Insights
Wilson Elser is at the forefront of Cyber Security & Data Privacy. Our practice attorneys keep abreast of the latest trends and their implications for our clients. Indeed, several of our attorneys are considered authorities on this dynamic area of law.
In this series of podcasts, four of our senior Cyber Security & Data Privacy Practice attorneys discuss trends and developments in areas critical to our clients and the broader business community.
In the second installment of the series, we hear from Anjali Das, Co-Chair of the firm’s Cyber Security & Data Privacy Practice, offer her perspectives on data breach class actions, how they proceed and what they cost.
Wilson Elser is at the forefront of Cyber Security & Data Privacy. Our practice attorneys keep abreast of the latest trends and their implications for our clients. Indeed, several of our attorneys are considered authorities on this dynamic area of law.
In this series of podcasts, four of our senior Cyber Security & Data Privacy Practice attorneys discuss trends and developments in areas critical to our clients and the broader business community.
In the second installment of the series, we hear from Anjali Das, Co-Chair of the firm’s Cyber Security & Data Privacy Practice, offer her perspectives on data breach class actions, how they proceed and what they cost.
Anjali Das (Partner-Chicago, IL) was quoted in ““Cyber Insurers Track Privacy Exposures,” which appeared in the July 12, 2023, posting of Business Insurance. Increased privacy claims surrounding the collection and sharing of data by companies are reverberating through the cyber insurance sector as underwriters and policyholders take steps to stem losses. Anjali noted that in this environment, “Motions to dismiss are not readily granted … courts are allowing cases to move into discovery to learn more about the new wave of claims and suits, some of which are based on arcane language in the Video Privacy Protection Act (VPPA),” a federal statute enacted in 1988. “The recent wave of litigation has courts … wrestling with the role of VPPA in the modern world,” she said. One attraction of the VPPA to plaintiffs is that it provides for statutory damages of up to $2,500 per violation, and a concern for insurers is that cyber insurance often contains provisions for defence costs, and class-action suits can be lengthy, potentially making insurers responsible for what could be substantial defence costs.
Read the article in full here https://bit.ly/3PXCm83
Wilson Elser is at the forefront of Cyber Security & Data Privacy. Our practice attorneys keep abreast of the latest trends and their implications for our clients. Indeed, several of our attorneys are considered authorities on this dynamic area of law.
In this series of podcasts, four of our senior Cyber Security & Data Privacy Practice attorneys discuss trends and developments in areas critical to our clients and the broader business community.
In the fourth and final podcast of the series, Jana Farmer, a partner in Wilson Elser’s White Plains, New York, office, provides her perspectives on State data privacy laws, from exemptions to private rights of action.
Is the crypto industry in the United States dead? In the absence of formal legislation regulating the crypto industry in the United States, the Securities and Exchange Commission (SEC) has taken matters into its own hands and is singlehandedly going after crypto firms for violating federal securities laws by failing to register their activities with the SEC. The SEC’s aggressive stance against the industry has ratcheted up following criticism for its failure to act quickly enough to stop the death spiral of FTX last year. The latest crypto firms caught in the crosshairs include two of the largest, Binance and Coinbase, which are the subjects of recent SEC enforcement actions.
In recent years, the SEC, under the leadership of Chairman Gary Gensler, has repeatedly taken the position that crypto assets1 constitute “securities” subject to regulatory oversight by the Commission under the test set forth in the U.S. Supreme Court case, SEC v. W.J. Howey Co.,328 U.S. 293 (1946). Specifically, the SEC contends that crypto assets are “investment contracts” in which persons invest money in a “common enterprise” and reasonably expect to receive profits derived from the managerial or entrepreneurial efforts of others. Meanwhile, the crypto industry and its leaders have denounced this classification in the absence of specific regulation or guidance.
