Introduction
6.1 The Code is placed and works within a matrix of insurance consumer protection law. It is necessary to describe that developing matrix because it affects not only the Code standards but relevant insurance practice.
6.2 Australia has a range of laws dealing with the relationship between the insurer and the insured. The Code refers to some of the relevant statutes.18
Corporations Act and sales
6.3 The Corporations Act requires that the terms and conditions of a general insurance policy must be presented in a ‘clear, concise and effective manner’.19 The ASIC Act prohibits misleading and deceptive conduct or unconscionable conduct20 in relation to financial products — including insurance products. The IC Act introduced a statutory framework for insurance contracts and imposes a number of statutory obligations on insurers to inform clients of policy details.21 The Treasury Paper summarised the position:
The combination of these requirements means that insurers produce, in respect of each relevant type of policy, a Product Disclosure Statement (PDS). The PDS must be issued by the insurer to persons when they first enter the contract. The PDS is required by the law to contain a range of information, including: the terms and conditions of the policy; the costs, any amounts that may be payable; information about the dispute resolution system and how that could be accessed; and information about the cooling off regime. The information must be presented in a ‘clear, concise and effective’ manner. If the PDS relates to certain class of household/domestic contracts that are prescribed under the Insurance Contracts Act 1984, then it must also ‘clearly inform’ the consumer of any terms of the contract that differ from the standard cover for that type of contract.22
6.4 The broad objective of the PDS is to help consumers to compare the key elements of financial products so that they can check whether the products meet their needs and thereby make informed choices.23
6.5 Section 35 of the IC Act requires insurers to offer consumers ‘standard cover’ for prescribed general insurance policies24 which set out prescribed events. The NDIR Report noted
“Essentially all natural disasters, including flood, are required to be included as ‘standard cover’. Also to be included as ‘standard cover’ are policies that provide replacement cover”.25 An insurer which wishes to limit or exclude standard cover must prove that the insurer clearly informed the insured whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise.26
6.6 The Code standards on buying insurance require that the sales process is conducted in a fair, honest and transparent manner. There are standards for the insurer to give the applicant:
access to the information relied on in assessing the application; an opportunity to rectify
18 Code, section 1.18.
19 Corporations Act 2001, section 715A.
20 See paras 7.10–7.23 above.
21 NDIR Report, paras 13.16–13.24.
22 Treasury Paper, paras 41, 42.
23 Treasury Paper, paras 40–44.
24 Prescribed under the Insurance Contracts Regulations 1985, Divisions 2 and 3.
25 NDIR Report, para 13.19.
26 ICA, section 35(2) — there is an alternative ‘reasonable person would have known’ test; NDIR Report, para 13.21.
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General Insurance Code of Practice 2012–2013 Independent Review Final Reporterrors; and, on a decline, a referral to another source of insurance options. There are standards for employees, AFSL holders and authorised representatives including training standards.27
Insurance Contracts Act
An Act in four Parts6.7 The Insurance Contracts Act 1984 (Cth) (IC Act) has four main purposes. The first purpose is captured in sections that deal with pre-contract issues: insurable interest28 and conduct.29 A fundamental feature of these provisions is the limitation of an insurer’s remedies for an insured’s conduct. Importantly, the effect of a misrepresentation or non-disclosure must be proportionate to the prejudice to the insurer, not the loss of the whole contract, no matter how minor the wrong nor how disconnected from the loss. Secondly, the IC Act sets out standard terms of cover, which could be derogated from by the insurer by giving notice of the difference to the customer. The third purpose is captured in provisions that explicitly or implicitly add or subtract terms in the insurance contract, or give them limited effect, in certain circumstances. There are some limitations and prohibitions on the legal effect of certain common terms of the insurance contract. Some modify the general law so that the insurance contract operates differently. Some require notification of a term for it to be effective under the IC Act.30 Importantly, the effect of a breach of the contract must also be proportionate to the prejudice to the insurer, not the loss of the whole benefit and contract, no matter how major the wrong nor how disconnected from the loss. The fourth purpose is captured in provisions that require the insurer to give information, notices or reasons on a subject.31
Gender and natural disasters
6.8 Gender specific language and references were removed from the IC Act in 2008.32 After the natural disasters of 2010 and 2011, and on the recommendation of a number of reviews, commissions and reports,33 the Insurance Contracts Amendment Act 2012 (Cth) was passed to insert a standard definition of ‘flood’ and to provide for a KFS to be a part of the disclosure and sales process for general insurance. Section 37 of the IC Act was amended34 to provide that the standard definition of flood would apply to prescribed contracts entered into and events occurring after the transition period. An insurer must ‘clearly inform’35 an insured if the contract does not include flood cover. Section 37D provides that if an insurance contract does offer flood cover then it does so on the terms of the standard definition and there is no
‘opt out’ by notifying the insured. An insurer must supply a KFS with the content and in the circumstances prescribed by the regulations.36 The supply of a KFS does not, of itself, discharge the obligation to clearly inform the insured of a matter.37
