Enforcing ‘fairness’ – the future of insurance claims handling in Australia
There has been a marked trend in recent times, and particularly following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), for significant laws and other measures to be introduced that more closely regulate claims handling for general insurers. The key theme of those measures is mandating and enforcing ‘fairness’ for the insured, particularly in respect of retail and small business insurance.
We look at the measures that have been introduced and provide our views on their impact on the future of claims handling in Australia.
Enforcement of ‘good faith’
One measure that has already been implemented provides for stronger enforcement of the duty of utmost good faith in general insurance. In 2019, amendments to the Insurance Contracts Act 1984 (Cth) (ICA) were introduced that:
- expressly empowered ASIC to apply to the Court for a declaration that a person contravened the implied duty of utmost good faith; and
- provided significant civil penalties for persons found to have contravened the implied duty of utmost good faith.
The amendments have broadened ASIC’s powers in relation to a breach of the duty of utmost good faith beyond those relating to the variation, suspension and cancellation of an Australian Financial Services Licence (AFSL). The specific enforcement remedy that is available for individual or series of contraventions will allow ASIC to approach enforcement in a more targeted and breach-specific manner.
Claims handling as a ‘financial service’
Draft legislation has been released which proposes to give effect to the Royal Commission’s recommendation that the handling and settlement of insurance claims comprise a ‘financial service’ under the Corporations Act 2001 (Cth) (Corporations Act). The new laws were initially intended to take effect from 1 July 2020 (with a transition period available for licensing), however the Morrison Government has recently announced a six-month deferral for the implementation of the legislation.
Claims handling will be affected in the following key ways by the draft legislation:
- Certain persons involved in handling and settling claims will now generally be required to hold an AFSL. This includes loss assessors and adjusters acting on behalf of an insurer, insurance fulfillment providers who have authority to reject all or part of claim, and third-party claims managers and administrators.
- AFSL holders and their representatives will now be required to provide their services ‘honestly, fairly and efficiently’. This generally means that they will need to handle and settle claims:
- in a timely manner, without undue delay;
- in the least onerous and intrusive way possible, including by requesting information and undertaking other assessment methods only if it is strictly relevant to the claim;
- fairly and transparently, and giving reasons for decisions; and
- in a supportive manner.
- A ‘Statement of Claim Settlement Options’ will also need to be provided to retail clients if the insurer is offering to settle all or part of a general insurance claim through cash settlement, instead of repairing or replacing the insured product.
The incorporation of claims handling and settling as a financial service under the Corporations Act will also impose further obligations on insurers as to training and competence requirements and breach identification and reporting obligations.
New Insurance Code of Practice
The new General Insurance Code of Practice (Code) will take effect by 1 July 2021, although some provisions relating to family violence policies take effect on 1 July 2020. As previously reported, ASIC has also recently written to general insurers outlining its expectation that additional consumer protections be put in place sooner on account of COVID-19.
The key changes to the Code in relation to claims handling are as follows:
- Vulnerability: There is a new section that applies to retail insurance products for customers experiencing vulnerability.
- Financial hardship: There are enhanced provisions relating to financial hardship, which among other things, require a general insurer’s collection agent and lawyers to receive training in respect of the financial hardship requirements of the Code.
- Sanctions: For ‘Significant Breaches’ of the Code, the Code Governance Committee (CGC) may now require a general insurer to compensate an individual for direct financial loss and pay a community benefit of up to AUD100,000. The CGC will also report Significant Breaches or serious misconduct to ASIC.
- Claims information: There are now requirements for information to be provided to customers about the scope of works for a home building claim and cash settlement offers.
- Claim investigation standards: A detailed section has been introduced into the Code providing mandatory claims investigation standards. The standards include timeframes for the provision of information and updates to customers and requirements relating to requests for information and formal interviews.
The Code will come into force as instances of breach reporting are on the rise. On 4 May 2020, the CGC reported that there were 31,186 breaches reported for the year, up from 13,668 for the preceding year. Most breaches concerned the management of claims and complaints. It is not clear whether the increase in breach reports is due to more breaches occurring, or simply better monitoring and reporting, or both.
Unfair Contract Terms
In response to the recommendations made in the Royal Commission, legislation has been passed to extend the unfair contact terms (UCT) regime to insurance contracts. The UCT regime will now apply to contracts of insurance subject to the ICA that are entered into, renewed or varied on or after 5 April 2021.
Broadly speaking, the UCT regime empowers a court or tribunal to declare a term of a standard form insurance contract void if it is found to be ‘unfair’. A term will be considered ‘unfair’ if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The UCT regime is proposed only to apply to ‘consumer contracts’ and ‘small business contracts’. Specific matters that have been introduced into the UCT regime to tailor it to insurance contracts include the following:
- a term that sets out the amount of excess or deductible will not be considered ‘unfair’ providing that it is transparent and is disclosed at or before the contract is entered into;
- terms that set out the ‘the main subject matter of the contract’, being a description of what is insured, are excluded from the UCT regime; and
- third party beneficiaries, as well as the parties to the insurance contract, will be allowed to rely on the UCT regime to challenge the term of a contract.
