House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 2 - Insurer avoidance of life insurance contracts, and duty to take reasonable care not to make a misrepresentation (recommendations 4.6 and 4.5)

Outline of chapter

2.1 Part 1 of Schedule 2 to the Bill amends the Insurance Contracts Act to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of non-fraudulent misrepresentation or non-disclosure by an insured person. This amendment implements recommendation 4.6 of the Financial Services Royal Commission.

2.2 Part 2 of Schedule 2 to the Bill amends the Insurance Contracts Act to replace the duty of disclosure for consumer insurance contracts with a duty to take reasonable care not to make a misrepresentation. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

Context of amendments

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.3 The Financial Services Royal Commission concluded that the current regime for allowing insurers to avoid contracts of life insurance is unfairly weighted in favour of insurers. Recommendation 4.6 of the Financial Services Royal Commission was that the Insurance Contracts Act be amended to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of non-fraudulent misrepresentation or non-disclosure by an insured.

2.4 Under section 29(3) of the Insurance Contracts Act, a life insurer can avoid a contract of life insurance within three years of entering into the contract if the insured:

•

failed to comply with their duty of disclosure at the time of entering into the contract; or

•

made a misrepresentation to the insurer before entering into the contract.

2.5 Section 29(3) applies where the insured's failure to comply with the duty of disclosure or misrepresentation was not fraudulent.

2.6 Section 29(3) was inserted into the Insurance Contracts Act in its current form in 2013 by the Insurance Contracts Amendment Act 2013. Prior to the 2013 amendments, section 29(3) did not give life insurers as broad a power to avoid contracts of life insurance on the basis of a non-fraudulent failure to comply with the duty of disclosure, or a non-fraudulent misrepresentation. That is, under the previous law, the insurer could not avoid a life insurance contract with the insured unless the insurer could show that it would not have entered into a contract on any terms had it known the information that was omitted or misrepresented.

2.7 Consistent with recommendation 4.6 of the Financial Services Royal Commission, this Schedule restores the wording of section 29(3) to its pre-2013 form.

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.8 Under the current law, an insured is required to disclose matters known to the insured that are relevant to the insurer's decision of whether or not to accept the risk of insurance and, if so, on what terms (section 21 of the Insurance Contracts Act).

2.9 A modified duty of disclosure applies to 'eligible contracts of insurance' (section 21A of the Insurance Contracts Act). These contracts are prescribed in the Insurance Contracts Regulations 2017 and include contracts relating to consumer credit insurance, motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance and travel insurance. Life insurance contracts and all other insurance products purchased by consumers are not eligible contracts of insurance.

2.10 Under the existing duty of disclosure for eligible contracts of insurance, the insurer must ask specific and relevant questions. The insured's duty does not extend beyond responding to those questions. When the insured renews their contract, the insurer may ask the insured specific questions or ask them to confirm or update the information they previously gave the insurer.

2.11 Insurers must also inform the insured clearly in writing of their duty of disclosure. If an insurer does not inform the insured of their duty, the insurer cannot rely on the duty of disclosure (section 22 of the Insurance Contracts Act).

2.12 If an insured breaches their duty of disclosure the insurer may access the remedies outlined in Division 3 of Part IV of the Insurance Contracts Act. Broadly, depending on the circumstances of the failure to comply with the duty of disclosure, these remedies allow the insurer to:

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reject a claim;

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reduce a payout;

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increase a premium; or

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avoid the contract.

2.13 In assessing the current duty of disclosure, the Financial Services Royal Commission found the existing approach to disclosure is no longer relevant for modern consumer contracts of insurance. Commissioner Hayne concluded that the duty does not recognise the breadth and depth of the gap between what a consumer knows and what an insurer knows is relevant. That is, the duty fails to recognise the extent of the information asymmetry between a consumer and an insurer.

2.14 The Financial Services Royal Commission set out observations made in the United Kingdom Law Commission and the Scottish Law Commission's 2009 joint report: Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation. Commissioner Hayne found those observations - that, even where consumers act honestly and reasonably, they may be denied cover and they can easily misunderstand the insurer's questions - apply equally in the Australian context.

