Insurance Contract

Contents

  • Introduction
  • Types of insurance
  • The insurance agreement
  • Duties and rights
  • Elements of a claim
  • Claims procedure
  • Policy benefits and limitations
  • Dispute resolution
  • Further reading
  • Contact points

Introduction

This page provides an overview of the law relevant to buying and claiming on personal and small business general insurance. Life and medical insurances are not dealt with in any detail. The Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013 and will change the law as to: duty of utmost good faith, disclosure and misrepresentations, subrogation and third parties. As the changes will take effect at various time points after Royal Assent, extra care should be taken in considering these issues.

What is insurance?

Insurance is a contract between an insurer and the insured by which, in exchange for money (the premium), the insurer agrees to cover (indemnify) the insured to the extent of the agreement. It is of course an ancient concept and today by revenue a $40 billion Australian industry.

Why insure?

There may be an obligation to insure by statute (e.g. for bodies corporate) or by contract (e.g. for tenants). Insurance should be considered as risk management for any peril that may threaten the financial well-being of the insured. Insuring against fire damage or motor vehicle third party property liability, for example, may give relatively inexpensive peace of mind.

Brokers and agents

The introduction of the Financial Services Reform Act 2001 (Cth) and later Acts have caused widespread changes to the industry. The terms ‘broker’ and ‘agent’ are now superseded in statute by ‘licensee’ and ‘authorised representative’. However in principle, a broker acts for the person who wants or has insurance, and an agent is a party who acts on behalf of the insurer in arranging insurance and processing insurance claims. As insurance today may be purchased in many places, it is important to know whether the party is acting for the insured or the insurer.

Types of insurance

Today, almost any risk may be insured if a valid insurable interest is established (see Insurable interest below).

Personal insurance

Personal insurance may cover property (and/or related liability) of:

  • motor vehicle
  • home building or contents
  • pleasure craft (e.g. boats)
  • travel
  • accident and sickness.

Liability for personal injuries caused by car accidents is insured and paid for at the same time as vehicle registration. It is known as Compulsory Third Party (CTP) insurance (see Chapter 30: Accidents and injuries).

Home building and/or contents insurance policies will usually include cover for liability as homeowner or occupant as the case may be (e.g. covering a visitor who falls down the stairs). For convenience, many homeowners insure both building and contents together. Accidental damage to valuables is often available for an extra premium.

Personal accident or sickness insurance covering an income stream may be a person’s greatest general insurance risk. Life insurance, which is not within the scope of this chapter, encompasses several types of risk insurances for example term life, trauma (critical accident or illness) and income protection (salary continuance).

Household workers insurance for employees such as cleaners, gardeners or child carers is available through WorkCover Queensland, often at very little expense.

Small business insurance

Small business insurance may cover:

  • industrial special risk comprehensive cover
  • business package components, including fire and allied perils, business interruption, theft, money, plate glass, engineering, accidental damage for valuables, goods in transit and/or fidelity guarantee
  • construction and erection
  • business motor vehicle or fleet
  • various liabilities, including public, product, professional indemnity, company director or officer, statutory liability and/or management liability
  • personal accident or illness.

It is often better for a business to obtain independent financial advice from a broker before arranging insurance. Legal advice regarding obligations to insure and/or risk transfer provisions in contracts with associates may also be prudent.

The insurance agreement

Each element of an insurance contract is important. The contract is often referred to as a policy but will be governed by proposal, schedule, policy wording (now contained in a Product Disclosure Statement (PDS)), Statement of Advice (containing any specific advice), statutes and the common law.

Proposal

The insured may receive guidance from a range of people in completing the proposal form. These may include the insurer’s staff, a licensee or authorised representative. Today it is often done over the telephone for mutual convenience. While the situation may become complicated by the involvement of others, the person seeking insurance has a very important duty to disclose all that a person would consider relevant to an insurance company. These duties of disclosure and utmost good faith are discussed below.

