Last updated 1 September 2022
What risks are insured and the amount that an insurer will pay if a risk eventuates and an insured suffers loss or faces a potential liability and requires legal representation, will be determined by the insurance contract.
For some classes of commercial insurance, the insurer and insured may nominate in the insurance contract the law that will govern the interpretation of the contract (e.g. England, Singapore, New South Wales) and the court or forum in which disputes about the insurance contract will be heard. However, in the case of many types of general insurance marketed to consumers in Australia, s 8 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act) restricts the parties from specifying that the law of another jurisdiction governs the insurance contract, where the nominated law is different to what would normally be regarded as the proper law of the contract. This is to prevent insurers from contracting out of consumer protection provisions of the Insurance Contracts Act. An insurance contract may also nominate a particular resolution process before parties can proceed to litigation.
Each element of an insurance contract is important. The contract is often referred to as a policy but will be governed by proposal, schedule, policy wording (now contained in a Product Disclosure Statement (PDS)), Statement of Advice (containing any specific advice), statutes and the common law.
The insured may receive guidance from a range of people in completing the proposal form. These may include the insurer’s staff, a licensee (broker) or authorised representative (agent). It is often done over the telephone for mutual convenience.
The person seeking insurance has a very important duty to disclose all information that a reasonable person would consider relevant to an insurance company when deciding whether to provide insurance cover and on what terms. Even if using the services of a licensee, the person seeking insurance should be careful to ensure that all relevant information is provided to the insurer.
The policy schedule will include particulars on any individual policy taken from both the insurer and the insured (usually from the proposal form). When considering an insurance proposal, when renewing an insurance policy and before making a claim, the insured should check that all particulars are correct such as:
- those named as insured (for companies, the correct company name and Australian company number should be noted)
- those noted as having an interest in the policy (and exactly the nature of the interest)
- the thing(s) insured
- the time period insured (including whether the policy is a ‘claims made’ or an ‘occurrence-based’ policy)
- the basis of insurance (i.e. agreed or market value)
- the excess/deductible (including whether the deductible is defence legal ‘cost inclusive’ or ‘costs exclusive’)
- any sub-limits, special endorsements or conditions.
The policy wording is contained in the PDS. It is important to keep this document and carefully note:
- that the wording version in the PDS is the same as described in the schedule
- any notices highlighting the insured’s duty of utmost good faith and disclosure
- the definitions (e.g. contents may not include all that a person wants to have covered such as cover for electrical appliances but not home office equipment)
- sub-limits (e.g. those applied to valuable items and collections or a lower level of cover for investigation costs in a professional indemnity policy (e.g. when meeting the professional costs of responding to tax office audits or workplace health and safety investigations))
- exclusions (e.g. criminal fines, acts of terrorism, and fences may not be covered for storm damage)
- average or co-insurance clauses (e.g. if the insured item is underinsured (the value that the item is insured for is less than the actual value of the item), the insurance company may wish to reduce all claims in proportion to what the true sum insured should have been. This may be regardless of the value of the actual claim)
- conditions of cover (e.g. the responsibility to take all reasonable precautions to prevent loss)
- the claims process, particularly in relation to the time limits and process for claims notification.
Duties and rights
Federal and state statutes and the common law contain established duties and rights concerning insurance law. The industry itself has also introduced a number of self-regulatory measures. Relevant legislation includes:
- Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act) as amended
- Financial Services Reform Act 2001 (Cth) (FSR Act).
The FSR Act statutes have reformed the entire financial services industry, including insurance, particularly in respect of industry regulation and consumer information required in the PDS and any statement of advice.
The industry itself has also introduced a number of self-regulatory measures.
Duty of utmost good faith
Insurance policies are special contracts because an insured is usually in a better position to know what risk is to be transferred to the insurer, and an insurer usually has far more negotiating power and insurance law knowledge than the typical insured. The Insurance Contracts Act provides that a contract for insurance is based on utmost good faith (s 13).
Accordingly, both insurer and insured (now including those covered in the policy wording but not named in the schedule) have the duty to act in the utmost good faith toward the other. The duty is not one of usual good faith but utmost good faith when contracting, and it is not to be diminished by any other obligation or right. There are important consequences for breach of this duty for example the policy (along with claims falling under it) may be avoided for such breaches. Both insured and insurer should be mindful of this serious duty at all times.
Duty of disclosure
It follows from the duty of utmost good faith that the insured, usually knowing far more relevant information about the subject matter to be insured, should disclose all that a reasonable insured person would know to be relevant to the insurer. This is a statutory requirement (s 21 Insurance Contracts Act). However, s 21(1)(a) of the Insurance Contracts Act has modified the disclosure required at the time a contract of insurance is first entered into. It requires the insurer to ask specific questions about what is considered relevant, rather than relying on a general question to the intending insured to reveal everything they think relevant. If there is no specific question asked and the matter is not exceptional (as defined by the Insurance Contracts Act), the insurer may no longer be able to rely on a non-disclosure to deny a claim or avoid a policy. The insured must remember, however, that it is a new insurance contract every year, so they must make proper disclosure on each and every renewal.
According to s 22 of the Insurance Contracts Act, the insurance company must, in writing and before the insurance agreement is entered into, advise a person seeking insurance that that person has a duty of disclosure.