The Australian Financial Complaints Authority has opened consultation on a new approach document about the duty to take reasonable care not to make misrepresentations. 

Misrepresentation reforms under the Insurance Contracts Act took effect in October 2021 following the Hayne royal commission.

The changes mean insureds have a duty “to take reasonable care not to make a misrepresentation”, rather than having to disclose every matter a reasonable person would expect to be relevant. They reflect that consumers may not know what information is important to an insurer.

AFCA approach documents help complainants and financial businesses better understand how the service applies legal principles, industry codes, regulatory guidance and good industry practice considerations when investigating complaints and reaching decisions.

Its draft approach document on misrepresentations notes that whether a consumer has taken “reasonable care” is mostly a subjective test, and the key elements will depend on individual cases. 

Factors likely to be relevant in most cases include whether insurer questions are clear and specific, and how clearly it communicated the importance of answering questions. 

“This is because a consumer should clearly understand the duty, the consequences of failing to comply with that duty and the information the insurer requires to assess the risk,” the draft says.

A fraudulent misrepresentation would breach the duty, but given the seriousness of such an allegation, AFCA says it would expect the insurer to provide “clear and cogent evidence”.

The document notes renewals are typically a separate contract, which must be considered, and the issue of genuinely held beliefs is taken into account.

“If a complainant represented something they genuinely believed was the truth, then it is unlikely that AFCA will find they have breached the duty,” the document says. “However, if the complainant misrepresented something they did not ‘know’ (i.e. they guessed or suspected the answer), then it is possible they may have breached the duty depending on all the other circumstances.”

AFCA has also released a draft amended approach document on non-disclosure and misrepresentation that applies to policies entered into or renewed before October 5 2021, or complaints about policies that are not consumer insurance contracts entered into after that date.

The ombudsman service says its approaches are informed by feedback received during complaint handling processes from financial businesses, complainants, industry associations and consumer representatives, plus government and regulators. 

Consultations on the new and amended documents close on November 27 and AFCA expects to publish the finalised approaches next month.

More details are available here.