Policy schedule

The policy schedule will include particulars on any individual policy taken from both the insurer and the insured (usually from the proposal form). Rather than hoping for the best when making a claim, when first receiving the schedule, the insured should check that all particulars are correct, such as:

  • those named as insured
  • those noted as having an interest in the policy (and exactly the nature of the interest)
  • the thing(s) insured
  • the time period insured
  • the basis of insurance (i.e. agreed or market value)
  • the excess
  • any special endorsements or conditions.

Policy wording

The policy wording is contained in the PDS. It is important to keep this document and carefully note:

  • that the wording version in the PDS is the same as described in the schedule
  • any notices highlighting the insured’s duty of utmost good faith and disclosure
  • the definitions (e.g. contents may not include all that a person wants to have covered, such as cover for electrical appliances but not home office equipment)
  • sub-limits (e.g. those applied to valuable items and collections)
  • exclusions (e.g. fences may not be covered for storm damage)
  • average or co-insurance clauses (e.g. if the insured item is under-insured (the value that the item is insured for is less than the actual value of the item), the insurance company may wish to reduce all claims in proportion to what the true sum insured should have been. This may be regardless of the value of the actual claim.)
  • conditions of cover (e.g. the responsibility to take all reasonable precautions to prevent loss)
  • the claims process, particularly in relation to the time limits and process for claims notification.

Duties and rights

Federal and state statutes and the common law contain a bundle of established duties and rights concerning insurance law. The industry itself has also introduced a number of self-regulatory measures. Relevant legislation includes:

  • Insurance Contracts Act1984 (Cth) (IC Act) as amended
  • Financial Services Reform Act 2001 (Cth) 2001

It is important to note that despite many policies offered in ‘standard form’, the Australian Consumer Law does not apply to general insurance. At the time of writing, this situation is being reviewed by federal government.

The IC Act (including its Regulations) was passed to reform and modernise the law of insurance contracts to strike a fair balance between insurers and the insured. The operation of this statute is overseen by the Australian Securities and Investments Commission (ASIC) and, following the Insurance Contracts Amendments Act 2013, its powers to be involved in claim disputes will increase significantly.

The Financial Services Reform Act 2001 (Cth) statutes have reformed the entire financial services industry, including insurance, particularly in respect of industry regulation and consumer information required in the PDS and any statement of advice.

Duty of utmost good faith

The IC Act includes a well-settled common law concept of uberrima fides (utmost good faith) (s13). Insurance policies are special contracts for several reasons; for example, an insured is usually in a better position to know what risk is to be transferred to the insurer, and an insurer usually has far more negotiating power and insurance law knowledge than the typical insured.

Accordingly, both insurer and insured (now including those covered in the policy wording but not named in the schedule) have the duty to act in the utmost good faith toward the other. The duty is not one of usual good faith but utmost good faith when contracting, and it is not to be diminished by any other obligation or right. There are important consequences for breach of this duty, for example the policy (along with claims falling under it) may be avoided for such breaches. Both insured and insurer should be mindful of this serious duty at all times.

Duty of disclosure

It follows from the duty of utmost good faith that the insured, usually knowing far more relevant information about the subject matter to be insured, should disclose all that a reasonable insured person would know to be relevant to the insurer. This is a statutory requirement (s21). However, section 21A of the IC Act has modified the disclosure required at the time a contract of insurance is first entered into. It requires the insurer to ask specific questions about what is considered relevant, rather than relying on a general question to the intending insured to reveal everything they think relevant. If there is no specific question asked and the matter is not exceptional (as defined by the IC Act), the insurer may no longer be able to rely on a non-disclosure to deny a claim or avoid a policy. The insured must remember, however, that it is a new insurance contract every year so they must make proper disclosure on each and every renewal.

According to section 22 of the IC Act, the insurance company must, in writing and before the insurance agreement is entered into, advise a person seeking insurance that that person has a duty of disclosure.

Dishonesty and fraud

As with any contract, it is naturally unlawful to be dishonest in any insurance matter. Insurers take fraud seriously and may well prosecute even a low-value fraudulent matter as a policy measure to discourage fraud throughout the insurance market.

Generally, where insurance has been obtained and there has been fraud, misrepresentation or non-disclosure, the insurance company has several options. It can:

  • avoid the contract if the non-disclosure or misrepresentation was fraudulent (s28(2))
  • reduce its liability in respect of any claim under the policy to the extent of the non-disclosure or misrepresentation (s28(3)).