Removal of duty of disclosure for consumer contracts
Draft legislation has been released which would remove an insured’s duty of disclosure under the ICA in respect of a ‘consumer insurance contract’ and replace it with a duty to take reasonable care not to make a misrepresentation. The legislation was initially to come into effect on 5 April 2021, however the Morrison Government has recently announced a six-month deferral for the implementation of the legislation.
Under the draft legislation a ‘consumer insurance contract’ is a contract of insurance that is:
- obtained wholly or predominantly for the personal, domestic or household purposes of the insured; or
- for new business and the insurer, before the contract is entered into, gives the insured a written notice stating that the contract is a consumer insurance contract.
The draft legislation will impose a duty on an insured to ‘take reasonable care not to make a misrepresentation to the insurer before the relevant contract of insurance is entered into’. In determining whether the duty has been breached, the court is to have regard to all relevant circumstances, including:
- the type of insurance contract;
- any explanatory material or publicity produced or authorised by the insurer; and
- how clear, and how specific, any questions asked by the insurer were;
- how clearly the insurer communicated the importance of answering those questions and the possible consequences of failing to do so; and
- whether or not an agent was acting for the insured.
The individual characteristics of the insured may also be taken into account of the insurer was, or ought to have been aware, of those characteristics.
What does this mean for the future of claims handling in Australia?
The developments outlined above are broad and far reaching, and they are coming quickly. A timeline of the developments on their current expected timing is as follows:
Culture and policies
Collectively, the developments trend significantly towards legislating and regulating claims handling and settlement in a way that requires insurers to adopt and implement standards of fairness with insureds. What then should insurers be doing to ensure their claims operations are meeting the new legal requirements?
As a starting point, policy wordings and claims handling policies and procedures will need to be updated to ensure that they are consistent with the new requirements. Further, the changes are likely going to require training for claims personnel and managers on:
- claims handling timelines and communication protocols;
- how to assess claims involving allegedly unfair contract terms or consideration of whether an insured has breached the new duty to take reasonable care not to make misrepresentations in respect of consumer insurance contracts; and
- complaint handling and increased regulatory oversight.
While these matters are important and necessary, insurers that take steps to ensure that their claims teams more broadly have a culture and ethos of treating customers fairly and of claims transparency will be far better placed to avoid falling foul of the new requirements. Accordingly, implementing, monitoring and maintaining a claims culture of fairness, honesty and efficiency will be critical to insurers and claims personnel going forward.
Increased regulatory supervision and enforcement
Following the Royal Commission, ASIC has publicly indicated that it will have a greater focus on court-based outcomes and will adopt a ‘why not litigate?’ approach.
This is in fact already happening. Perhaps as a shot across the bow for general insurers, ASIC has recently taken action against a general insurer for alleged contraventions of the insurer’s duty of utmost good faith in the handling of an insurance claim.
The recent amendments to the ICA providing pecuniary penalties for a breach of the duty of utmost good faith, together with the additional powers ASIC will have when claims handling becomes a ‘financial service’ under the Corporations Act, mean that ASIC will be better placed to closely monitor, supervise and take action in respect of claims handling of general insurance claims. The outcome of the Royal Commission supports the view that it will also have the political will and impetus to be active in this area in the near future.
Moreover, the new sanctions available to the CGC under the Code provide a further avenue of enforcement against insurers who fail to adhere to their claims handling obligations under the Code.
A number of businesses involved in the claims handling and assessment process may now need to obtain an AFSL. This will carry with it increased administrative costs and burdens. For businesses that do not obtain an AFSL, they will need to ensure that they do not inadvertently provide a ‘claims handling and settling service’ that constitutes a ‘financial service’ under the Corporations Act.
Unfair contract terms and duty to take reasonable care to not misrepresent
It is unclear how the UCT regime and the duty to take reasonable care to not make a misrepresentation will apply to insurance contracts in practice. Judicial guidance in this area will need to be closely monitored.
AFCA will also have jurisdiction to determine complaints and disputes about insurance products within its jurisdiction that involve consideration and determination of the UCT regime or the new duty. AFCA has previously commented that the UCT regime will provide enhanced protection for consumers and assist AFCA in reaching fair outcomes in external dispute resolution. An example provided by AFCA is that the UCT regime ‘may help in complaints about travel insurance with very broad exclusions for medical conditions, where the exclusions are not supported by actuarial data’.
By analogy, insurers may therefore need to be prepared to provide actuarial data or other supporting information that supports the existence of exclusions in a policy of insurance on a portfolio level in order to refute any finding that the exclusion is ‘unfair’ for the purpose of the UCT regime. This could significantly increase the difficulty and costs associated with maintaining a declinature on a clearly excluded risk.
Claims handling in Australia may very well be operating in a different landscape in eighteen months’ time. Insurers who take steps to comprehensively prepare now will be better placed to ensure they meet their legal obligations to customers and avoid the attention of the regulators.