2.15 The Financial Services Royal Commission concluded that the duty to take reasonable care not to make a misrepresentation to an insurer is more appropriate for consumer contracts of insurance and is substantially less complex than the current disclosure duty. Commissioner Hayne noted it placed the burden on an insurer to elicit the information that it needs and does not require the consumer to surmise or guess what information might be important to an insurer.

2.16 In agreeing to amend the duty of disclosure for consumers, the Government noted the current requirements fall short of adequately safeguarding consumers against having their claims declined where they may have inadvertently failed to disclose their past circumstances or because insurers have failed to ask the right questions.

Summary of new law

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.17 Part 1 of Schedule 2 amends the Insurance Contracts Act to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of a non-fraudulent relevant failure by an insured. This amendment implements recommendation 4.6 of the Financial Services Royal Commission.

2.18 The key feature of the new law is that an insurer may only avoid a contract of life insurance on the basis of a non-fraudulent relevant failure within three years of entering into the contract if the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms had the relevant failure not occurred.

2.19 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2]

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.20 Part 2 of Schedule 2 replaces the existing duty of disclosure with a new duty for an insured to take reasonable care not to make a misrepresentation when entering into a consumer insurance contract. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

2.21 The new duty applies only to contracts of insurance (including general and life insurance contracts) that are wholly or predominantly obtained for the insured's personal, domestic or household purposes.

2.22 In determining whether the insured has taken reasonable care not to make a misrepresentation, it is necessary to take into account:

•

any particular characteristics or circumstances of the insured that the insurer was, or ought to have been, aware of; and

•

all other relevant circumstances.

2.23 The amendments to implement recommendation 4.5 (the duty to take reasonable care not to make a misrepresentation) will apply in relation to consumer insurance contracts that are entered into on or after 5 October 2021 to align with the application date of the Design and Distribution Obligations in Schedule 1 to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.

Comparison of key features of new law and current law

Detailed explanation of new law

2.24 Part 1 of Schedule 2 also amends the Insurance Contracts Act to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of non-fraudulent misrepresentation or non-disclosure by an insured. This amendment implements recommendation 4.6 of the Financial Services Royal Commission.

2.25 Part 2 of Schedule 2 amends the Insurance Contracts Act to replace the duty of disclosure with a new duty for an insured to take reasonable care not to make a misrepresentation when entering into (including renewing, extending, varying or reinstating) a consumer insurance contract. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.26 Part 1 of Schedule 2 amends section 29(3) of the Insurance Contracts Act to implement recommendation 4.6 of the Financial Services Royal Commission.

2.27 Current section 29(3) of the Insurance Contracts Act applies where the insured's failure to comply with the duty of disclosure or misrepresentation on entering into a life insurance contract was not fraudulent. In these circumstances, the insurer may avoid the contract as long as the failure was within three years of entering into the contract.

2.28 Current section 29(3) was inserted into the Insurance Contracts Act in its current form in 2013 by the Insurance Contracts Amendment Act 2013. Prior to the 2013 amendments, section 29(3) did not allow the insurer to avoid a life insurance contract unless the insurer could show that it would not have entered into the contract with the insured on any terms had it known the information that was omitted or misrepresented.

2.29 Consistent with recommendation 4.6 of the Financial Services Royal Commission, the amendments restore the pre-2013 wording of section 29(3) of the Insurance Contracts Act.

2.30 Therefore, where the insured's failure to comply with the duty of disclosure or misrepresentation on entering into a life insurance contract was not fraudulent, the insurer may (within three years of entering into the contract) avoid the contract only if the insurer would not have been prepared to enter into a contract with the insured on any terms, had the relevant failure not occurred. [Schedule 2, item 19, section 29 of the Insurance Contracts Act]

2.31 The intent of the amended section 29(3) is to place the insurer in a position similar to the position they would have been if the insured had not made the relevant failure. This means that if the insurer would not have offered that product on any terms if the insurer had known about the relevant failure, the insurer has a right to avoid the contract.