Under the IC Act, an insurer is generally entitled to reduce the claim to the extent that its rights were prejudiced (s54). For example, had the insurer known a vehicle was the turbo model, they may still have underwritten the policy but with a higher excess and premium.

Outright fraud may be difficult to prove but, when proved, the insurer will be entitled to deny the portion of the claim that is affected. For example, in a theft claim, if the insured knew that a bottle of whisky was almost empty rather than almost full (as stated on the claim form), and fraud was proved, that part of the whole claim could be denied. However, if the fraud on the claim is indivisible (e.g. saying that a burnt-down house was in good condition when in fact it was condemned by the local council), the entire claim may be refused.

Special rules apply in relation to fraud, misrepresentation and non-disclosure in relation to life insurance contracts, which allow a life insurance provider to avoid the contract or vary the policy terms (s29).

An insured accused of any dishonesty should seek legal advice immediately.

The common law and equity

Individual cases involving disputes about insurance and interpreting its statutes are decided by judges and magistrates, and these case precedents make up the common law (see Chapter 1: Where law comes from).

Although the IC Act is a comprehensive review of the law of insurance, it is not a statutory code, and it still falls to the common law to interpret statutory provisions and continue making law in areas not otherwise covered. Fundamentally, an insurance policy is a contract and general contractual principles will apply.

For example, there appears to be a developing line of case authority to the effect of insurers being liable for interest and/or damages following unreasonable claims denial, but each case will naturally be decided on its own evidence.

General insurance code of practice

The General Insurance Code of Practice (the Code) is an industry agreement adopted by most leading insurers. It is administered by the Financial Ombudsman Service Ltd (FOS), and a failure by the insurer to comply with the Code may be disclosed by the FOS in its annual report. An independent review report was published on 2 August 2013 and as with the IC Act, significant changes may occur to the Code shortly.

Some relevant claims procedure deadlines include:

  • notify the insured of required information, appoint loss adjuster and/or provide initial time estimate of claims decision on initial claims receipt (10 business days)
  • keep the insured informed of progress (at least every 20 business days)
  • respond to the insured’s information requests (10 business days)
  • accept or reject the claim once all relevant information in hand (10 business days)
  • respond to a complaint (15 business days).

For claims rejections, it is required for the insurer to provide:

  • written decision reasons
  • information on complaints handling procedures
  • copies of service provider reports upon which the rejection was made upon request.

A copy of the Code is available from the Insurance Council of Australia (see Contact points below).

Financial Ombudsman Service Ltd

Most leading insurers are also members of the FOS, which is not a government ombudsman but an industry dispute resolution scheme controlled by its Terms of Reference and Operational Guidelines. For more information visit the FOS website (www.fos.org.au). Further discussion of FOS claims dispute procedure follows below.

Elements of a claim

A claim can be broken down into a number of elements: event, proximate cause, insured property, insurable interest and proof of ownership and value.

Event

The event that gives rise to the claim is usually thought of as a single sudden one. While this is often the case, it need not always be so. For example, an event may be a steady drip from a shower pipe behind a bathroom wall, the damage of which occurred and remained hidden for some years.

Proximate cause

The loss or damage must be proximately caused by an insured event. For example, a piece of jewellery may have gone missing, but it is for the insured to prove that it was in fact stolen. Similarly, where a house has been damaged, it is the responsibility of the owner to prove that the damage was caused by an event that is covered by the insurance policy (e.g. a fire or storm).

Insured property

The property of the claim, which has been lost or damaged, may not be covered, either because it falls outside of what is so defined (e.g. the home building when only contents are insured) or it is excluded (e.g. a motor vehicle in a claim under a home contents policy, even though it was stored in the home building).

Insurable interest and third party beneficiaries

Even if the subject matter of the claim meets other requirements, the insured generally must have an insurable interest in it. The concept of an insurable interest bears similarities to legal interest but is not necessarily the same. For example, by virtue of marriage, a spouse may have an insurable interest in a motor vehicle, even though registered ownership is with the partner. If such persons are mentioned in the policy wording, they are known as third party beneficiaries and, depending on when the policy incepted or renewed, may now have similar duties and rights to the insured named in the policy schedule. This distinguishes insurance from a wager, where one may not have any interest in an event (apart from the bet).

