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Be careful: law change will discard consumers’ disclosure duty

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From October 5, duty of disclosure obligations will no longer apply to consumer insurance contracts, thanks to Hayne-inspired reform aimed at redressing the balance of power between insurers and their customers.

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

As insurers and consumers prepare, questions remain about the impact of the reform, and whether insurers’ reliance on customer responses at the point of purchase can be justified in the age of Big Data.

What we do know is that the change only applies to consumer insurance contracts, which are defined as contracts obtained “wholly or predominately for personal, domestic or household purposes”. The duty of disclosure will still apply to contracts other than consumer insurance contracts.

So why the variation? Royal commissioner Kenneth Hayne, in his final report, says the duty of disclosure “fails to recognise the extent of the information asymmetry between a consumer and an insurer”.

“A duty to take reasonable care not to make a misrepresentation to an insurer places the burden on an insurer to elicit the information that it needs in order to assess whether it will insure a risk and at what price,” he writes.

“The duty does not require an individual to surmise, or guess, what information might be important to an insurer.”

The Government, in agreeing to carry out the recommended reform, said the changes will “ensure that obligations for disclosure applied to consumers do not enable insurers to unduly reject the payment of legitimate claims”.

It should be said the case study that provoked Commissioner Hayne to act related to life insurance – where an insured’s income protection claim was denied on the basis of some unrelated but undisclosed medical history.

However, he saw fit to apply the reform to life and general insurance.

At this stage, nobody knows exactly what the impact will be. Insurers will still be able to deny claims on the basis of misrepresentation. Most commentators expect, however, that it will become harder for insurers to deny claims, because they must now be able to show that reasonable care has not been taken.

Significant numbers of disclosure-related disputes land with the Australian Financial Complaints Authority (AFCA) each year.

Insurance Ombudsman John Price tells insuranceNEWS.com.au the upcoming change is similar to one enacted in the UK in 2012, and crucial lessons can be learned.

Mr Price says when determining whether a consumer has taken reasonable care not to make a misrepresentation, the reforms require that there is consideration of all the circumstances, including:

  • The type of insurance contract and the target market, as declared under the new product design and distribution obligations
  • Any explanatory material or publicly produced or authorised material by the insurer. That includes advertising material, “which could be an issue”, according to Mr Price, “particularly around some of the life products that refer to ‘no medical tests necessary’, ‘covered for life’ and all of those things”
  • The clarity of the questions asked
  • How clearly the insurer has informed the insured of the duty and the importance of answering that duty
  • Whether the person has a broker or other agent acting for them
  • Whether it is a new contract or renewal
  • Any particular characteristics of an insured that an insurer was aware of, or ought to have been aware of.

“I think from an insurer’s point of view it is most important that the insurers, before October 5, update the contracts and the call scripts to reflect the new duty to take reasonable care,” Mr Price says.

“Insurers will find it harder to establish that people have failed to take reasonable care not to make a misrepresentation, in particular if the insurer doesn’t ask all the questions.

“They need to make sure that the questions being asked are very clear and precise at inception or renewal.

“If we look at what has happened in the UK, if there isn’t a failure to take reasonable care, there is nothing that the insurer can do, it doesn’t have a remedy available to it.”

But what exactly does “reasonable care” mean?

Mr Price says if a person was reckless or has disregard for the truth, is careless or negligent, then that would all constitute a failure to take reasonable care.

But if someone gives an answer that they think is the right answer and it later turns out to be wrong, “that is not careless”.

“You can only make a representation about what you know,” Mr Price says.

“As long as you’ve done that honestly, then there is no requirement on you to go off and research if you believe that the answer you have provided is the correct answer.”

How do you know if someone lied, but later claimed it was an honest mistake?

“That’s a matter of looking at all the facts that are there, and you are looking at what a reasonable person would have known.”

Consumer representatives welcome the change, but concerns remain about the practice of relying on customer answers at the point of sale, while carrying out detailed checks at the point of claim.

Consumer groups say this can result, in the case of motor insurance, in people driving around for years with “fake insurance”, putting themselves and other road users at greater risk.

“We support the new disclosure change, and it will help in some innocent misrepresentation situations,” Financial Rights Legal Centre Policy and Communications Officer Julia Davis told insuranceNEWS.com.au.

“Whether the insurer can deny the claim will come down to whether a misrepresentation was reasonable – and the onus is now on the insurer to prove otherwise. It will also force [insurers] to make their questions more clear.”

But Ms Davis still recommends insurers carry out “more front-end verification of disclosures”.

“If the insurer verified the disclosure data at the front end, at least people would know they were not covered, and they could see a broker to find special cover or drive less.”

It’s a point of view supported by Mr Price.

“I see a lot of logic to that,” he says. “These days, using technology and artificial intelligence that is available, you’d think that it would be easy enough to pick that up.

“The question is what the information is being used for and does it become a type of privacy breach.

“That would be the only downside I would see. I certainly think there is something there, in particular where people are being innocent in their disclosure of their claims history or other history.

“If that’s clarified as early as possible, if they don’t have cover at least they can look for cover elsewhere. If it could be achieved and technology could assist in that regard then I think it could make it easier for everybody.”

Leading personal lines insurers IAG and Suncorp, and the Insurance Council of Australia (ICA), declined to comment on whether earlier checks could be carried out.

ICA did welcome the reforms, however.

“The new duty will mean a simpler application process for customers as it replaces a lengthy prescribed notice under the existing duty of disclosure,” an ICA spokeswoman told insuranceNEWS.com.au.

“We believe the new duty will provide improved clarity and certainty to insurers and their customers, while ensuring respective rights are fairly protected.

“Insurers are reviewing their systems and processes so that questions posed to their customers are clearly designed to gather the information that insurers need.”

However, the spokeswoman says if information provided to insurers is not accurate, “the insurer will have equivalent remedies to those currently available under the Insurance Contracts Act”.

“Depending on the circumstances and the insurer’s underwriting criteria, those remedies can include reducing or not paying a claim, cancelling a policy or treating the policy as if it never existed.”

IAG says it has not relied on the duty of disclosure for most of its consumer retail products since 2015. Even under the current rules, insurers have the option of relying on misrepresentation rather than a breach of the duty of disclosure.

“IAG does not anticipate the duty to not misrepresent reforms materially changing our current processes, due to our current non-reliance on the duty of disclosure,” a spokesman said.

“Broadly speaking, we support reforms that ensure better, fairer outcomes for customers.”

For brokers, the complexity comes from having two different sets of obligations in play at once.

National Insurance Brokers Association CEO Dallas Booth believes the reform is aimed primarily at the direct space, but “a complicating factor for brokers is having two disclosure regimes depending on which segment they are dealing with”.

The change is just one of many adjustments for the industry to deal with in the post-Hayne era. How it will play out, and whether there will be any unintended consequences, is yet to be seen.

But – despite having been inspired by a life insurance case study – the reform is now broadly welcomed by the general insurance industry.

“The duty to take reasonable care is a fairer duty and helps protect people in purely innocent circumstances, where they have taken reasonable care to do what they should have,” Mr Price says.