27 Code, section 2.
28 Part III.
29 Part IV.
30 They are found in ICA Parts V–VIII.
31 Parts IX and X and sprinkled in Parts V–VIII.
32 Statute Law Revision Act 2008.
33 See section 10, Issues 6 and 7, and Appendix G.
34 Inserting sections 37A–37E.
35 But see above the view that the test should be ‘clear, concise and effective’.
36 Sections 33–33D.
37 Section 33D.
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General Insurance Code of Practice 2012–2013 Independent Review Final ReportInsurance Contracts Amendment Bill
6.9 Shortly before Christmas 2012, the Hon. Bill Shorten MP issued the Insurance Contracts Amendment Bill 2013. The Bill reflects not only the Cameron/Milne report from 2003–2004 but extensive stakeholder consultation. The most relevant changes for the general insurance industry are:
1. an insurer can give an insured a notice under the Act electronically;
2. an increase and consistency in the rights and obligations of third party beneficiaries;
3. sections to make ‘unbundling’ clearer so that an insurer can avoid or reduce its liability under one cover under an insurance contract even if another cover under that same contract are not affected; and
4. an increase in ASIC’s regulatory powers under the Act.
6.10 On 21 March 2013 the Senate referred the provisions of the Insurance Contracts Amendment Bill 2013 for inquiry and report. The reporting date is 25 June 2013.
Fairness in insurance contracts
6.11 The relationship among the fairness standards under the Code, the utmost good faith duty and unfair contract terms remedies is an important issue for this Review. It is necessary to sketch the background and to comment on current proposals for the purposes of this Review.
6.12 The Code contains a number of standards that require a Code Participant to act fairly:
1. to be open, fair, and honest in dealings with customers and be committed to high standards of service when selling insurance, dealing with claims, responding to catastrophes and disasters and handling complaints;38
2. the sales process will be conducted in a fair, honest and transparent manner;39
3. employees and authorised representatives will conduct their services in an honest, efficient, fair and transparent manner;40
4. employees and service providers will conduct their services in an honest, efficient, fair and transparent manner;41 and
5. by conducting complaints handling in a fair, transparent and timely manner.42
6.13 I recommend that these precepts are gathered together in one place in the Code and should apply consistently to each phase of the Code Participant’s relationship with the customer.
6.14 There are two current proposals for statutory change which are particularly relevant for the Code fairness standards. The first is that a breach of the duty of utmost good faith should constitute a breach of the IC Act. The second is that the unfair contract terms provisions of the ASIC Act should be grafted into the IC Act. These proposals were commented on in more detail in the Issues Paper Appendix F.
6.15 The Code fairness standards are important. The FOS QF Survey emphasised the importance
— see the Issues Paper and Appendix D of this Report. The effect of the unfair contract terms legislation would be to excise an unfair term from a contract. An alternative might be that the insurer cannot rely on the unfair term. The effect the utmost good faith changes would be to
38 Code 1.20.
39 Code 2.2.1(4).
40 Code 2.2.4(1).
41 Code 3.3.7(1).
42 Code 6.6.1(1).
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General Insurance Code of Practice 2012–2013 Independent Review Final Reportimply a fairness standard into each contractual term; the effect of the fairness standards in the Code is to establish a benchmark for conduct.
6.16 The combined effect of the fairness standards under the Code, the utmost good faith duty and unfair contract terms remedies is complex. If the Government proposals proceed there will be a right for a party to have an unfair term made void, varied or not reliable. Further, unfair conduct which breaches the utmost good faith duty, will constitute a breach of the IC Act and unfair conduct under the Code will be a breach of, or non-compliance with, the Code. The Government proposals usher in a new era for insurance contracts, with some things old and some new. The IC Act should remain as the main consumer statute for insurance contracts.
The doctrine of utmost good faith would end its period as a panacea for unfairness in insurance contracts. The new measures, in main subject matter and the tests of significant imbalances, legitimate interests and detriment, will merit close attention in the development of the legislation. It is in the community’s interest that the three parts of the law on fairness in insurance contracts — the fairness stands under the Code, the IC Act utmost good faith duty and the unfair contract terms laws — mesh coherently to give all stakeholders a high standard of fairness and certainty in their dealings.