Proof of ownership and value

It can be distressing when the subject of an insurance claim is either gone or destroyed, and proof of the insured ever owning it and its value are questioned by the insurer. Keeping purchase invoices, ownership manuals and other documentation is advisable. However, making statutory declarations under the Oaths Act 1867 (Qld) or providing photographic evidence of ownership may be sufficient.

Claims procedure

It is important that the proper procedure in making a claim is followed, as breakdowns in procedure may well translate to delays and less than full entitlement being received by the insured. Insurers are now allowed to give notices and information electronically and may often wish to do so.

Read the policy

After immediate matters are dealt with (e.g. putting out fires), the next thing an intending claimant should do is read the policy, including all of the following, as the case may be:

  • proposal
  • schedule
  • PDS, including policy wording
  • relevant communications and file notes.

It is always better to deal with the insurer from a position of some knowledge.

Lodging a claim

Claims service, including claims handling procedures, will vary from insurer to insurer. A good first step for a person making a claim is to telephone the company and find out if there will be one or a series of claims staff appointed to deal with the claim. If there is only one person, it is advisable to note their direct contact information.

Once the insurer has been contacted, there is a good chance the claims officer will have a standard procedure to follow in handling the matter. This may include:

  • taking the insured’s name and policy details
  • asking for a brief description of the loss and its cause
  • taking the basic claim details over the telephone or sending out a claim form
  • asking the insured person to obtain quotations to repair the damage
  • advising that a loss adjuster/assessor will be in contact to go through the claim on site.

Loss adjusters

Loss adjusters (or assessors) are either employees of the insurer or contractors to it. Their role is to assess liability and recommend what amount (or quantum) should be paid by the insurance company. Loss adjusters may either come from the ranks of the related trade (which is particularly common in motor vehicle claims), the insurance company, or from a legal or other background.

In motor vehicle claims, assessing centres are now quite common for damaged but driveable cars, and some insurers will ask its nominated repairer to also assess the claim.

Investigators

Investigators are usually appointed where a loss adjuster is not able to gather all the information desired by the insurance company. This could be for a number of reasons, including:

  • witness statements need to be taken
  • large claims need to be investigated according to company procedure
  • a certain type of claim (e.g. loss of all luggage) needs to be investigated
  • further investigation is necessary before accepting liability due to unusual or suspicious circumstances.

Investigators are sometimes retired police officers, and covert surveillance of an insured does take place from time to time. Unless the insured is concerned that something is wrong, assisting the investigator may be quite fair and reasonable. However, if there are any concerns, the insured should say nothing and obtain legal advice immediately.

Repairers

Various tradespeople and other professionals (e.g. engineers) may be involved in the claim process. As with adjusters and investigators, the insured should know what repairers are involved and what work they are doing. A copy of all relevant documents (including their reports) should be given to the insured person.

The work of repairers should be checked regularly and without delay. Quality issues with work should generally be directed first to the adjuster or directly to the insurer if no adjuster is appointed.

Service providers for the insured

Preparation of the claim may be an expense covered by the policy. The insured should review the policy and obtain insurer agreement in advance but if in doubt take independent legal advice.

Public insurance adjusters, investigators, repairers and other professionals may be hired by the insured themselves to deal with insurance claim matters. While this is not uncommon in countries such as the USA, it may be for the insurer to decide if they will pay for such representatives and indeed what weight, if any, is placed on their opinions. This will be a matter of negotiation and may be better placed in the hands of the insured’s solicitor.

Claiming on another’s insurance

Those claiming on the insurance of the at-fault party (e.g. a negligent truck driver) are often described by an insurer’s staff as third parties. They are a third party to the policy of insurance between the insurer and the insured. These third parties may wish to claim on another’s insurance, as they either have no insurance or do not wish to claim on their own policy for some reason.

Unless there is an unusual circumstance, such as a contractual arrangement between the third party and the insured, the insured has died or gone missing and cannot reasonably be found, there may be no legal entitlement for the third party to claim on a policy direct.

