The industry ombudsman has released guidance on general insurance disputes relating to breaches of the duty to take reasonable care not to make misrepresentations – one of many reforms arising from the Hayne royal commission.

The Australian Financial Complaints Authority has also updated its approach to older non-disclosure and misrepresentation rules.

Changes to the Insurance Contracts Act in 2021 meant that instead of a duty to disclose “every matter” a reasonable person would expect to be relevant, consumers instead faced a new duty “to take reasonable care not to make a misrepresentation”.

The new duty applies only to consumer insurance contracts. Other insurance contracts, or policies entered into or renewed before October 5 2021, retain the old duty of disclosure and duty not to make a misrepresentation.

AFCA says its two new approach documents address issues raised by the industry, consumer advocates and other stakeholders during consultations last November. Fraudulent misrepresentation and non-disclosure were among topics flagged.

“If an insurer would have issued the same policy on the same terms and premium, then it cannot avoid a policy due to fraudulent misrepresentation,” the two documents say.

“In other limited cases, avoiding the policy may not be fair. This may be when the information not disclosed made little difference to the insurer’s position. For example, the insurer would have simply charged a slightly higher premium or imposed a condition that made no difference to its liability.

“In those cases, AFCA will consider whether it is fair in all the circumstances for the policy to be avoided and the claim denied.”

The authority says its decisions in such cases will consider factors including the requirement to deter fraud; whether the impact extends beyond the person who carried out the fraud; and the extent of prejudice the non-disclosure or misrepresentation had on the insurer’s position.

It says its approach is consistent with the Insurance Contracts Act’s clause on fraud.

“While AFCA is not a court, it is required to do what is fair in all the circumstances,” the authority says. “It is appropriate that AFCA have regard to this provision given it aligns closely to our purpose.  

“This means AFCA will likely consider in those cases, an insurer should be able to avoid the policy unless that outcome would be both harsh and unfair to the complainant.”

AFCA says whether someone has taken reasonable care is “mostly a subjective test” and there is “no limit” to the range of factors considered.

Relevant matters can include how clear and specific the insurer’s questions are, and how clearly the insurer communicated to the insured the importance of properly answering the questions and the possible consequences of failing to do so.

”If a complainant represented something they genuinely believed was the truth, then it
is unlikely that AFCA will find they have breached the duty,” AFCA says.

”However, if the complainant misrepresented something they did not ‘know’ (i.e. they
guessed or suspected the answer), then it is possible they may have breached the
duty depending on all the other circumstances.”

See AFCA’s consultation feedback report here, and the two approach documents here.

Claims denied due to misrepresentations are often disputed.

In February, AFCA backed Auto & General after it denied a motor claim due to a failure to comply with the duty at renewal. The insured had failed to disclose a licence suspension and the insurer said it would not have offered cover if it had known about it.

The policyholder, an international student, said he was unfamiliar with insurance practices and did not intend to misrepresent his driving history, but AFCA found he failed to take reasonable care.

The previous month, AFCA ruled against the same insurer in relation to a driver’s failure to disclose criminal convictions. The insured said he believed he didn’t need to tell anyone about convictions dating back more than 10 years – and AFCA said the insurer had not established that he failed to take reasonable care.

Last year, AFCA accused Allianz of showing ”a serious lack of understanding” as to the nature of the duty. The insurer had declined a landlord’s claim after a fire because the property was unoccupied – but AFCA said it had not asked specific questions about occupancy.

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