will include conduct which occurred both before and after the contract was entered into, such as conduct involving non-disclosure or misrepresentation.

Third party beneficiaries

Rights and obligations of third party beneficiaries under life insurance contracts

The changes to be introduced by the Amendment Act clarify that a third party beneficiary has the right to recover from an insured money payable under a life insurance contract. It also specifies that a third party has the same obligations in respect of their claim against the insurer, as if the third party beneficiary was the insured.

Non-disclosure or misrepresentation by members of group life insurance schemes

The Amendment Act also clarifies that if an insured breaches their duty of disclosure or makes a misrepresentation after joining a superannuation, retirement or group life scheme, but prior to life insurance cover being provided to them by the group, the non-disclosure or misrepresentation will be deemed to have occurred prior to the commencement of the contract.

Written notice for third party beneficiaries of contracts for liability insurance

Third party beneficiaries are now able to seek from an insurer written notice as to whether the insurer admits that a contract of liability insurance applies to a claim, and written notice as to whether the insurer intends to conduct negotiations and legal proceedings in respect to the claim.

Failure on behalf of an insurer to provide this written notice will result in the insurer being unable to refuse payment of the claim on the grounds that the third party beneficiary breached a contract of liability insurance by settling a claim against the insurer, or admitting liability. A third party beneficiary is defined broadly by the ICA as any person who is not a party to a contract, but is referred to, by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends. Previously, this protection was offered only to the insured.

Right of third parties to recover against insurers

Currently, the ICA permits a third party to recover from an insurer damages payable to them by an insured, in the event that the insured is deceased or cannot be located. The amendments specifically extend this right of recovery to damages payable by a third party beneficiary of a contract for liability insurance.

ASIC to have power to represent third party beneficiaries

On 28 June 2013, the Australian Securities and Investments Commission (ASIC) was granted the power to bring an action against an insurer on behalf of a third party beneficiary. Previously, this assistance was restricted to actions bought on behalf of an insured.

The instances in which ASIC may bring an action against an insurer are broadly defined, with ASIC being permitted to bring an action when they are of the view that an insured or third-party beneficiary has suffered, or is likely to suffer, damage as result of a breach of the ICA. It should therefore be noted that ASIC may bring an action on behalf of a third party beneficiary, under the provisions relating to third-party beneficiaries contained in the Amendment Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.