SEC’s Suit against Coinbase
On June 6, 2023, the SEC filed suit against Coinbase, Inc. (Coinbase) and its parent company, Coinbase Global Inc. (CGI) for violating federal securities laws.2 Coinbase is a Delaware corporation founded in 2012 that operates a crypto asset trading platform that services U.S. customers. A wholly owned subsidiary of CGI, Coinbase is registered with the SEC and trades under the ticker symbol “COIN” on the Nasdaq Global Select Market. The SEC’s lawsuit contends that Coinbase is operating as an unregistered securities exchange, broker and clearinghouse in violation of the Securities Exchange Act of 1934 (Exchange Act). In addition, the SEC contends that CGI is jointly and severally liable as a “control person” under the Exchange Act.
Background
By way of background, Coinbase operates one of the largest global trading platforms that allows customers to buy, sell and trade crypto assets. Coinbase reportedly services more than 108 million customers accounting for billions of dollars in daily trading volume. As explained by the SEC, crypto asset trading platforms enable customers to purchase and sell crypto assets for fiat currency (legal tender issued by a country) or for other crypto assets. These platforms typically possess and control the crypto assets deposited and/or traded by their customers and, thus, function as a central depository.
Similar to traditional securities exchanges, Coinbase’s platform (1) lists names, ticker symbols, prices, market cap and trading volume for crypto assets; (2) enables customers to place various buy/sell orders; (3) matches buy/sell orders through an electronic automated matching system; and (4) settles customer trades in exchange for fees charged by Coinbase.
Since 2021, Coinbase has offered “Coinbase Prime,” which is akin to prime brokerage services marketed to institutional clients for digital assets. Prime routes orders to the Coinbase platform and to third-party platforms so that customers have access to the broader crypto marketplace.
Since 2017, Coinbase has offered “Coinbase Wallet,” which is made available to both retail and institutional customers. Wallet routes customer orders through third-party decentralized trading platforms or decentralized exchanges (DEXs) to access liquidity outside of the Coinbase trading platform. Unlike orders to buy or sell crypto assets placed through the Coinbase platform or Prime, Coinbase does not maintain custody over the crypto assets traded through Wallet. Instead, these crypto assets are “self-custodied” by customers who hold the private keys.
According to the SEC, all of the crypto assets made available for trading on the Coinbase platform, Prime and/or Wallet are “securities” within the meaning of the Howey test discussed above.3 In particular, the SEC claims that these “Crypto Asset Securities [were] offered and sold … as an investment contract and thus a security.” For each of these assets, “statements by the crypto asset issuers and promoters have led investors reasonably to expect profits based on the managerial or entrepreneurial efforts of such issuers and promoters.” Further, “This was investors’ reasonable expectation whether they acquired the Crypto Asset Securities in their initial offering, from prior investors, or on crypto asset trading platforms, including the Coinbase Platform (or through Prime or Wallet).”4
The Complaint
According to the Complaint, the function of “exchanges,” “broker-dealers” and “clearing agencies” are typically carried out by separate legal entities that are independently registered and regulated by the SEC. This regulatory oversight is designed to protect investors from manipulation and fraud. In addition, registered entities must comply with SEC record-keeping and inspection requirements. Here, Coinbase purportedly violated securities laws by failing to register as a national securities exchange, broker and clearing agency for transactions involving the purchase, sale and trading of crypto asset “securities.”
The SEC also claims that the Coinbase “Staking Program” constitutes the unregistered offer and sale of securities in violation of the Securities Act of 1933. Staking is a consensus mechanism or protocol used by a blockchain to validate transactions involving digital assets. The two most popular consensus mechanisms are known as “proof of work” and “proof of stake.” Under the latter protocol, crypto asset owners who commit or “stake” their assets can obtain a reward or payment.
Coinbase allegedly markets its Staking Program to customers as an investment with an expected rate of return of up to 6.00% APY. Under the Howey test for securities, participants in the Staking Program (1) invest money in the form of eligible crypto assets; (2) participate in a common enterprise with Coinbase (e.g., the Staking Program); (3) reasonably expect to profit from their participation in the Staking Program; (4) are merely “passive” investors, based primarily on Coinbase’s efforts, which are essential to the success or failure of the enterprise.