2.32 However, where the insurer would have offered that product on different terms (for example, different terms and conditions or a different premium) if the insurer had known about the relevant failure, the insurer only has the right to vary the contract in accordance with sections 29(4) to 29(8) of the Insurance Contracts Act. Sections 29(4) and 29(5) set out a formula by which the insurer may substitute the sum insured. Alternatively, sections 29(6) to 29(8) provide that the insurer may, by notice in writing given to the insured, vary the contract in such a way as to place the insurer in the position they would have been had the relevant failure not occurred.

Example 2.1

Jason purchased a term life insurance policy contract two years ago. When entering into the contract, Jason made a non-fraudulent relevant failure with regard to symptoms of ventricular tachycardia (an irregular heartbeat) he had previously experienced.

The insurer's internal underwriting policy, which was consistently followed in practice, stated that applications for term life insurance that disclosed symptoms of ventricular tachycardia should be accepted with a premium loading. This means that the insured pays a higher premium to account for the additional risk.

The insurer cannot avoid the term life insurance policy contract because it would have offered the contract with a premium loading. However, the insurer can vary the contract in accordance with sections 29(4) to (8) of the Insurance Contracts Act.

Example 2.2

Jenny purchased a term life insurance policy contract two years ago. When entering into the contract, Jenny made a non-fraudulent relevant failure with regard to symptoms of ventricular tachycardia (an irregular heartbeat) she had previously experienced.

The insurer's internal underwriting policy, which was consistently followed in practice, stated that all applications for term life insurance that disclosed symptoms of ventricular tachycardia should be declined.

The insurer can avoid the term life insurance policy contract as the insurer would not have offered the contract on any terms.

Example 2.3

James purchased a term life insurance policy contract two years ago. When entering into the contract, James made a non-fraudulent relevant failure with regard to symptoms of ventricular tachycardia (an irregular heartbeat) he had previously experienced.

The insurer's internal underwriting policy, which was consistently followed in practice, stated that all applications for term life insurance that disclosed symptoms of ventricular tachycardia should be declined.

Under the insurer's internal underwriting policy, a total and permanent disability policy could be sold to insureds with symptoms of ventricular tachycardia.

The insurer can avoid the term life insurance policy contract on the basis that the insurer would not have offered term life insurance on any terms, even though it could have been possible that the insurer would have offered another product, like a total and permanent disability policy.

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.33 Part 2 of Schedule 2 amends the Insurance Contracts Act to replace the duty of disclosure of an insured. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

2.34 The new duty of disclosure is that an insured must take reasonable care not to make a misrepresentation to the insurer. It applies when a consumer insurance contract is 'entered into'. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.35 Under section 11(9) of the Insurance Contracts Act, a reference to the entering into of a contract of insurance also includes a reference to:

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for life insurance contracts - the making of an agreement by the parties to the contract to extend or vary the contract; and

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for other contracts of insurance:

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the making of an agreement by the parties to the contract to renew, extend or vary the contract; or

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the reinstatement of any previous contract of insurance.

2.36 For a contract of life insurance that is a consumer insurance contract, a person who is insured under a life insurance contract must take reasonable care not to make a misrepresentation. This replaces the current obligation on the life insured to comply with the duty of disclosure in section 31A of the Insurance Contracts Act. [Schedule 2, items 15 and 28, section 27AA of the Insurance Contracts Act]

Consumer insurance contracts

2.37 The new duty to take reasonable care not to make a misrepresentation to the insurer applies in relation to:

•

consumer insurance contracts; and

•

proposed contracts of insurance that, if entered into, would be consumer insurance contracts.

[Schedule 2, item 6, section 20A of the Insurance Contracts Act]

2.38 A 'contract of insurance' (as defined in section 10 of the Insurance Contracts Act) is a consumer insurance contract if the insurance is obtained wholly or predominantly for the personal, domestic or household purposes of the insured. [Schedule 2, items 3 and 4, definition of 'consumer insurance contract' in sections 11 and 11AB of the Insurance Contracts Act]

2.39 This definition is consistent with the definition of 'consumer contract' (to which unfair contract term protections apply) in section 12BF(3) of the ASIC Act.

