Proposed changes to insurer remedies on non-disclosure

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Steve Wright has dug deeper into the Contracts of Insurance Bill which is before Parliament and examined the proposed changes to non-disclosure.

Friday, May 17th 2024, 2:07PM 1 Comment

by Steve Wright

This is a very basic summary of provisions relating to non-disclosure and insurer remedies as I interpret the Bill - I suspect others may come to different conclusions.  The provisions are numerous and there is a lot of detail that can’t be covered in 800 words.  As usual my comments are limited to life and health insurance.

Non-disclosure

Policyholder disclosure obligations have changed and differ depending on the type of policy: consumer insurance contract or non-consumer contract.  A consumer insurance contract is a policy primarily issued for ‘personal, domestic, or household purposes.’  To my mind this includes life policies and health policies issued to protect individuals for family protection, but probably not life policies issued to businesses or individuals for business protection.

If my interpretation on this is correct, then the disclosure duties specified may differ, even for the same client of an adviser, depending on the risk/need and the type of policy issued.

The Bill sets out provisions regarding what qualifies as non-disclosure entitling an insurer to remedies. There are two types of non-disclosure:

• Deliberate or reckless; and
• Neither deliberate nor reckless.

The insurer has the onus of proving non-disclosure was deliberate or reckless.

Insurer remedies for non-disclosure.
Remedies are only available to insurers where:

• policyholders don’t meet their disclosure requirements, resulting in qualifying misrepresentations (consumer insurance contracts) or qualifying breaches (non-consumer insurance contracts)); and
• the insurer can prove it would not have entered into the contract (or agreed to the variation) at all or would have done so only on different terms; and
• The insurer has complied with its (proposed new) requirement to inform the policyholder of their duty to disclose and the possible consequences of non-disclosure.

The remedies available have been legally specified in the Bill.  No other remedies are available.

Different remedies apply depending on whether the non-disclosure relates to establishing a policy or making variations to a policy. 

Insurer remedies for qualifying non-disclosure relating to establishing a policy.

For non-disclosure which is deliberate or reckless:

• The insurer may avoid the policy and need not repay any premium paid.

For non-disclosure that is neither deliberate nor reckless and:

• If the insurer would not have entered into the contract: The insurer may avoid the policy but must return any premium paid. However, for policies that pay benefits on death, the insurer may only avoid the contract if non-disclosure occurred less than three years prior to the death of the life insured or the date the insurer seeks to avoid the policy.                                                                                                                                                                                                      (What is the position where life policies provide benefits on death and other events, such as disability?  Does the three-year provision apply to the whole policy or only the actual ‘life cover component’?  What if the ‘disability component’ includes a benefit on death? What if the policy includes a ‘health insurance component’? Health insurance is expressly excluded from the definition of life policy!)
• If the insurer would have accepted on different terms: The insurer may apply those different terms.                                                                                                                                                                                                                   Strangely, and again as I read the Bill, it seems that applying a premium loading is not a remedy for cases where, but for the non-disclosure, a higher premium would have been charged. The remedy is to reduce claim benefits payable proportionately according to the prescribed formula. (No doubt the actuaries will be making submissions on this!)

Remedies for qualifying non-disclosure relating to variations of a policy.

For deliberate or reckless non-disclosure:

• The insurer may terminate the policy as at date of variation.  There is no obligation to return premium. (I suspect there will be lots of comment on this one too – seems harsh to allow the termination of the policy for non-disclosure on a variation that may be minor!)

For non-disclosure that is not deliberate or reckless and for which:

• The insurer would not have agreed to the variation: The insurer may ignore the variation but must return any increased premium paid.
• The insurer would have accepted the variation on changed terms: The insurer may apply the changed terms and proportion claim benefits accordingly if an increased premium would have been payable.

Personally, I dislike the idea of reducing benefits for non-disclosure: it’s not in the policyholder’s best interests because it will likely result in them becoming significantly underinsured.

By way of example: an insurer’s only remedy (for a policyholder with $100,000 trauma cover, who neither deliberately nor recklessly makes a non-disclosure on policy application and for which the sole terms the insurer would have applied is a 50% loading) is to reduce the policyholder’s claim benefit to $66,667. This is a potentially catastrophic outcome for the policyholder (who may by now be uninsurable and find their family exposed to significant financial risk).

No doubt insurers will be making submissions. I urge FAPs to understand implications for their advisers and clients and make their submissions too.  Time is however short; submissions must be received by 3 June 2024.

Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.

Tags: insurance

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