6.17 It is not a part of the Review’s work to comment on the principles involved in these proposals but it is critical for all stakeholders that the principles are rendered into the IC Act in a workable way and in a way which is consistent with the Code’s approach and its fairness standards.
6.18 Assistant Treasurer Bradbury announced on 20 December 2013 that the Federal Government would legislate to introduce consumer protection legislation on unfair contracts terms in relation to general insurance contracts. The IC Act would be amended to include provisions based on the ASIC Act and take into account the unique features of insurance contracts. ASIC would be granted a range of enforcement powers to administer the new laws. The proposed legislation would apply to new and renewed contracts entered into after the commencement of the legislation and there would be an adequate transition period.
Development of the Code
Introduction and legislative background6.19 The Banking Industry Ombudsman scheme was initiated in 1989 and its Code of Practice, (recommended by the Martin Committee in 1991) was released in 1993.
6.20 The insurance industry established its Ombudsman scheme, the descriptively named General Insurance Enquiries and Complaints Scheme (IEC) and the Life Insurance Complaints Service, both in 1991. The Superannuation Complaints Tribunal commenced in 1994. The life insurance Code of Practice was launched in 1995 — the same year as the Life Insurance Act 1995 (Cth).
6.21 The period 1989 to 1995 had seen the advent of Codes and ombudsman schemes for the insurance industry as a whole. The Wallis Inquiry, a year later, considered the role of Codes:
“a regime of co-regulation where statutory provisions provide the enforcement and broad principles for regulation, but the details are left to more flexible industry-based Codes and dispute resolution arrangements”.43 It also considered amending the provisions in existing laws to “make penalties proportionate to losses incurred through Code breaches”.44
6.22 Codes of Practice occupy a fragile place in the matrix of insurance regulation. The prohibition on a corporation in trade or commerce contravening an applicable industry code is limited to a
43 Financial System Inquiry, Discussion Paper, page xix, November 1996.
44 Financial System Inquiry, Discussion Paper, page xix, November 1996.
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General Insurance Code of Practice 2012–2013 Independent Review Final Reportcode that is prescribed45 and the General Insurance Industry Code of Practice is not. The ASIC Act provides that a court may have regard to an applicable industry code in determining whether the conduct of a financial services supplier is unconscionable.46 The reference includes both mandatory and voluntary codes, but only if they are in the Regulations.47 The Code is not. The reference also includes any industry code but only if the service recipient acted on the reasonable belief that the supplier would comply with that code.48 On this basis the Code is a benchmark for unconscionable conduct.
6.23 The first General Insurance Code of Practice came into effect in 1994. It was one of the first.49 The Code was developed by the ICA and aimed to raise the standards of practice and service in the insurance industry. It was developed in anticipation that the Insurance Act 1973 (Cth) would be amended to require each authorised insurer to adopt the Code approved by the Insurance and Superannuation Commission (the precursor to the Australian Prudential Regulation Authority).50
The 2009 Code
6.24 The Independent Review in 2009 made ten recommendations. Some recommendations were for amendments to the Code. One important recommendation was that participating companies ensure that the training they provide to their employees meets the requirements set out in clause 3.6.7 of the Code. Another recommendation was for a larger role for the CCC to enable it to better monitor compliance with the Code and to identify serious or systemic issues with the Code or its application. There were also changes to the terms of the Code on hardship and the prominence given to the duty of utmost good faith.
The 2012 amendments to the Code
6.25 In February 2012, the ICA approved amendments to the Code, with effect from 1 July 2012, to enhance the section 3 claims handling standards and to remove section 4.3 from the Code.51 6.26 Section 3.4 is enhanced by standards for informing the customer of rights in relation to a
claim and dispute as well as the supply of experts’ reports.
6.27 The 2012 Code introduces the category of specified policies.52 There is a ‘right to claim provision’ which dictates the insurer’s response to an inquiry about whether a policy covers a claim. The insurer must invite the making of a claim; promise to assess coverage fully; and not discourage the making of a claim.53 The 2012 Code importantly includes a time limit of four months for a decision on a claim unless exceptional circumstances apply54 and a time limit of 12 months where exceptional circumstances apply.55 The 2012 Code adds a time limit of 12 weeks to obtain an expert report and an obligation to supply reports to the policyholder on which the insurer has relied in assessing the claim.56
6.28 The 2012 Code57 embellishes the specific terms of the 1994 Code on investigators, assessors and loss adjusters58 and adds training requirements.59