2.40 Consumer insurance contracts include both:

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general insurance contracts; and

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life insurance contracts.

2.41 Consumer insurance contracts are likely to include contracts previously classified as eligible contracts of insurance - such as contracts relating to consumer credit insurance, motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance and travel insurance. Other insurance contracts that are not currently eligible contracts of insurance (such as pet insurance) are also consumer insurance contracts.

2.42 If a contract for insurance is for new business, an insurer may elect to notify the insured that a contract is considered to be a consumer insurance contract. When an insurer has notified the insured that the contract is to be considered a consumer insurance contract, it won't need to be required to prove that the contract is a consumer insurance contract. This allows the insurer to resolve any uncertainty as to whether a particular contact is categorised as a consumer insurance contract. This broadly replicates the existing section 6(3) of the Insurance Contracts Regulations 2017. [Schedule 2, item 4, section 11AB of the Insurance Contracts Act]

2.43 If it is alleged in a proceeding in relation to a contract of insurance that the contract is a consumer insurance contract, the contract is presumed to be a consumer insurance contract unless proved otherwise. [Schedule 2, item 4, section 11AB of the Insurance Contracts Act]

2.44 The duty of utmost good faith in Part II of the Insurance Contracts Act will continue to be a duty of each party in the pre-contractual phase (and an implied term of an insurance contract), and operates alongside the duty to take reasonable care not to make a misrepresentation. However, in relation to the disclosure of a matter to the insurer under a consumer insurance contract, the insured does not have a duty under Part II of the Insurance Contracts Act other than the duty to take reasonable care not to make a misrepresentation. [Schedule 2, item 5, section 12 of the Insurance Contracts Act]

2.45 For contracts of insurance that are not consumer insurance contracts, Division 1 (Duty of Disclosure) and Division 2 (Misrepresentations) of Part IV of the Insurance Contracts Act continue to apply.

The duty to take reasonable care not to make a misrepresentation

2.46 In determining whether an insured has fulfilled the new duty to take reasonable care not to make a misrepresentation to the insurer, regard must be had to all the relevant circumstances of a particular case. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.47 The circumstances that are relevant in determining whether the insured has fulfilled the new duty to take reasonable care not to make a misrepresentation to the insurer will vary depending on the facts of the particular case. There is no limitation on the range of factors that can be considered (noting that all relevant circumstances must be considered).

2.48 However, when determining what matters could be looked at when determining whether the insured has taken reasonable care not to make a misrepresentation:

•

section 20B(3) of the Insurance Contracts Act specifies a range of matters that may be taken into account in determining whether an insured has fulfilled the new duty; and

•

section 20B(4) of the Insurance Contracts Act requires the insurer to respond appropriately to particular characteristics or circumstances about the insured of which the insurer was, or ought to have been, aware. This may be to ask for more information, or to provide assistance where the insured may require it.

[Schedule 2, item 6, section 20B of the Insurance Contracts Act]

Matters that may be taken into account in determining whether the insured has fulfilled the new duty

2.49 All relevant circumstances are to be taken into account when considering whether the insured has taken reasonable care not to make a misrepresentation to the insurer. Without limiting the range of factors, consideration may be given to the following matters:

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the type of consumer insurance contract in question and its target market;

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explanatory material or publicity produced or authorised by the insurer;

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how clear, and how specific, any questions asked by the insurer were;

•

how clearly the insurer communicated the importance of answering their questions and the possible consequences of failing to do so;

•

whether or not an agent was acting for the insured; and

•

whether the contract was a new contract or was being renewed, extended, varied or reinstated.

[Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.50 The list of matters reflects common scenarios of relations between the insurer and the insured that may be relevant in determining whether an insured has fulfilled the new duty. This list of matters is indicative and non-exhaustive. Other matters may also be taken into account when relevant.

