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Claims handling heats up in Australia

  • Legal Development 17 二月 2021 17 二月 2021

There are significant changes ahead in respect of claims handling with the removal of the claims handling services exemption (so that such services are now a financial service) and the transition to the General Insurance Code of Practice 2020. Insurers and claims handlers will also need to heed ASIC's warnings about claims handling obligations in relation to COVID-19 related claims.

Who's afraid of an Australian Financial Services Licence?

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Cth) was passed by the Australian Parliament on 10 December 2020 and the amendments regarding the removal of the insurance claims handling and settling exemption as a financial service under the Corporations Act 2001 (Cth) (the Corporations Act).

The removal of the insurance claims handling exemption from the definition of 'financial service' was a recommendation arising from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission). In light of various case studies which examined the handling of claims, the Royal Commissioner found there was no basis in principle for continuing to exclude claims handling from the definition of a financial service. 

With the removal of the exemption, the general obligations in the Corporations Act relating to Australian Financial Services Licence (AFSL) holders will apply to claims handling and settling services. Accordingly, the service provider will require  an AFSL to provide the services and will be subject to the general obligations to provide services  efficiently, honestly and fairly. 

This may cover any of the following aspects of claims handling:

  • making claims decisions, including investigating claims and interpreting policy provisions;
  • conducting settlement negotiations;
  • preparing estimates of loss or damage, or likely repair costs; or
  • recommending mitigation of loss.

The new provisions commenced on 1 January 2021 but transitional provisions will apply. ASIC has now started accepting applications for AFSL variations or new applications.  If  a complete application for an appropriate AFSL is lodged by 30 June 2021, then between 1 July 2021 and 31 December 2021, claims handling and settling services can continue to be provided. From 1 January 2022, claims handling and settling services will not be able to be provided without an appropriate AFSL.

On 27 November 2020, ASIC released a draft information sheet on the new AFSL requirements for claims handling and settling.

The information sheet confirms that insurers will generally need to handle and settle insurance claims:

  • in a timely way;
  • in the least onerous and intrusive way possible;
  • fairly and transparently; and
  • in a way that supports consumers, particularly ones who are experiencing vulnerability or financial hardship.

Applicants seeking an AFSL authorisation for claims handling and settling services will also be required to provide a Claims Handling and Settling Service Statement as part of their application.

Consultation is ongoing as to claimant intermediaries that may be exempt from the requirement to hold an AFSL to provide claims handling and settling services.

ASIC succeeds in action against insurer for breach of utmost good faith

ASIC was recently successful in obtaining declarations that an insurer had breached its duty of utmost good faith in the manner in which it handled claims arising from a home, building and contents policy.(1) The case was referred to ASIC for investigation in the Financial Services Royal Commission Final Report.

This is the first time that ASIC has sought to enforce section 13(1) of the Insurance Contracts Act 1984 (Cth) (the ICA), which requires an insurer to act towards the insured in respect of any matter arising under, or in relation to, the policy with utmost good faith.

In this case, ASIC argued that the insurer had breached its duty of utmost good faith by, amongst other things:

  • not informing the Insured that the contactor had been the subject of numerous complaints and that the repairer was not acceptable to the insurer;
  • failing to ensure that any builder commenced repairs to the property in a timely way;
  • failing to make safe the works at the property;
  • failing to consider and respond in a timely way to a formal complaint made by the insured; and
  • failing to adequately respond to a follow-up email sent by the insured, which delayed the completion of the repairs.

The insurer made several admissions, including that it had failed to act consistently with commercial standards of decency and fairness with due regard to the interests of the insured, thereby breaching the implied term of utmost good faith.

The Federal Court declared there had been a breach of the insurer's duty of utmost good faith under the ICA in its handling of the claim lodged by the policyholder.

ASIC has flagged that the case is an "important warning for insurers" about its attitude to conduct that breaches the key duty of good faith, and the rights of insureds in relation to how their insurance claims are handled.

Given the date of the relevant breaches, in this case, ASIC was only able to seek a declaration against the insurer for breach of the duty of utmost good faith.  Chief Justice Allsop of the Federal Court found that the declaratory relief propounded by ASIC was appropriate in the circumstances. The Court determined that a single declaration would suffice to cover the five different occasions on which the insurer breached the requirements of section 13 of the Insurance Contracts Act 1984 (Cth) (ICA).

Given subsequent amendments to the ICA in March 2019, ASIC now has powers to seek a pecuniary penalty against an insurer, which for a breach after 1 July 2020, is the greater of:

i. $1,100,000 (5,000 penalty units); or

ii. three times the benefit obtained or detriment avoided; or

iii. 10% of annual turnover of the body corporate for the 12 month period before the contravention  (capped at $555 million).

COVID-19 claims handling under close scrutiny

As the effect of COVID-19 spread throughout the world, ASIC wrote to the directors of every general insurer in Australia  a number of times in 2020, setting out how it expects insurers to be managing claims arising from the COVID-19 pandemic.  ASIC stated that its expectation is that insurers will handle insurance claims with utmost good faith and deal with complaints genuinely, promptly, fairly and consistently.

ASIC's missives also focused on the need for insurers to demonstrate flexibility in dealing with a policyholder's specific circumstances and to take a proactive approach to communicating with policyholders about their insurance cover.

ASIC's letter to directors in October 2020 followed the decision by the Supreme Court of New South Wales in the first business interruption (BI) policy test case. Again, communication was a key focus of this directive with ASIC stating that it "strongly encourages" insurers to communicate in a way that helps small business make an appropriate and informed decision about whether they should lodge claims for BI losses.

Although, the letter reminds all insurers that BI claims should be assessed and where appropriate, paid in a timely manner, the general insurance industry has confirmed that it  will be seeking leave to appeal the decision in the first test case to the High Court of Australia and general insurers will also commence a second test case seeking clarity from the courts on some of the critical legal issues arising in the claims.

General insurers will be required to transition to the General Insurance Code of Practice 2020 prior to 1 July 2021.  Once the process for assessment of claims is able to proceed, ASIC has flagged that it will pay close attention as to whether insurers are meeting the commitments set out in the new code.

How we can assist

Our team can advise you as to whether services you provide may constitute claims handling and settling services and, if necessary, we can help you apply to ASIC for a variation to your AFSL to cover claims handling and settling services or apply for an AFSL for the first time. 

Our claims teams are also happy to discuss systems and processes that you might be able to put in place to manage COVID-19-related claims

 

(1) ASIC v Youi Pty Ltd [2020] FCA 1701

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