SEC’s Suit against Binance
The same week the SEC filed suit against Coinbase, on June 5, 2023, it filed a separate enforcement action for securities law violations against Binance, which operates one of the largest international crypto asset trading platforms; its U.S. affiliates BAM Management and BAM Trading; and Changpeng Zhao (Zhao), the founder, principal owner and CEO of these entities.5 Similar to the suit against Coinbase, the SEC alleges that the Binance entities were operating unregistered national securities exchanges, broker-dealers and clearing agencies for crypto assets that are securities. However, unlike the case against Coinbase, the SEC also accuses the Binance entities and Zhao of engaging in widespread nefarious activities to defraud customers and investors, reminiscent of similar allegations against FTX and its founder, Sam Bankman-Fried.
For instance, in 2019, Binance created BAM Management and BAM Trading to launch its U.S. trading platform ostensibly created to comply with U.S. laws and regulations. U.S. customers were supposedly barred from trading on Binance’s international platform. According to the SEC, defendants allowed “VIP” U.S. customers to circumvent these restrictions by masking their U.S. IP addresses to access the international trading platform in addition to forgoing Know Your Customer (KYC) documentation, which is a lynchpin of U.S. banking regulation.
In addition, the SEC Complaint highlights defendants’:
- Lack of oversight over how U.S. customers’ crypto assets are stored, secured and transferred (and potentially diverted and commingled)
- Internal controls deficiencies identified by auditors with respect to custody of digital assets
- Use of two Zhao-controlled entities (Merit Peak and Sigma Chain) as “market makers” to create liquidity for crypto assets traded on the platforms, creating a conflict of interest
- Ongoing control by Binance and Zhao of BAM’s U.S. operations and lack of independence
- Manipulative “wash trading” to artificially inflate the volume of trading activity on the platforms and price of crypto assets.
Shortly after filing its Complaint, the SEC filed an emergency motion in court seeking a temporary restraining order to freeze assets held by the defendants for U.S. customers. In support of its motion, the SEC contends that:
- There is lack of transparency regarding the custody and control more than $2.62 billion in customer assets deposited, held or traded on the U.S. platform
- Binance and Zhao have admitted their intent to circumvent U.S. laws and regulatory compliance
- Binance and Zhao continue to maintain control over U.S. customers’ crypto assets
- BAM’s lack of internal controls or trading data confounded auditors’ ability to verify that the company was fully collateralized for customers’ crypto assets
- Binance and Zhao followed a pattern and practice of commingling customer funds and moving funds outside the United States.
For now, it remains to be seen whether the Binance saga unfolds in the same vein as the collapse of FTX.
Conclusion
The lack of clear federal legislation in the United States regarding crypto assets means that this industry will remain subject to the whims of various state and federal regulators for the foreseeable future. For instance, earlier this year, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a Joint Statement acknowledging the “crypto-assets risks to banking organizations.”6 These agencies continue to assess safety and soundness concerns with banking services “that are concentrated in crypto-asset-related activities or have concentrated exposure to the crypto-asset sector.” Meanwhile, in May 2023, the New York Attorney General proposed legislation to tighten regulation of the cryptocurrency industry to protect consumers and investors.
In contrast, other countries are at the forefront of crypto legislation. According to PwC, the “European Union is at advanced stages of finalizing the new Markets in Crypto-Assets Regulation. In the United Arab Emirates, Dubai authorities are setting up the world’s first authority focusing solely on virtual assets. Switzerland has integrated one of the more mature regulatory framework for digital assets.”7
For now, the lack of an established regulatory framework in the United States, in addition to the aggressive stance taken by the SEC and other regulators against the crypto industry, may cause a flight to safety and predictability in crypto-friendly nations. Meanwhile, U.S. companies in this space should take heed of the risk of engaging in issuing, selling and/or trading unregistered crypto assets that may be viewed as securities.