2.51 Further, if the insurer was, or ought to have been, aware of particular characteristics or circumstances of the insured individual, these characteristics or circumstances must be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

The type of consumer insurance contract in question and its target market

2.52 The type of consumer insurance contract and its target market may be taken into account when determining whether the insured took reasonable care not to make a misrepresentation to the insured. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.53 Consumer insurance contracts can vary widely. For instance, consumer insurance contracts can have different pricing mechanisms, payment arrangements, subject-matters and terms and be of different duration. They can be negotiated, standard-form, written, verbal, online or a mix of these contract types. Therefore, the type of insurance contract may affect what the insured is required to do to satisfy the new duty.

2.54 For example, if a consumer purchases a bespoke motor vehicle insurance contract that has unique terms, such as for an antique car, it is likely that, before the contract is entered into, the insurer would seek more detailed information about the consumer and their circumstances than if the consumer was purchasing a standard motor vehicle insurance contract.

2.55 Policies containing options and levels of cover may have a broad target market with narrower components within them. For example, if a consumer selects the wrong insurance cover when purchasing online (such as commercial insurance instead of residential insurance) this should be taken into account when considering whether the duty was met by the insured in answering questions in relation to that contract.

2.56 Similarly, consumer insurance contracts can have different target markets. For example, home contents insurance for rare or otherwise unusually valuable items may be targeted toward users' needs. When taking this matter into consideration, a target market determination made by the insurer in accordance with their design and distribution obligations under the Corporations Act should be taken into account. ^[3]

Explanatory material or publicity produced or authorised by the insurer

2.57 Whether the insurer provided easily comprehensible, accessible material that explains the specific consumer insurance contract in question would generally be taken into account in determining whether the insured discharged their duty. If that material was ambiguous, the ambiguity would also be taken into account. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.58 Explanatory materials may include both written and non-written communications to convey the type of information that the insurer considers relevant.

How clear, and how specific, any questions asked by the insurer were

2.59 The clarity and specificity of questions asked by the insurer may be taken into account when determining whether the insured took reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.60 There is no express consequence for insurers asking an insured to answer questions of a general nature or questions that are unclear, confusing or ambiguous (as is the case with the existing disclosure requirements for eligible insurance contracts). However, this would likely be taken into account in determining whether the insured has satisfied their duty to take reasonable care not to make a misrepresentation.

2.61 For example, it may generally be more difficult for an insured to answer:

•

compound questions that are open-ended, general or long; or

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questions that are difficult to understand or interpret.

2.62 Therefore, when assessing this matter, the sort of things that would be taken into account may be the type of questions asked as well as the circumstances in which the questions are asked.

2.63 In this regard it is intended that on the renewal of an insurance contract, the new law would not prevent an insurer from providing the insured with a copy of information previously provided and asking them for details of any material changes.

How clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so)

2.64 How clearly the insurer communicated the importance of answering the questions, and the possible consequences of failing to do so, may be taken into account when determining whether an insured has taken reasonable care not to make a misrepresentation. This will also be relevant where the insurer did not communicate the importance (or the consequences) of answering the questions. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.65 Therefore, an insurer should give a clear explanation of the duty to take reasonable care not to make a misrepresentation and the consequences of a misrepresentation (including the remedies available to the insurer if the insured fails to take reasonable care) to the insured. This explanation can be given to the insured in the form that the insurer considers to be effective.

2.66 Section 22 of the Insurance Contracts Act (which requires an insurer to inform the insured of the existing duty of disclosure in writing) does not apply to consumer insurance contracts. However, this does not change the insurer's obligation to give a clear explanation of the new duty to the insured. In addition, consistent with section 22, a failure by the insurer to fulfil those obligations will reduce the remedies available to the insurer in the event that the insured does make a misrepresentation.

Whether or not an agent was acting for the insured

2.67 Whether or not an agent (such as a financial advisor or insurance broker) was acting for the insured is one of the matters that is relevant in determining whether the insured has fulfilled the new duty to take reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.68 The appointment of an agent by the insured does not, by itself, change the insured's duty to take reasonable care not to make a misrepresentation to the insurer. However, depending on the nature of the agent's involvement, it may be a reason to expect the insured was informed about their duty to take reasonable care not to make a misrepresentation and what they need to do to discharge the duty.