It is usually the case that cover is dependent on the insured:

  • making a claim themselves
  • passing on the third party’s claim and requesting cover for that also
  • meeting other contractual requirements, such as payment of an excess.

The third party should send a letter of demand with a time limit for compliance to the insured. Personal delivery of the letter is preferable. However, litigation is sometimes necessary before an insured will complete all required steps.

Policy benefits and limitations

Some will purchase insurance just on price, and while most policies have a similar theme, each personal and small business policy is a contract worded differently. While, in the scope of this chapter, it is impossible to say exactly what entitlement may be owed to a particular insured, the following general principles will apply and should be considered.

Once a claim, on the face of things, is established (as described in Elements of a claim above), one must then look at limiting factors.

Prescribed minimum cover

For some personal insurances, the Commonwealth Government has prescribed a statutory minimum policy cover (and exclusions) in the Insurance Contracts Regulations 1985 (Cth) as a ‘safety net’. These policy types are:

  • personal motor vehicle
  • home building
  • home contents
  • sickness and accident
  • consumer credit
  • travel.

If the insured has less cover than that prescribed by government because, for example, the insurance contract places sub-limits on payments for certain types of claims, then pursuant to section 35 of the IC Act, the insurer must still pay an amount equal to the minimum prescribed cover in the Regulations unless the insured:

  • knew or could reasonably be expected to know that the cover was less than the minimum statutory prescribed cover
  • was clearly informed in writing prior to taking out the insurance, that the contracted cover was less than the minimum statutory prescribed cover.

This information notice is often in the PDS supplied by an insurer with the blank proposal form. However, if the insurer representative did not actually supply the PDS, the insured may be entitled to government minimum cover.

Sub-limits

Insurers often apply policy sub-limits to certain risks, for example:

  • jewellery and watches
  • any item containing a precious metal or gemstone
  • antiques, manuscripts and curios
  • collections of stamps, coins, medals
  • art works, tapestries and handmade rugs
  • cash, bullion, bonds
  • computers and computer equipment
  • mobile phones
  • items used in business or trade
  • contents in the open air.

Such sub-limits are usually less than the government-prescribed minimum cover and therefore must be explained to the insured prior to taking out the policy. If this has not been done, the insured is entitled to the minimum cover determined by government.

Co-insurance and average clauses

Under-insurance is seen by the industry as a big problem in this country. That is, the insured are often taking out policies where the sums insured are significantly less than proper value.

Where an insured has insured an item for less than its actual value, some insurers will reduce any claim in proportion to what the correct sum insured should have been. For example, if the insured owned a car valued at $50 000 but only had it insured for $25 000, the insurance company might then say it is only responsible for half of any claim. If the car owner then claimed $10 000 in repairs for a car accident, the insurance company could average out its liability and say it was only responsible for half of the insurance value and need only pay half of the claim, in this case $5000.

Under section 44 of the IC Act, an insurance company can only rely upon averaging where there is an averaging clause in the contract, and it has clearly notified the insured person of the effect of that clause.

Moreover, the section operates:

  • to provide an under-insured buffer of 20%. This means that an insurer cannot rely upon an averaging clause where the value insured is 80% or more of the actual value. In the above example, if the car owner had insured the car for $45 000 (or 90% of its real value), the insurance company could not limit its liability to 90% of the total claim but would have to pay the whole claim
  • where an item is more than 20% under-insured, the insurance company cannot average out to more than 80% of the insured value. In the above example, if the car owner insured the $50 000 car for $25 000 and then claims $10 000 in repairs, the insurance company would have to pay $6250.

Exclusions

In contrast to the subject matter simply not being insured or under-insured, a number of exclusions are typically applied to any one insurance policy. These may come in many forms, but some examples include:

  • flood
  • wear and tear, rust or corrosion
  • depreciation
  • storm or tempest loss, damage to fences, gates or retaining walls
  • theft by a person ordinarily residing with the insured person(s)
  • intentional damage
  • damage in connection with an unlawful purpose
  • government seizure
  • insects or vermin damage
  • racing, pace-making, reliability trial, speed or hill-climbing test
  • some types of loss or damage where the building remains unoccupied for more than 60 continuous days, even when on holiday.