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1 The SEC broadly defines crypto assets to include digital assets, tokens, cryptocurrencies, virtual currencies, and digital coins issued and/or transferred using blockchain or distributed ledger technology.
2 SEC v. Coinbase, Inc., et al., Case No. 1:23-cv-04738 in the U.S. District Court for the Southern District of New York.
3 These crypto assets specifically include those traded under the following ticker symbols: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO.
4 SEC v. Coinbase, Inc., Complaint, par. 126.
5 SEC v. Binance Holdings Limited, et al., Case No. 1:23-cvo-01599 in the U.S. District Court for the District of Columbia.
6 Federal Reserve, FDIC and OCC Joint Statement on Crypto-Asset Risks to Banking Organizations (January 3, 2023).
7 PwC Global Crypto Regulation Report 2023 (December 19, 2022).
In Mathur v Ontario, the climate litigation filed against the Ontario government by seven young people was dismissed, but not without clarifying some key points. This litigation forms part of a wider trend by youth to hold governments accountable on climate action.
Overview
Earlier this month, the Ontario Superior Court of Justice released Reasons for Judgment in the closely watched climate change action of Mathur v Ontario. The applicants, a group of youths, commenced a suit against the Province of Ontario alleging that the Province had breached the Canadian Charter of Rights and Freedoms (the Charter) by abdicating its responsibility to address climate change.
In 2020, the Province lost a preliminary motion to have the claim dismissed on the basis that it was plain and obvious that the claim did not present a reasonable cause of action. However, after a full hearing on the merits, Justice Vermette agreed with the Province that its actions in addressing climate change did not violate the applicants’ s7 Charter rights to life and security of the person or their s15 right to equality.
The legislation at the center of the case is the Cap and Trade Cancellation Act 2018 (the CTCA). Section 16 of the CTCA repeals the Climate Change Act, which had established targets for reducing greenhouse gas (GHG), including a reduction of 37% below 1990 levels by the end of 2030. Under the new legislation, the Province implemented a less ambitious target of reducing GHG levels to 30% below 2005 levels by 2030. Notably, this target is out-of-sync with the commitments recently made by the Federal government. In March 2022, Canada submitted its most recent national GHG reduction targets under the Paris Agreement, announcing a target of 40-45% emissions below 2005 levels by 2030.
The applicant’s argued that the repeal of the Climate Change Act and its associated targets, and the passing of the new less ambitious targets, was unconstitutional as it deprived future generations of their rights to life and security of the person by subjecting them to the increasing negative effects of climate change. Further, it was argued that these negative effects would be experienced disproportionately by young people, a “generational cohort” characteristic analogous to the protected characteristic of age already recognized in Charter jurisprudence.
Justiciability
The Court first considered whether challenges on constitutional grounds to Ontario’s repeal of the Climate Change Act and introduction of the new target were reviewable by the courts.
The Court held that the applicable test is whether the question is purely political in nature, or whether it has a sufficient legal component to warrant the intervention of the judicial branch. Prior case law has held that challenges to state action under the Charter must involve specific legislation and/or state action. Questions involving generalised government policy are non-justiciable. The judicability of state action concerning climate change had been subject to divergent findings in other Canadian jurisdictions.
Here, the applicants challenged specific state action and legislation so the Court found this aspect of their claim was generally justiciable.
However, the Court found that the portion of the applicants’ claim which sought a determination of Ontario and Canada’s “fair share” of global carbon contributions was not justiciable, as the issue did not have a sufficient legal component to allow a court to choose among competing approaches.
Repeal of the Climate Change Act did not violate Charter rights
The Court rejected that the enaction of s16 of the CTCA, and corresponding repeal of the Climate Change Act, was itself a violation of the applicants’ Charter rights, because a mere change in the law cannot be the basis for a Charter violation. The Court held that “in the absence of a constitutional right that requires the government to act in the first place, there can be no constitutional right to the continuation of measures voluntarily taken, even where those measures accord with or enhance Charter values”.
Is there a state obligation to protect s7 rights?
