Duty to Take Reasonable Care: Does the Obligation Continue Until Cover Commences?

A significant change in focus

Since 5 October 2021, applicants for life insurance have been bound by a duty to take reasonable care not to make a misrepresentation. This new duty shifts responsibility from the applicant to the insurer and raises questions about an applicant’s obligation to disclose material information between the application date and the commencement of cover.

The duty to take reasonable care

In 2021, the Insurance Contracts Act 1984 (Cth) (the Act) underwent a series of reforms following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission).

At the time of the Commission, applicants for life insurance had a duty of disclosure. The Commission found that the duty of disclosure unfairly burdened applicants because insurers were in a stronger position to identify and obtain relevant information.[1] The Commission found that replacing the duty of disclosure with a duty to take reasonable care would shift responsibility to the insurer to elicit the information it needs to assess risks.[2]

Under the Act’s new section 20B, applicants are now subject to a duty to take reasonable care not to make a misrepresentation before entering into a life insurance contract. This changes the focus from what information the applicant should have volunteered to whether the applicant took reasonable care not to make a misrepresentation in response to the insurer’s questions.

The obligation to take reasonable care on an ongoing basis

An issue facing life insurers is how the duty to take reasonable care operates in the period between the submission of an application and the commencement of cover.

Section 20B(1) of the Act provides that the duty to take reasonable care applies “before the relevant contract of insurance is entered into”, and section 20B(2) provides that whether or not an insured has taken reasonable care is to be determined with regard to all the relevant circumstances. 

However, it is not clear from the wording of those sections whether an applicant’s failure to notify the insurer of a change in circumstances after submitting an application but before the commencement of the contract would amount to a breach of the duty. 

Whether representations are continuing – the courts’ approach

Case law indicates that, generally, Australian courts consider that representations continue until withdrawn or modified.  They are treated as continuing while negotiations continue and are treated differently from mere silence.[3]

The continuing effect of representations was discussed most recently in a life insurance context in AIA Australia Ltd v Sharma [2023] FCAFC 42. In that case the Full Court of the Federal Court considered whether an incoming group life insurer could exercise remedies available under the Act in respect of misrepresentations made by an applicant to a prior life insurer.

Dr Sharma held default death cover under a group life insurance policy provided by OnePath Life Ltd. In early 2011, Dr Sharma applied for additional underwritten insurance cover. During this application, Dr Sharma made a series of representations through the application form, personal statement and declaration denying the existence of cardiac troubles or chest pain. However, prior to the application, Dr Sharma had suffered a heart attack and had undergone a major heart surgery.

In late 2011, Colonial Mutual Life Assurance Society (CommInsure) became the group life insurer, and all insured members were provided with continued cover, without having to take any additional step, such as opting in or providing further or updated medical information or declarations. Dr Sharma was notified of the change and provided with an opportunity to opt out. At no point did he advise CommInsure of the false representations regarding his heart condition.

Ultimately, the Court found that the misrepresentation made by Dr Sharma was actionable by Comminsure, because CommInsure was a member of a class of persons who could be expected to, and did, act on the misrepresentation, and because “there is a general rule that a representation, once made in the course of a negotiation for a contract prima facie continues in force until it is withdrawn or altered or the contract is completed”.[4]  On that basis, the misrepresentation was found to have been made not only to OnePath but also to CommInsure.

Sharma contemplates a fraudulent misrepresentation, that is, a representation which (in that case) the applicant knew to be false at the time of the application.  Perhaps less straightforward is a case where a statement is accurate when made but becomes inaccurate because of subsequent events. Nonetheless, Sharma and other case authorities acknowledge the principle that representations made during negotiations continue in force until the contract is completed. 

In our view, this supports the proposition that the applicant for a life insurance contract has a duty to correct representations that subsequently become false to avoid making a misrepresentation.  Further, there is nothing in the Act indicating that the duty not to make a misrepresentation ceases after completing an application.  Notably, sections 24, 25 and 27 of the Act refer more broadly to statements made “during the negotiations for [a contract of life insurance] but before it was entered into”.

