Insurance contracts require a duty of utmost good faith on both sides. Claims may be reduced if the insured under-insured the property. Unusual terms must be disclosed by insurers. Exclusions relating to other insurance contracts are regulated, and claims by non-policyholders are also covered. Breach of a policy does not automatically void all claims.
Policyholders should insure property and risks at their full value. Property insurance premiums are assessed on the assumption that property is insured for full value. If property is under-insured (the loss claimed exceeds the sum insured under the policy), then effectively the policyholder is assuming the risk of the uninsured portion of the loss.
A number of insurance policies deal with this uninsured portion by reducing or averaging the insurer’s liability under the policy, thereby reducing the cover available to the policyholder under the insurance contract. An averaging clause is only effective if the policyholder has been clearly informed in writing of its nature and effect before entering into the contract (s 44 IC Act).
The IC Act also limits the effect of such a clause if the property insured is either the principal place of residence for the policyholder or their family, or the contents of such a residence. In such cases, the averaging clause will have no effect if the sum insured is more than 80% of the value of the property. If the property is insured for less than 80% of its value, then the sum insured shall be averaged in accordance with the following formula:
A = the amount of loss;
S = sum insured; and
P = 80% of value of the property.
A and B have a new-for-old insurance policy for the contents of their home. The contents are valued at $60,000 but they have only insured them for $40,000 (less than 80% of their value). A stereo worth $2,000 is stolen. Even if the relevant insurance contract contained an average clause, section 44 of the IC Act would provide the following basis for averaging:
This means the policyholder would only receive $1,666 (less any excess) towards the replacement of the stereo and would need to pay at least $334 of the loss themselves.
Before an insurance contract is entered into, the insurer must clearly inform the consumer in writing of any unusual provision and its effect (s 37 IC Act). If the insurer does not do so, it cannot rely on an unusual provision in the contract (not being a prescribed contract; see “Prescribed contracts”). An example of an unusual term would be a requirement that a policyholder give immediate notice to the insurer of a claim.
Some policies seek to limit the liability of the insurer if the policyholder has entered into some insurance contract covering the same claim. An example of this would be a provision in a policy that cover under the policy is only available for amounts not paid by any other valid and collectable insurance. Under section 45 of the IC Act, such “other insurance” provisions are void, unless the other insurance policy is identified and specified.
A person entitled to cover under an insurance contract cannot have a claim denied simply because they are not named in the policy (ss 20, 48 IC Act). For example, a home contents insurance policy which extends coverage to a policyholder’s family and their belongings will cover the policyholder’s spouse and children even though they are not named in the insurance documents.
The June 2013 reforms to the IC Act introduces a new term to the IC Act: “a third-party beneficiary”. This is defined as a person who is not a party to an insurance policy, but who is specified or referred to in the policy by name, or otherwise, and who is entitled to benefit from the policy (new s 11(1) IC Act).
Under the 2013 reforms to the IC Act, ASIC is entitled to bring an action against an insurer on behalf of third-party beneficiaries – if ASIC forms the opinion that an insurer has breached the terms of a policy or the IC Act (s 55A, as amended).
Where an insured person has died or cannot be found (after reasonable inquiry) and you have a claim for damages against that person, you may recover directly from their insurer the amount payable under the insurance contract in respect to your claim (s 51 IC Act). Under the 2013 reforms to the IC Act, section 51 of the IC Act has been amended to extend its operation to third-party beneficiaries. Section 601AG of the Corporations Act 2001 (Cth) permits a direct claim against an insurer of an insured and liable company, if that company is subsequently deregistered.
Where an insurer may not refuse to pay a claim
Prior to the IC Act, the breach of a condition in an insurance contract (regardless of how minor) normally entitled an insurer to avoid the policy altogether. This common law right of insurers has been severely restricted by section 54 of the IC Act.
Section 54 is a much litigated and very important provision of the IC Act. It provides that an insurer cannot refuse to pay a claim in whole or in part by reason of some act or omission by the policyholder that occurred during the period of the insurance contract, but the insurer may reduce its liability under the policy by an amount that fairly represents the extent to which the insurer’s interests have been prejudiced by the policyholder’s act or omission.
For example, a policyholder who in breach of a condition of the policy fails to notify a claim during the relevant policy period may still be covered by the insurance contract if the insurer has suffered no prejudice as a result of the late notification. Another example is a motor vehicle insurance policy that excludes cover if the driver of the vehicle is unlicensed. Unless the insurer can demonstrate prejudice caused by the vehicle being driven by an unlicensed driver, it may be liable for the full amount of the claim.
However, if the relevant breach by the policyholder is the cause of the loss claimed under the policy (e.g. drink driving), then section 54 does not assist the policyholder.
Most insurance policies require policyholders not to admit liability to the other party or attempt to resolve claims without the agreement of the insurer. Sometimes difficulties are created for policyholders when a claim can be resolved on reasonable terms but the insurer hasn’t yet decided to cover or pay the claim. In these circumstances policyholders must be careful not to act in a manner that may jeopardise their insurance cover.
Section 41 of the IC Act provides the policyholder with some protection in these circumstances. If an insurer does not respond within a reasonable time to a notice from the policyholder requiring the insurer to cover the claim, the policyholder may proceed to resolve the claim and an insurer may not refuse to pay the claim because the settlement was reached without the insurer’s consent. If an insurer agrees to cover a claim it must decide whether it will assume the conduct of any legal proceedings.
A property claim arising from a catastrophe should be finalised within one month (s 9 Code).
Section 57 of the IC Act requires an insurer to pay interest to cover any delay in payment under an insurance contract. The period for which an insurer is required to pay interest commences on the day from which it was unreasonable for the insurer to withhold payment.
The right to interest does not depend on the commencement of legal proceedings. The rate of interest is prescribed in the IC Regulations and is calculated on the basis of the 10-year treasury bond yield plus 3%.
It is important for policyholders and legal practitioners alike to remember the following when dealing with a difficult insurer who is refusing to pay a claim.
First, insurers have a duty of utmost good faith towards policyholders (and vice versa). This duty is confirmed by sections 13 and 14 of the IC Act.
Second, the courts will generally interpret ambiguous terms in an insurance contract in favour of the policyholder. This is known as the “contra proferentem rule”.
Section 7 of the Code provides that after receiving all relevant information and completing all enquiries, insurers should decide to either accept or deny a claim within 10 business days. If this timeframe is not practical they are required to agree to a reasonable timeframe with the policyholder. The Code requires the insurer to notify a policyholder of the appointment of a loss assessor/adjuster within five business days of appointing them. Insurers are required to keep policyholders informed of the progress of their claim, at least every 20 business days.
The Code requires claim forms to be in plain language, and insurers must keep policyholders informed about the progress of a claim unless they are awaiting a response from the policyholder. When a claim is rejected an insurer is required to properly advise the policyholder of that decision and the reasons for it. When a claim is rejected an insurer is required to provide written advice of that decision and reasons.