The Court found the applicants’ complaint, at its core, was that “Ontario did not aim sufficiently high when setting the target” and therefore imposed an “increased risk of death and/or negatively impacts or limits the applicants’ security of the person”. Under normative Charter jurisprudence, the state has no obligation to ensure the provision of rights protected by s7. Rather, the state is simply obliged not to interfere with them. The arguments presented by the applicants raised the legal issue of whether s7 of the Charter imposes positive obligations on the state.
Despite no decisions having yet recognised a freestanding positive obligation on the state to protect s7 rights, the Supreme Court of Canada in Gosselin v. Quebec (Attorney General) 2002 stated that the Charter is a “living tree”, capable of adapting to changing societies, and that a freestanding positive state obligation might, in the future, exist in special circumstances.
Section 7’s adaptability to changing times has likewise been recognised in decisions of the Federal Court of Appeal, opining that, some day, the provision may evolve to encompass positive obligations, possibly in the domain of climate rights.
No breach of fundamental justice
Recognising that s7 of the Charter could, in theory, include positive state obligations, the Court analysed whether the government action of setting the target through s 3(1) of the CTCA was contrary to the existing principles of fundamental justice, assuming (and not deciding) that the state had positive obligations to protect the applicants’ s7 rights in this case.
The Court found the applicants had established that by setting the target at levels below what was required to avoid the accepted consequences of climate change, Ontario had contributed to an increase in the risk of death or risks to the security of the person. The Court rejected Ontario’s argument that it was necessary to show the risks would actually materialise. The Court also rejected the argument that Ontario’s GHG emissions causes no “measurable harm”, finding that “Ontario’s emissions contribute to climate change and the increased risk that it creates”.
Because the applicants had met their burden to prove the risks complained of were likely to occur, and assuming the state had positive obligations to prevent these risks from materialising, the Court next analysed whether the deprivations were in accordance with the principles of fundamental justice.
The appellants relied on two well-established principles of fundamental justice, the principles against arbitrariness and gross disproportionality, and one novel principle, the notion that “a government cannot engage in conduct that will, or could reasonably be expected to, result in the future harm, suffering, or death of a significant number of its own citizens”.
The Court found that the principle against arbitrariness was not well suited to a positive claim case under s7. The test for arbitrariness under existing law requires a finding there is no rational connection between a government action’s purpose and its effects. The court found that the purpose of the target was to “reduce GHG in Ontario to address and fight climate change”. As the objective was not to completely eradicate the effects of climate change, it could not be said that the target had no rational connection to the purpose. The Court concluded “incrementalism and imprecision… do not lead to a conclusion of arbitrariness”.
Turning to the principle against gross disproportionality, the Court explained that this principle is infringed “if the impact of the restriction on the individual’s life, liberty or security of the person is grossly disproportionate to the object of the measure”. The Court found that this principle had no application to this case, given that the applicants were not arguing that the target created too great an infringement on their rights. Indeed, they were arguing the opposite, namely that the target was not aggressive enough.
The Court found that previously recognised principles of fundamental justice were poorly suited to analysing a s7 Charter claim advanced under a positive rights and obligations framework. The Court next considered whether a proposed new principle of fundamental justice, societal preservation, ought to be recognised.
Principles of fundamental justice are concerned with how the legal system operates. They are not co-extensive with important public policies and state interests, and must instead be a basic tenet of the legal system. The Court found no support that “social preservation” met this requirement and found that adopting such a principle would create significant analytical challenges in applying the existing legal test for determining whether s7 rights have been infringed.
As the applicants were unsuccessful in establishing that the Province’s actions were contrary to any specific principal of fundamental justice, the claim under s7 was dismissed.
No breach of s15 right to equality
Unlike the potential for positive state obligations under s7 jurisprudence, it has been conclusively determined that s15 of the Charter does not impose a general, positive obligation on the state to remedy social inequalities or enact remedial legislation.
