Insurance

Terminology
    Insurer Insurer Proposal Policy of Insurance

What is insurance?


Insurance is the process by which risk is spread, usually among a large group of people. It is a contract by which one party (the insured) agrees to pay an amount of money (the premium) to another (the insurer) who agrees to pay money to or on behalf of the insured on the happening of an event, which may be certain or contingent.

Types of Insurance
         

Fire & Perils Life Marine Superannuation Worker s Compensation Accident - property Personal Accident Disability Liability Motor Vehicle  CTP  Comprehensive  Third Party Property

Business insurance


Mandatory insurance includes:  workers compensation  motor vehicle third party insurance

Business insurance


Optional business insurance includes:

       

business interruption business protection cash in transit computer failure / lightning strike directors and officers liability employers liability fleet insurance income protection

Business insurance
         

key person insurance litigation risk loss from burglary loss of profits motor vehicle insurance personal injury plate glass, glass, windows and showcases public risk succession water leakage

Under and Non-insurance

One in six businesses have no insurance
42% No Bus Int. 12% No P.L.

Sources of insurance law



Under common law, the relationship between the insurer and the insured is regulated by the law of contract. Any ambiguity in the language of the contract is interpreted contra proferentem, against the insurance company.

Sources of insurance law



Commonwealth insurance statutes include:  the General Insurance Reform Act 2001  the Insurance Contracts Act 1984 (ICA)  the Insurance (Agents and Brokers) Act 1984  the Insurance Act (1973)  the Life Insurance Act 1995  the Marine Insurance Act 1909

 Gaps  Overlaps  Regulatory conflicts  Economic inefficiency

Regulatory Environment for the General Insurance Industry

Ministerial Portfolios
Financial Services Advisory Committee

Commonwealth Department of The Treasury

Government Policy
Council of Financial Regulators

International Regulation & Competitive Pressures

Accounting Standards Board Urgent Issues Group

Trade Practices Act

Privacy Legislation Marine Insurance Act Discrimination Legislation (federal and state)

Financial Services Reform Act Insurance Contracts Act Corporations Law

ATO

Insurance Act

Tax rulings becoming law

Market Conduct
Attorney Generals Dept Privacy Commissioner Equal Opportunity Commission, State Consumer Affairs

Consumer & Shareholder protection ASIC

ACCC

Prudential regulation & Policyholder protection APRA

State & Territory Statutory schemes

Prudential regulation, guarantee funds, nominal defendant schemes, product regulation

Actuaries and Professional Standards

Code of Practice

Accounting Standards
Privacy Code

Regulatory levies Fire Services Levy / Stamp Duty / GST

Taxation Issues

Catastrophe Reserves

NSW Insurance Protection Tax

Insurance Contracts Act



Does not apply to

     

Health Insurance Marine Insurance Reinsurance Workers compensation Compulsory Third Party insurance State or Territory Insurance organisations Life insurance Disability insurance

Limited application to:

 

Types of insurance


Contingency insurance is a contract between the insured and the insurer where the insurer agrees that, when an event happens, it will pay an agreed sum of money, e.g. life insurance. Indemnity insurance is where the insurer agrees to pay against the actual loss that the insured suffered, and there is no certainty that the event triggering payment will ever occur, e.g. theft insurance, fire insurance.

Average


If an insured item is insured for less than 80% of the value, the insurance company may offer to pay only a pro rata portion of the insured amount. Where an insured holds two or three policies for the same risk, recover can only be made once.

Average
Amount payable = Value stated in policy 80% of real value x loss

Insurable interest


Traditionally, the insured had to have an insurable interest in the subject matter of the insurance. The ICA has abolished the need for an insurable interest (ss. 16, 18). The insured must suffer a pecuniary or economic loss, but they do not need to show legal or equitable ownership of any property lost or damaged (s. 17).

Value


Indemnity  The amount paid by the insurer to the insured is not more than the loss sustained; the insured should not profit by the happening of the event insured against. Replacement  The cost of replacing the item with a new item (i.e.) the insured gains value

Subrogation


After an insurer has paid to the insured the monies indemnifying the loss suffered, the insurer is then entitled to recover from any third party at fault the damages for causing the loss which otherwise could have been sought by the insured.

Standard Cover


Provides for standard insurance cover for:  Car  home building  home contents  sickness and accident  consumer credit and  travel Unless insurer has informed insured of any departures from standard cover (s 35)

Notification by Insurer


Insurer cannot rely on unusual terms unless prior to the contract the insurer gave the insured written notice of the unusual term (s 37) s22: Insurer to clearly inform insured in writing of general nature & effect of duty of disclosure (prescribed form may be used) (s22)

Duty of Disclosure


Part IV provides a code for  Breach of the duty of disclosure  Misrepresentation  Fraud by the insured (s33)

Duty of Disclosure
Insurance Contracts Act 1984 (Cth) s. 13 A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

Duty of Disclosure
Insurance Contracts Act 1984 (Cth) s. 21
1)

Subject to this Act, an insured has a duty to disclose to the insurer before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: a. the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and if so on what terms, or b. a reasonable person in the circumstances could be expected to know to be a matter so relevant.

Duty of Disclosure
Insurance Contracts Act 1984 (Cth) s. 21
2)

The duty of disclosure does not require the disclosure of a matter: a. that diminishes the risk; b. that is of common knowledge; c. that the insurer knows or in the ordinary course of his business as insurer ought to know; or d. as to which compliance with the duty of disclosure is waived by the insurer.

Duty of Disclosure
Insurance Contracts Act 1984 (Cth) s. 21
3)

Where a person: a. failed to answer, or b. gave an obviously incomplete or irrelevant answer to, a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

Duty of Disclosure


Where a question in the insurance proposal is ambiguous and a person answered in a reasonable way, the question will be taken to have that meaning (s. 23). Where a statement by the insured is untrue but made on the basis of a reasonably held belief, the statement is not to be taken as a misrepresentation (s. 26).

Ambiguous Questions (s23)

Where: a) a statement is made in answer to a question asked in relation to a proposed contract of insurance; and b) a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have; that meaning shall be deemed to be the meaning of the question.

Reasonable Belief (s26)

1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation.

Relevant to Risk (s26)

2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

Failure to Answer (s27)



A person shall not be taken to have made a misrepresentation by reason only that the person failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.

Remedies (s 28)
1) Applies where a person under a contract of general insurance: a) failed to comply with the duty of disclosure; or b) made a misrepresentation to the insurer before the contract was entered into;  but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions if there was no breach or misrepresentation

Remedies (s28)
2) If the failure was fraudulent, the insurer may avoid the contract. 3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

Relief (s 31)


If a contract has been avoided by the Insurer for fraudulent

 

Breach of the duty of disclosure Misrepresentation

A court may, if it would be harsh or unjust not to do so

 

Disregard the avoidance Allow the insured to recover the whole or part of his claim

Relief (s 31)


A court shall only do so if the insurer has  Not been prejudiced by the fraud; or  The prejudice is minimal A court shall have regard to:  The need to deter insurance fraud;  The culpability of the insured

Payment of Claim


Interest payable on claims for period during which unreasonable for insurer to have withheld payment (s57)