Some exclusions (e.g. flood) may be seen as contentious. Following flood and body corporate (strata) issues of 2011, in 2012 the Federal Government passed amending legislation requiring insurers to clearly inform the insured in writing whether the policy covers flood, which now carries a standard definition. Depending on the circumstances, the issue may be a matter of fact, expert opinion or a matter of law. If it is a matter of policy interpretation on whether the loss or damage was, for example, caused by flood as defined in the PDS, compared with rainwater runoff, then the insured should seek legal advice.

Dispute resolution

An insured may believe their insurer’s claims procedure is not fair or that a claims decision is wrong or unreasonable.

Generally, procedural matters should first be raised with the claims officer. If no acceptable result is forthcoming, the insured should discuss the matter with the relevant claims manager. This may resolve the problem, but if not, a formal letter of complaint should be written to the Internal Dispute Resolution (IDR) officer as soon as practicable after the claims decision for insurer response within 45 days.

Serious procedural and claims decision disputes should be discussed with a solicitor immediately. A solicitor will be able to advise policy interpretation and options within a reasonable timeframe. Hopefully, a solicitor’s letter and negotiation by telephone will be all that is required.

Financial Ombudsman Service complaints scheme

Insurance Enquiries and Complaints Ltd was incorporated in 1991 by the Insurance Council of Australia as an industry dispute resolution service. It has now merged into the FOS. Most leading Australian insurers and brokers are members. The FOS fields general inquiries and runs a complaints scheme, including a panel that makes decisions. The FOS is currently able to make binding decisions on personal and small business insurance claims of up to $280 000 in value. There is a limited power to decide on third party motor vehicle property claims of up to $3000 in value.

Complaints to the FOS against any insurance service provider should be made as soon as practicable but within six years of the cause of action accruing and within two years of any IDR decision. The complaint may be lodged online or in hard copy. The FOS allows respondents 45 days to resolve the dispute by IDR; when no agreement is reached within that time, the FOS complaint then proceeds.

Once the complaint is accepted with FOS, there is an exchange of documents from both sides; a FOS dispute officer prepares the case and presents it to the decision-making body (e.g. a dispute analyst or panel). The FOS also has power to negotiate or conciliate a resolution. Once the FOS made an arbitration decision, both the insured and respondent are notified. A decision must be accepted or rejected within 30 days.

There are some limits to the FOS Terms of Reference and Operational Guidelines, for example in matters of alleged fraud. It is usually best to consult a solicitor before lodging a complaint. Although strict rules of evidence law do not apply, thorough case preparation, including expert examination and reporting, is important. Upon notice of an FOS complaint, the respondent may well instruct their own specialist staff and defence lawyers. Complaint applications have no filing fee, and each party generally bears its own legal costs, although up to $3000 for the insured’s costs may be awarded.

The FOS dispute resolution procedure may be a suitable arbitration process to the insured, if not as speedy as sometimes hoped. If the insured accepts the decision, the respondent must pay the decided amount (subject to a reasonable release document); but if not, the insured is still free to pursue their rights to sue in a court of law.

Litigation

Where a significant claims dispute arrives at an impasse, legal action may be unavoidable. Legal representation is naturally recommended for any litigation action, as the respondent will likely instruct specialist staff and lawyers to defend the claim. There are a number of procedural steps before a matter reaches court, and these ordinarily require the attention of a solicitor experienced in insurance disputes. Contact details of solicitors experienced in insurance law are available from the Queensland Law Society referral service.

 

Further reading

Derrington, D. and R. S. Ashton (2005) The Law of Liability Insurance, LexisNexis Butterworths, Sydney.

Kelly, D. and M. Ball (2001) Kelly and Ball Principles of Insurance Law, Looseleaf Service, LexisNexis.

Mann, P. and C. Lewis (2003) Annotated Insurance Contracts Act, 4th edn, Law Book Company, Pyrmont.

Sutton, K. (1999) Insurance Law in Australia, 3rd edn, LBC Information Services, Sydney.