Whether the contract was a new contract or was being renewed, extended, varied or reinstated

2.69 The circumstances of an insured entering into a new contract are different to those surrounding the renewal, extension, variation or reinstatement of a contract. This may be taken into account when considering whether the new duty has been fulfilled. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.70 The insurer should communicate with and provide information to the insured in circumstances when:

•

a contract is being entered into for the first time; or

•

a contract is being renewed, extended, varied or reinstated.

2.71 When entering into a contract for the first time, the insurer may need to take greater care to ensure that they have done what is necessary to satisfy themselves of their knowledge of the insured's position.

2.72 In contrast, when an insurance contract is being renewed, extended, varied or reinstated, it may be appropriate for the insurer to provide previously disclosed information to the insured and ask them for details of any material changes (along the lines of what is currently provided for under the existing sections 21A and 21B of the Insurance Contracts Act).

2.73 The insured should follow the insurer's guidance as to what needs to be disclosed. Guidance may include the type of information that might need updating and examples of information commonly overlooked by an insured consumer.

Particular characteristics or circumstances of the insured that are known by the insurer must be taken into account

2.74 Section 20B(3) of the Insurance Contracts Act sets out matters that, if relevant, may be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation to the insurer. This list of matters reflects common scenarios of relations between the insurer and the insured that may be relevant in determining whether an insured has fulfilled the new duty but is non-exhaustive. Other matters may also be taken into account when relevant.

2.75 In relation to matters taken into account under sections 20B(2) and (3) of the Insurance Contracts Act, if the insurer was aware, or ought reasonably to have been aware, of particular characteristics or circumstances of the insured, those characteristics or circumstances must be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.76 As a result, an insured will not be disadvantaged under the new duty even if they do not specifically disclose those particular characteristics or circumstances to the insurer.

2.77 This makes it clear that an assessment of whether an insured met the standard of the duty is not limited to the actions of the insured and may require consideration of the insurer's knowledge of the insured's circumstances and the actions taken by the insurer once made aware of that knowledge.

2.78 For example, where an insured requires special assistance in satisfying the requirements for an insurance application, and the insurer is aware of this, whether and how the insurer assisted the insured will be relevant in determining whether the standard of the new duty was met by the insured.

Failure to answer a question

2.79 Consistent with section 27 of the Insurance Contracts Act, the insured is not taken to have made a misrepresentation in respect of the new duty merely because they failed to answer a question or gave an obviously incomplete or irrelevant answer to a question. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.80 This allows for circumstances where a response is obviously incomplete or irrelevant (for example, where an insured may have overlooked a question). The inclusion of this provision encourages the insurer to follow up in such cases if, in the particular circumstances, the insurer considers the issue to be material.

Fraudulent misrepresentation

2.81 Consistent with the current law, and for the avoidance of doubt, any misrepresentation made fraudulently is taken to be a breach of the duty to take reasonable care not to make a misrepresentation. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

Warranties of existing facts to be representations

2.82 A statement with respect to the existence of a state of affairs made in or in connection with a consumer insurance contract by the insured (or that is attributable to the insured) does not have effect as a warranty. Instead, the statement has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into. This replicates section 24 of the Insurance Contracts Act for misrepresentations, and applies it to the new duty. [Schedule 2, item 6, section 20C of the Insurance Contracts Act]

2.83 This amendment ensures that the effect of section 24 of the Insurance Contracts Act continues to apply to consumer insurance contracts. The amendment is required because the provisions relating to the general duty of disclosure in Division 2 of Part IV of the Insurance Contracts Act (which includes section 24) will no longer apply to consumer insurance contracts. [Schedule 2, item 8, section 20E of the Insurance Contracts Act]

Group life insurance

2.84 The new duty to take reasonable care not to make a misrepresentation to the insurer applies to a life insured in a consumer insurance contract provided under a group life contract. [Schedule 2, items 29 to 32, section 32 of the Insurance Contracts Act]

2.85 A group life contract is defined in section 11 of the Insurance Contracts Act to mean a contract of life insurance that is maintained for the purposes of:

•

a superannuation or retirement scheme under which there can be more than one life insured; or

•

another kind of group life scheme (including a scheme that is not related to employment) under which there can be more than one life insured.