Despite agreeing with the applicants that young people are disproportionately impacted by climate change, the Court reasoned this disproportionate impact is caused by climate change itself, and not the target or the CTCA. Similarly, the worsening impacts of climate change are not caused by the disputed state action. Because the target and the CTCA have the purpose of reducing GHG emissions and moderating the effects of climate change, it cannot be said the effects of climate change are worsening because of the target or the CTCA.
Finally, the Court rejected the applicants’ arguments that a “generational cohort” characteristic was analogous to an age characteristic already recognised as protected under s15. The Court recognised that the “impacts of climate change will be experienced by all age groups in the future”, and that the “generational cohort” distinction was a temporal distinction that does not violate s15, because it is not based on an enumerated or analogous ground.
Conclusion
The Ontario Superior Court of Justice recognised that the natural world is rapidly changing. Unfortunately for the applicants in Mathur, the Canadian legal system has not yet changed in kind. Mathur represents an ambitious claim and carefully considered judgment regarding the nature of Charter rights in a world increasingly impacted by climate change. The Court made significant remarks regarding the existential threat posed by climate change and the potential existence of positive state obligations to take steps to fight climate change. However, these positive obligations, if recognised, would require adaptations of existing legal principles and tests. Justice Vermette was not prepared to rework the existing principles and tests to find in favour of the applicants. This case seems destined for the Court of Appeal where the applicants will no doubt hope to find a bolder approach to interpreting and expanding upon the current legal framework. Inspiration can perhaps be found in decisions such as Urgenda v Dutch Government and Neubauer v Germany.
Further youth action on the cards
This month we have also heard that the Hawaiian youth litigation against the Hawaiian Department of Transportation has been allowed to proceed to trial in the Autumn. It is alleged that the establishment, operation and maintenance of the state’s fossil fuel-based transportation system allows greenhouse gas emissions that violate the youth group’s rights under state constitutional law to a clean and healthful environment. This follows the litigation in Held v Montana and Juliana v US, all brought by youth groups.
Before that, the US trial in Held v Montana is due to begin on 12 June 2023, as the first ever constitutional climate trial and first ever children’s climate trial in US history. Again, the litigation asserts that by supporting a fossil fuel-driven energy system, which is contributing to the climate crisis, Montana is violating their constitutional rights to a clean and healthful environment; to seek safety, health, and happiness; and to individual dignity and equal protection of the law. The youths also argue that the state’s fossil fuel energy system is degrading and depleting Montana’s constitutionally protected public trust resources, including the atmosphere, rivers and wildlife.
Co-authored by Legalign colleagues Scott Harcus, Partner, AHBL Vancouver and Simon Konsta, Partner, DACB London.
Stratton Horres (Senior Counsel-Dallas, TX) and frequent co-author, attorney David Steiger, have weighed in on the hotly debated subject of the use of Artificial Intelligence (AI) in the legal market. Their article, “Where the Rubber Hits the Road: Practical AI Solutions Are Coming to the Legal Market,” appeared on April 4, 2023, in Reuters Legal News and Westlaw Today. The authors contend, “What is driving adaptation of increasingly sophisticated AI into the business of law is the tremendous savings in time and money that result from ridding old processes of unnecessary duplication of effort and the value add that comes from leveraging the power of ever-growing amounts of data.” They also highlight some of the most promising AI products for law firms currently available.
W+K has just released the latest issue of our NZ Insurance Market Trends Update. It explores emerging legal and claims trends impacting insurers, underwriters, brokers and corporates operating in the New Zealand market.
In this edition, we look at significant developments and issues across financial lines, casualty, property & energy, healthcare, and cyber & technology.
We highlight new trends in long-standing issues, such as the recent focus in D&O claims on directors’ liability when their company is financially distressed, the risks associated with an increased use of structural engineers to strengthen earthquake-prone buildings, and exposures for accountants and lawyers with regard to the bright-line property rule.
We also look at emerging issues, such as condensation claims, claims by workers who are forced to return to the office post-lockdowns, and the potential Income Insurance Scheme.
You can download a copy of the update here.
