Since October 5 2021, the duty of disclosure has no longer applied to consumer insurance contracts, as a raft of Hayne-inspired regulatory changes have been introduced.

The Insurance Contracts Act was amended, discarding a duty to disclose “every matter” a reasonable person would expect to be relevant and introducing a new duty “to take reasonable care not to make a misrepresentation”.

Some predicted it would become harder for insurers to deny claims, because they now needed to show reasonable care had not been taken. Others warned claims could still be voided if a misrepresentation was made.

Two-and-a-half years on, disputes around the duty still regularly find their way to the Australian Financial Complaints Authority (AFCA), with outcomes varied depending on circumstances.

But a recent ruling, in favour of an insured, flags “a serious lack of understanding” by a major insurer in relation to the duty. And at a recent member forum, the ombudsman scheme announced it will consult on a new approaches document to provide greater clarity.

AFCA says its approaches documents are based on “the experience of our ombudsmen … and aim to provide practical information and our approach on substantive issues”. Its website indicates the document on non-disclosure and misrepresentation was last updated in July 2020.

“We plan to develop, consult on, and ultimately issue an AFCA approach to the new duty in the second half of 2024,” Lead Ombudsman Insurance Emma Curtis told insuranceNEWS.com.au.

“The reason for doing so is that this is a question that can arise in a range of insurance complaints. An approach will provide greater clarity and transparency about how we deal with such matters.”

The recent ruling referred to above deals with a complaint under a landlord policy after a property was destroyed by fire.

Insurer Allianz declined the claim, arguing the property was unoccupied, but AFCA found that an amended product disclosure statement (PDS) had not been sent to the complainant, and she did not breach her duty to take reasonable care not to make a misrepresentation because the insurer asked no questions at renewal.

“The insurer argues that having provided notice of the relevant duty to the complainant, the complainant should have reviewed the policy and notified the insurer of any changes,” the ruling states.

“It argues the failure to notify was a misrepresentation by omission. The panel is concerned that this shows a serious lack of understanding in the insurer as to the nature of the duty.”

AFCA says that whether a person has failed to take reasonable care is “a subjective test to be determined with regard to all relevant circumstances”, including how clear and specific an insurer’s questions are. 

“The panel accepts the renewal schedule clearly sets out the relevant duty. What it does not do is ask any questions of the complainant. It is not sufficient to simply notify of the duty. There was no question on renewal about occupancy. There was no misrepresentation as there was no question to answer.”

Ms Curtis says AFCA does not receive a high number of complaints in relation to the duty and there is no indication the lack of understanding illustrated by the ruling is industry-wide. However, she urges insurers to “carefully consider the duty and how it should be applied”.

She says that to rely on a misrepresentation to deny a claim, an insurer needs to show three things: that the complainant made a misrepresentation; that they failed to take reasonable care; and the extent of prejudice caused.

“If any of these factors are not satisfied, the insurer cannot deny the claim on this basis,” she said. “For renewals, we would generally expect the insurer to either ask the complainant specific questions or provide information previously disclosed in the renewal offer that was relevant to its assessment and ask the complainant to let them know if there are any changes.” 

The Financial Rights Legal Centre says it continues to hear from insureds about claim denials based on a lack of disclosure, but it may be too early to tell whether the new duty has led to improvements.
 
“Two concerns remain,” Senior Policy and Advocacy Officer Drew MacRae told insuranceNEWS.com.au.

“The first is that insurers need to get on top of the law and the new expectations. This requires greater engagement with consumers, with more specific questions, and less reliance on mere disclosure in long, wordy PDSs. An AFCA approach may assist in this regard but the onus is on insurers to improve their processes here.
 
“The second is that we continue to see disputes arise regarding disclosures that could have been proactively obtained or automated in the first place via driving or insurance history.

“Very little if any action by insurers has occurred in the wake of our Automating Insurance Disclosure report.”

Asked whether the new duty is working for insurers and their customers, the Insurance Council of Australia would only say it acknowledges AFCA’s ongoing work. “We continue to work with our regulatory partners, our member organisations and consumer advocacy groups to uphold and promote positive outcomes for consumers,” a spokesperson said.

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