45 Australian Competition and Consumer Act 2010 (Cth), Part IVB, sections 51ACA(1) and 51AE.
46 Section 12CC(1)(g) and (3).
47 Section 12CC(1) (3); Australian Competition and Consumer Act 2010 (Cth) section 51ACA(1).
48 Section 12CC(1)(h) and (3).
49 The Code of Banking Practice was released in 1993.
50 First page.
56 Sections 3.4/4 and 3.5/5(d); FOS QF Survey, section 6(d).
57 Section 3.7.
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General Insurance Code of Practice 2012–2013 Independent Review Final Report6.29 The 2012 Code omits section 4.3 which allowed some flexibility in Code standards during catastrophes and disasters. It also omits the standard for Code Participants establishing internal processes for responding to catastrophes and disasters.60 Employee and service provider training and education in dealing with the aftermath of a catastrophe or disaster is required.61
Code Changes from the 1994 to the 2012 Code
6.30 In addition to the 2012 Code changes noted above, the 2012 edition of the Code exhibits significant similarities to and some important differences from the 1994 Code. The objectives are phrased very differently but have similar themes. There is a commitment: to good, then high, standards of customer service;62 to informed relationships between insurers and customers;63 and to better mechanisms for complaint and dispute resolution.64
6.31 One principle omitted in the 2012 Code is the reference to the need for consumers to be made aware of the provisions of the Code.65 Another omitted principle is the need to protect customers and insurers from increased costs from fraud.66 The 2012 Code says, like the 1994 Code, that it does not provide any legal entitlement or right of action.67 The 2012 Code omits the specific 1994 objectives of promoting product disclosure68 (no doubt because that matter is now covered by the ASIC Act, Chapter 7 of the Corporations Act, its regulations and ASIC regulatory guidelines), and of facilitating the education of customers about their rights and obligations under insurance contracts.69 The 2012 Code applies not only to retail insurance products but also to some wholesale insurance products.70 It contains the general requirement on insurers to be ‘open, fair and honest’.71
6.32 The 2012 Code omits entirely the 1994 section on policy documentation — the reasons noted above would justify the omission. Section 2 of the 2012 Code deals with buying insurance and focuses on the application and underwriting process. It also sets out conduct standards for employees and agents72 in their sales tasks and functions. These standards are similar to the standards for all insurance services by agents and employees under section 3 of the 1994 Code.
6.33 Both the 1994 and the 2012 Codes have detailed provisions on claims. The 2012 Code introduces a duty to conduct claims in a ‘fair, transparent and timely manner’.73 The 2012 Code is also marked by an attempt at a timetable for the insurer’s dealing with the assessment of a claim and the requirement to keep the customer informed about its progress.74 The 2012 Code now allows an insurer to agree a timetable for a specific claim.75 Both Codes require an insurer to give reasons for rejecting a claim76 and to advise the customer about internal and
58 Sections 5.2–5.4.
59 Sections 3.7/6&7; FOS QF Survey, section 6(e).
60 Section 4.
61 Sections 3.6, 6 and 7.
62 1994 Code, section 1.2(a) and 2012 Code, section 1.18(d) and section 1.20.
63 1994 Code, section 1.2(d) and the 2012 Code, section 1.17(a).
64 1994 Code, section 1.2(c) and 2012 Code, section 1.17(c).
65 1994 Code, section 1.3(f).
66 1994 Code, section 1.3(e).
67 2012 Code, section 1.12 and 1994 Code, section 1.2: no ‘legal right or liability’.
68 Section 1.2(b).
69 1994 Code, section 1.2(c).
70 Sections 1.4 and 1.5.
71 2012 Code, section 1.20.
72 Australian Financial Services Licensees and Authorised Representatives.
73 Section 3.5/1: for claims employees and service providers, it is ‘honest, efficient, fair and transparent’ — section 3.7/1.
74 Compare the 1994 Code, sections 5.1(c)–(f) with the 2012 Code, sections 3.1–3.4.
75 Section 3.3.
76 1994 Code, section 5.1(g) and (h) and 2012 Code, sections 3.5/3 and 5.
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General Insurance Code of Practice 2012–2013 Independent Review Final Reportexternal dispute resolution arrangements.77 The 2012 Code adds an obligation to supply reports on which the insurer has relied in assessing the claim.78 The 2012 Code79 embellishes
external dispute resolution arrangements.77 The 2012 Code adds an obligation to supply reports on which the insurer has relied in assessing the claim.78 The 2012 Code79 embellishes