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New duty on consumers to take reasonable care in Australia

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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:

  1. 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
  2. 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
  3. 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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