2.86 The new duty to take reasonable care not to make a misrepresentation to the insurer also applies to a life insured in a consumer insurance contract provided through a Retirement Savings Account. [Schedule 2, items 33 and 34, section 32A of the Insurance Contracts Act]

2.87 While the new duty applies to each individual life insured in a group life contract, the new duty does not apply to a superannuation fund trustee or authorised representative who enters the group life contract with the insurance company for the purposes of offering the insurance to fund members or employees. Like other commercial contracts, this relationship continues to be subject to the existing duty of disclosure.

Remedies for breach of the new duty

2.88 The remedies in Division 3 of Part IV of the Insurance Contracts Act continue to be available to the insurer if an insured breaches the new duty to take reasonable care not to make a misrepresentation. These remedies are currently available for a breach of the duty of disclosure and for the making of a misrepresentation.

2.89 The remedies apply where there has been a relevant failure by the insured. A relevant failure in relation to a contract of insurance is:

•

if the contract is a consumer insurance contract - a misrepresentation made by the insured in breach of the duty to take reasonable care not to make a misrepresentation; or

•

for other insurance contracts - a failure by the insured to comply with the duty of disclosure or a misrepresentation made by the insured to the insurer before the contract was entered into.

[Schedule 2, items 3 and 15, definition of 'relevant failure' in sections 11 and 27AA of the Insurance Contracts Act]

2.90 In addition, in relation to a contract of life insurance under which a person other than the insured would become a life insured, a misrepresentation is a relevant failure in relation to the contract (whether or not the contract is a consumer insurance contract) if:

•

the life insured made a misrepresentation during the negotiations for the contract but before it was entered into; and

•

this misrepresentation would have been a breach of the duty to take reasonable care not to make a misrepresentation if that duty had applied in relation to the life insured in relation to the contract.

[Schedule 2, item 15, section 27AA of the Insurance Contracts Act]

2.91 Section 28 of the Insurance Contracts Act sets out the remedies that are available to an insurer where the relevant failure occurs in relation to a general insurance contract. The amendments modify section 28 so that it applies in relation to general insurance contracts that are consumer insurance contracts (where a misrepresentation is made by the insured in breach of the duty to take reasonable care not to make a misrepresentation) in the same way that it currently applies to other general insurance contracts (where the insured fails to comply with the existing duty of disclosure). [Schedule 2, items 16, 17 and 18, section 28 of the Insurance Contracts Act]

2.92 Consistent with the existing law, the remedies under section 28 are not available to the insurer if they would have entered into the general insurance contract, for the same premium and on the same terms and conditions, even if the failure had not occurred. [Schedule 2, item 16, section 28 of the Insurance Contracts Act]

2.93 Section 29 of the Insurance Contracts Act sets out the remedies that are available to an insurer where the relevant failure occurs in relation to a life insurance contract. The amendments modify section 29 so that it applies in relation to life insurance contracts that are consumer insurance contracts (where a misrepresentation is made by the insured in breach of the duty to take reasonable care not to make a misrepresentation) in the same way that it currently applies to other life insurance contracts (where the insured fails to comply with the existing duty of disclosure). [Schedule 2, items 19 to 23, section 29 of the Insurance Contracts Act]

2.94 Consistent with the existing law, the remedies under section 29 of the Insurance Contracts Act are not available to the insurer if:

•

the insurer would have entered into the life insurance contract even if the failure had not occurred; or

•

the failure was in respect of the date of birth of one or more of the life insureds.