AFCA’s approach

Most complaints in relation to life insurance are made to the Australian Financial Complaints Authority (AFCA) rather than the courts, and it is not clear whether AFCA would adopt the same approach to this issue as the courts, and they are not bound to do so.

AFCA has issued guidance on the interpretation of section 20B which is currently available in the form of a consultation draft due to be finalised in October 2026.[5]

The draft guidance does not specify whether AFCA considers an applicant has a duty to correct statements made in an application because of a change in circumstances afterwards.

In outlining the requirement that there must be a misrepresentation, the draft guidance simply refers to a misrepresentation as “a statement of:

• fact that was untrue
• opinion that was not the subject of an honestly held belief or
• intent that never existed at the time the statement was provided.”

The draft guidance then provides that a misrepresentation would ordinarily be limited to “the complainant’s incorrect answers to the insurer’s questions when applying for the policy”.

In our view, the draft guidance would be improved by specifying:

• whether there is a continuing duty to take reasonable care up to the date the contract commences; and
• whether a breach of the duty may occur if there is a change in circumstance after the application is submitted which makes an answer to a question in the application incorrect. Whilst the draft guidance provides that the duty can also apply to answers previously made which the complainant failed to correct, it is unclear whether this applies to representations which were correct when made, but subsequently become false before the policy is incepted.

Failure to take reasonable care on an ongoing basis as a breach

In our view, whether an applicant’s failure to inform an insurer of a subsequent change in circumstances constitutes a breach of the duty to take reasonable care involves considering several factors, including the factors listed in section 20(B)(3) and (4) of the Act.  Among other things, it may be relevant to consider:

• the nature and materiality of the change in circumstance (e.g. diagnosis of a terminal illness may be treated differently from developing knee pain);
• what knowledge the applicant had (or could reasonably have obtained) of the change in circumstance;
• how long after the application the change in circumstance occurred; and
• what opportunity the applicant had to inform the insurer of the change in circumstance.

Further, the conduct of the insurer between the date of the application and the date cover commences is also relevant.  Among other things, it may be relevant to consider whether:

• a question in the application specifically addressed the relevant circumstance;
• the insurer has informed the applicant about their ongoing duty to take reasonable care up to the date cover commences; and
• the insurer has sought an update from the insured prior to cover commencing.

If insurers are concerned about the possibility of a change of circumstance between the date the application is submitted and the date cover commences, the insurer should:

• seek an update from the insured very shortly before cover commences;
• provide the applicant with a copy of the questions asked in the application and their earlier answers; and
• request that they confirm the accuracy of the answers.

What this means for life insurers

To date, no Australian court has considered an applicant’s duty to take reasonable care at all, let alone whether an applicant has a duty to modify a representation made during the period between the application for life insurance and the commencement of cover, and whether a failure to do so amounts to a breach of that duty.

The Act does not limit the duty to the time when the application is submitted, and case authorities indicate that representations are generally considered to be continuing up to the completion of the contract.  Those authorities suggest that the applicant’s duty to take reasonable care does not cease when the applicant completes the application form but extends to the date the contracted is entered into.  

Whether a failure to correct a subsequent inaccuracy will amount to a breach of the duty should involve an assessment of all the relevant circumstances, in line with section 20B(2) of the Act. 

Some uncertainty remains as to how AFCA will approach those issues, and in our view it would be of benefit to everyone if AFCA addressed them more clearly in its guidance. 

In the circumstances, we recommend that insurers take steps to solidify their application processes, including by:

• informing applicants of their continuing duty to take care and the consequences of a breach;
• following up with applicants to confirm their answers remain accurate shortly before cover commences (particularly if there is an extended interval between the date of the application and policy inception); and
• providing applicants with a copy of the application questions and answers before policy inception so they can more easily check and confirm the accuracy of their answers.

We are working closely with life insurers as they consider the implications of the “new” duty. If you’d like to discuss what this means for your products or claims frameworks, we’re here to help you navigate the path ahead with confidence.