DAC Beachcroft in collaboration with Legalign has published over 150 insurance predictions on Informed Insurance for 2022.
Making predictions about the future of the insurance market is not for the faint-hearted, but our international experts have looked ahead at the opportunities and challenges that the insurance market may face in the coming year and beyond.
Both our thought leadership articles and predictions are categorised into six themes, with the predictions also available in 17 different classes of insurance business.
The insurance predictions are categorised by six key themes:
Helen Faulkner, Global Head of Insurance at DAC Beachcroft, commented: “We hope insurers will find our insights valuable in planning for the future. There is a significant overlap in environmental, social and governance (ESG) issues that we are seeing emerge, which highlights a sweet spot on which to focus our attention in the year ahead to create a resilient industry of which we can all be proud.
In the wake of COP26 and the latest Intergovernmental Panel on Climate Change’s report, climate change risks continue to make headlines around the world.
An increasingly concerning issue is the rise of D&O liability exposures related to climate change. In this white paper, Legalign Global looks at the causes of exposure, regulatory and legal developments around the world, and the implications for D&O insurers in this space.
The white paper also provides jurisdictional snapshots of the regulatory and legal developments in D&O climate-related risk for Australia, Canada, France, Germany, New Zealand, Spain, the United Kingdom and the United States.
Click on the download below to read the full paper.
From 5 October 2021, the Australian Insurance Contracts Act 1984 (the ICA) will be amended so that consumer insureds will owe a new duty to take reasonable care not to make a misrepresentation to the insurer before entering into newly defined consumer insurance contracts (CICs).
A consumer will no longer be required to disclose “every matter that is known to the insured.. relevant to the decision of the insurer whether to accept the risk”. This change creates a regime analogous to that in the UK, under the Consumer Insurance (Disclosure and Representations) Act 2012 (the 2012 Act).
CICs concern insurance obtained wholly or predominantly for the personal, domestic or household purposes of the insured. This is a wide category and will include both general and life insurance contracts.
The change shifts the onus to the insurer to ask pertinent questions to elicit the information it regards as material to the risk. A consumer must take reasonable care not to make a misrepresentation when answering.
A misrepresentation made fraudulently is a breach of the duty. Other misrepresentations will be determined with regard to all the relevant circumstances. Where a breach of duty has occurred, an insurer has a “proportionate remedy” based on what the insurer would have done had the consumer not made the misrepresentation.
The insurer needs to be able to show that:
- It would have written the risk but on different terms (such as different deductibles or exclusions). If evidenced, the contract is to be treated as if those different terms apply; or
- It would have written the risk but on a higher premium. If evidenced, the higher premium is deemed to apply and the insurer’s liability is reduced proportionately to premium paid; or
- It would have not entered the contract at all. If evidenced, the insurer can avoid the contract (i.e. refuse all claims) but must return the premium.
The ICA expressly states that a consumer is not to be taken to have made a misrepresentation merely because it failed to answer a question or gave an obviously incomplete or irrelevant answer to a question. This provision is different to the UK regime and it may create difficulties for insurers with automatic renewals (which rely on the principle that the absence of a response is deemed to mean no change to material conditions).
The recent UK decision in Jones v Zurich highlighted the evidence an insurer must present to be able to avoid a contract for a non-fraudulent misrepresentation. It will not be simple for an insurer to prove that it would not have underwritten the risk without persuasive fact and/or expert evidence as to what the insurer would have done and it is clear that the materiality of any misrepresentation to the risk will be a key factor.
Insurers in Australia writing cover for CICs need to ensure that the questions asked of the consumer are clear and specific. Insurers should put in place processes to be able to determine clearly whether different terms or a higher premium would have applied if a misrepresentation had not been made or, in the alternative, why a risk would not have been underwritten at all.
The changes to the ICA do not affect non-CICs in Australia, so the existing duty of disclosure still remains in those circumstances.
For further information, please contact:
Doug Heard, DAC Beachcroft, London
William Robinson, Wotton + Kearney, Perth
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