[Schedule 2, item 19, section 29 of the Insurance Contracts Act]

2.95 Consequential amendments are made to other provisions relating to the remedies available to an insurer so that they apply to consumer insurance contracts (in relation to a misrepresentation by the insured in breach of the duty to take reasonable care not to make a misrepresentation) in the same way that they currently apply to other insurance contracts (in relation to a failure by the insured to comply with the existing duty of disclosure). [Schedule 2, items 26 to 36, sections 31, 31A, 32, 32A and 60 of the Insurance Contracts Act]

2.96 In seeking a remedy, the onus of proof is on the insurer to show that the insured has failed to discharge the duty to take reasonable care not to make a misrepresentation.

Consequential amendments

2.97 Consequential amendments ensure that the duty of utmost good faith in Part II of the Insurance Contracts Act does not impose any duty on the insured under a consumer insurance contract in relation to the disclosure of a matter to the insurer, other than the duty to take reasonable care not to make a misrepresentation. [Schedule 2, item 5, section 12 of the Insurance Contracts Act]

2.98 In addition, the general duty of disclosure in section 21 of the Insurance Contracts Act is modified so that it applies only in relation to contracts (and proposed contracts) of insurance that are not consumer insurance contracts. [Schedule 2, item 8, section 20E of the Insurance Contracts Act]

2.99 Finally, sections 21A and 21B of the Insurance Contracts Act (which contain a modified duty of disclosure for eligible contracts of insurance) are repealed. In this regard, as the concept of an eligible contract of insurance is being replaced with the concept of a consumer insurance contract, the modified duty of disclosure in sections 21A and 21B is redundant. [Schedule 2, item 9, section 21A and 21B of the Insurance Contracts Act]

Application and transitional provisions

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.100 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2]

2.101 The amendment will apply to any life insurance contract that is entered into after the date of commencement. [Schedule 2, item 2]

2.102 However, if a life insurance contract entered into prior to the date of commencement is varied on or after that date to increase the sum insured in respect of one or more of the life insureds, or to provide one or more additional kinds of insurance cover between the insurer and the insured, then to the extent of that variation the contract is treated as though it were entered into after the date of commencement. [Schedule 2, item 2]

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.103 The amendments in Part 2 of Schedule 2 to the Bill to implement recommendation 4.5 (the duty to take reasonable care not to make a misrepresentation) apply in relation to consumer insurance contracts (other than life insurance contracts) that are entered into on or after 5 October 2021. [Schedule 2, item 37]

2.104 The new duty to take reasonable care not to make a misrepresentation will also apply to life insurance contracts that are originally entered into on or after 5 October 2021. Therefore, the new duty will not apply when a life insurance contract that was originally entered into before 5 October 2021 is extended or reinstated after that day. In this regard, the existing duty of disclosure will apply to the life insurance contract when it is extended or reinstated.

2.105 Similarly, the new duty to take reasonable care not to make a misrepresentation will generally not apply when a life insurance contract that was originally entered into before 5 October 2021 is varied on or after that day. However, an exception applies if:

•

the variation is to increase the sum insured in respect of one or more of the life insureds, or to provide one or more additional kinds of insurance cover; and

•

the variation was not an automatic variation but was required to be expressly agreed between the insurer and the insured before the contract was varied.

[Schedule 2, item 37]

2.106 In these circumstances, to the extent of that variation, the life insurance contract is treated as though it were entered into on or after 5 October 2021. Therefore, to the extent of that variation, the new duty to take reasonable care not to make a misrepresentation will apply to the life insurance contract. [Schedule 2, item 37]

2.107 The new duty to take reasonable care not to make a misrepresentation will apply from 5 October 2021 to align with the application date of the Design and Distribution Obligations in Schedule 1 to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.

2.108 In this regard, the ASIC Corporations (Deferral of Design and Distribution Obligations) Instrument 2020/486 effectively deferred the application date of Schedule 1 to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 until 5 October 2021.

2.109 However, in some circumstances an insurer may wish to apply the new duty to take reasonable care not to make a misrepresentation from an earlier date. Therefore, the new duty will apply to a contract of insurance (including a the life insurance contract) from the date of commencement (that is, from the day after the Bill receives Royal Assent or 1 January 2021, whichever is later) if, before the contract is entered into, the insurer gives the insured a written notice that the contract is a consumer insurance contract. [Schedule 2, item 37]