February 20, 2019

More Hayne to come: General insurance claims and the Final Report

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) contains recommendations which may result in increased claim activity, and also lead to legislative change affecting how insurance claims are likely to be handled and assessed. We set out a summary of the key points on these issues together with our observations and comments below.

Potential claims

Based on the recommendations in the Final Report, it is likely that insurers and their insureds will experience the following increase in claims activity:

  • First, there will be regulatory investigations and/or enforcement proceedings brought on account of the findings in the Final Report. Specifically, Commissioner Hayne made findings of 19 instances of possible misconduct covering 24 civil or criminal offences across 22 entities.
  • Second, with the corporate watchdog ASIC’s first question now being “why not litigate?” rather than resolving matters by agreement, in the medium to long term, it is anticipated that there will be an increase in regulatory litigation as the enforcement culture changes. A key recommendation included in the Final Report is that ASIC adopt an approach to enforcement that:
    • takes, as its starting point, the question of whether a court should determine the consequences of a contravention;
    • changes the way in which enforceable undertakings are structured such that they contain admissions of contravention rather than merely identifying concerns of ASIC; and
    • recognises that infringement notices should be principally used in respect f of administrative failings by entities and will rarely be appropriate for statutory breaches where an evaluative judgment was required by the individual or entity concerned.
  • Finally, customers and third parties who have been affected by potentially unlawful conduct outlined in the Final Report may bring claims directly against companies and their directors and officers, either on an individual basis or as part of a class action.

From a coverage perspective, issues that may need to be considered are: the adequacy of any notification of facts or circumstances that might give rise to a claim related to the Royal Commission (or material put before it); the application of any dishonest conduct type exclusions, which may increase if ASIC litigates matters to conclusion and adverse factual findings are made, or admissions are made in enforceable undertakings; and issues relating to non-disclosure and pre-contractual misrepresentation.

Claims handling, assessment and resolution

Claims handling as financial advice

The handling and settlement of insurance claims is currently carved out from the definition of ‘financial service’ in the Corporations Regulations. The Final Report recommends removing that carve-out.

From a practical perspective, this means that insurers will need to do all things necessary to manage claims "efficiently, honestly and fairly" in accordance with the Corporations Act. Whether this adds any more than the duty of good faith is questionable, except that it will give consumers additional statutory protection.

In the Final Report Commissioner Hayne said that "there can be no basis in principle or in practice to say that obliging an insurer to handle claims efficiently, honestly and fairly is to impose on the individual insurer, or the industry more generally, a burden it should not bear."

But what exactly will the burden be?

The impacts from this recommendation might include:

  • increased scrutiny from and potential ASIC intervention in the handling of claims (including civil penalty action), which is currently limited;
  • a range of providers involved in the claims management chain having to be licensed (as a provider of financial services); and
  • information provided through the course of a claim may need to comply with the financial advice rules.

Unfair Contract Terms provisions

Commissioner Hayne recommended that the unfair contract term (UCT) provisions of the ASIC Act should also apply to insurance contracts. The Commissioner's Final Report was not the first time that insurers have seen this recommendation. The Treasury's Proposal Paper released in June last year outlined the extension of UCT protections to standard form insurance contracts.

If these changes are adopted, Insurers might face:

  • upfront costs to review and amend policy terms and product disclosure statements to ensure that they do not contain unfair terms; and
  • more protracted disputes, with insureds relying on an unfair contract term allegation when disputing a claim payment or coverage denial – particularly in consumer contracts or retail insurance policies.

External Dispute Resolution

Commissioner Hayne has recommended that the Corporations Act be amended to require AFSL holders (including insurers) to take reasonable steps to co-operate with the Australian Financial Complaints Authority (AFCA), including by making available to AFCA all relevant documents and records relating to the issues in dispute. This is in response to submissions that an insurer’s duty of good faith should extend to its conduct in an external dispute resolution process, and is a way of ensuring materials that are relevant to a dispute are provided to AFCA.

Non-disclosure

Commissioner Hayne has recommended that Part IV of the ICA should be amended for consumer contacts to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer (with consequent amendments to the remedial provisions of the ICA).

Whilst from a practical perspective, this is likely to make it more difficult for insurers to decline a claim on account of non-disclosure, the recommendation is premised on the notion that an insurer knows more than an insured as to what information is material to it in deciding whether to underwrite a risk and on what terms. This means insurers must ask the right questions in any proposal for insurance to elicit the information it needs from the insured.

Industry codes

Commissioner Hayne has also recommended the establishment and imposition of mandatory industry codes with enforceable provisions. The current industry codes are in different states of development and maturity. Despite many self-reported breaches by code participants, sanctions have not been imposed by the relevant bodies overseeing the codes. Through consultation with ASIC all necessary steps are to be taken by 30 June 2021 with relevant industry bodies to have the provisions of the various codes applicable to general insurance, life and superannuation, designated as enforceable code provisions by ASIC.

Next steps

Both the Federal Government and Labor opposition have indicated support for all of the above recommendations, and indeed the current Government has said it intends to go further than Commissioner Hayne’s recommendations. That includes empowering the Federal Court to determine criminal corporate disputes and extending the limitation period for claims before AFCA. If all of these proposals are ultimately enacted there is likely to be more claims activity. Perhaps the only question remaining is how long the law reform process will take to turn recommendations into reality.