Insurers warned: review consumer questions carefully

By Kate Tilley

Insurers are advised to carefully review the questions they ask potential insureds in light of 2021 changes to the Insurance Contracts Act.

That’s the message two lawyers shared at the AILA National Conference.

Barrister Ken Horsley and Minter Ellison partner Katie Clark examined the impact the revised duty of disclosure for consumer insurance contracts has had since amendments to the Act came into force in October 2021.

The explanatory memorandum for the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 said: “The existing approach to disclosure is no longer relevant for modern consumer contracts of insurance. The duty does not recognise the breadth and depth of the gap between what a consumer knows and what an insurer knows is relevant.”

The second reading speech said the new duty “removes the need for consumers to guess what the insurer may require to be disclosed”.

In a pre-conference media release, Mr Horsley said because the revised legislation gave insureds more “wriggle room” on what information they disclose on proposal or renewal forms, insurers must be “particular and precise” with the questions they ask.

He and Ms Clark said some smaller insurers, particularly underwriting agencies, may be insufficiently focused on reviewing the questions they ask and may therefore see declined claims overturned.

Consumer safeguards

The revised law applies only to “consumer insurance contracts”, including home and contents, motor vehicle and landlords’ policies.

The Act’s prior, more stringent duty of disclosure has been replaced with a duty to take reasonable care not to make a misrepresentation to an insurer.

Ms Clark said simplifying the disclosure regime “makes sense and fits with the unfair contract terms legislation”, but there has been no major litigation to give the industry guidance on how courts are likely to interpret the changes.

Mr Horsley and Ms Clark said the Act’s changes were “not a big talking point” in the insurance industry, so it was likely some insurers had not sufficiently revised proposal forms and renewal documents. That meant they could be forced to pay claims for coverage they may not have intended to include under the policy wording.

However, the pair agreed that, while there was no legislated limit to the number of questions an insurer can ask of a potential insured, insurers had to weigh that against “the goodwill factor”.

“If you’re asking 64 questions, the consumer may simply go to the next insurer,” Mr Horsley said.

Question answered incorrectly

In April 2014, the Australian Financial Complaints Authority (AFCA) found a motor vehicle insured had breached his duty to take reasonable care not to make a misrepresentation by not informing insurer Auto & General Services of his record of demerit points.

The driver had responded ‘no’ to a question: “Within the last three years, have any of the drivers reached the maximum demerit points allowed on their drivers licence or taken a good behaviour bond instead?”

A Queensland Government driving history confirmed the driver reached the maximum demerit points on 17 December 2022 and on 18 January 2023 entered a 12-month good driving behaviour period.

The driver lodged a claim after a not-at-fault accident in November 2023. The insurer argued it would not have renewed the policy, based on its underwriting guidelines, had the driver’s record been disclosed when the policy was renewed in July 2023.

The driver had renewed the original policy twice and was asked the same question about demerit points each time. He also was reminded when he contacted the insurer to make changes to the policy to reduce the premium and an amended certificate of insurance again reminded the insured to check that all the details were correct and of his duty to take reasonable care.

Caption: L-R Katie Clark with Ken Horsley and Nhu Huynh.

Pre-purchase inspection inadequate

In a January 2024 case, AFCA found an insurer could rely on policy exclusions after a cruiser the owner had just purchased was damaged, allegedly during storms, while travelling from Mackay to Sydney.

Zurich had declined the claim, predominantly because of crew reports that:

• Engine damage occurred because of a failure to maintain the engine properly.
• Damage attributed to a storm was pre-existing.

The vessel owner sought to rely on a positive pre-purchase inspection by a mate, AB, who purported to be an “authorised marine engineer”.

The AFCA determination said: “While I sympathise with the complainant’s position, this was predominantly caused by trusting an unsuitable person, Mr AB, to undertake a series of tasks which required more experience and expertise than Mr AB could bring to the situation. This caused a series of breaches of the insured’s obligations under the policy and therefore it is fair in all the circumstances for the insurer to deny the claim.”

AFCA said AB’s seven-page pre-purchase report was “materially incorrect and misleading”, but not a misrepresentation by the boat owner.

However, the insurer sourced evidence from crew on the vessel’s voyage to Sydney, skippered by AB, that there were problems with the steering, the autopilot and the navigation system, and the radar, gauges, bilge pump and other items did not work.

The boat owner said he trusted AB because they had a 20-year friendship and he did not seek proof of AB’s qualifications.

AFCA said while AB “likely made a misrepresentation to the complainant, the complainant’s belief in the veracity of his statements made to the insurer in the insurance application was reasonable in the circumstances”.

However, a qualified crew member said AB had not put sufficient oil in the engine that failed and equipment lost overboard in the storm had not been securely tied down. AB’s own images showed pre-existing damage that was part of the claim.

Vulnerable person

AFCA found the eight months it took the insurer to deny the claim was not a breach of the general insurance code of practice because of delays in investigation process and in interviewing the delivery crew.

AB declined to be interviewed and it took some time for another crew member to be located as he was travelling for work.

The insured said the claims process had left him with an unmovable boat, mental health and lots of financial problems.

The claim notes show the boat owner was identified as a vulnerable person.

However, AFCA found insufficient evidence to show the insurer caused the problems.

“While I am satisfied it is more likely than not the complainant did suffer financial hardship and mental health issues, these were more directly caused by … AB, not the insurer,” the determination said. Non-financial loss compensation was therefore not appropriate.

Mr Horsley and Ms Clark said the AFCA examples illustrated that insurers must ensure all publicly available material:

• Is clear and simple.
• Accessible to the target audience.
• Explains the importance of answering correctly.

They said insurers must ask themselves:

• Is the question clear?
• Is it specific?
• Have we avoided a long, compound or open-ended question?

Photo credit: AILA 2024 Conference photos supplied warringtonphotography.com.