The need to clearly explain any prescribed policy terms that deviate from the Standard Cover

This article written by an AFCA ombudsman is well worth a read. It discusses section 35 of the Insurance Contracts Act – prescribed contracts which deviate from standard cover). Whilst quite lengthy, it is comprehensive, clear and well structured (as you’d expect from such a person!) and considers the position from both insurers’ and consumers’ point of view.

Before I reproduce the article, I just want to remind readers that PolicyComparison.com among its many benefits, does help explain to all parties the features, benefits and exclusions found in over 3,000 policies. Providing a copy of the comparison is an added level of protection to show that every effort has been made to explain the coverage.

The article which appears on the Law Institute of Victoria website reads:

———————————————————

Section 35 of the Insurance Contracts Act 1984 (Cth) (ICA) sets out a requirement for insurers to notify an insured where their cover deviates from that set out in the standard cover.¹ If they do not do so, an insured can have their claim paid by reference to this standard cover.

What does this mean? How is the insured benefited from this? What should the insurer do to comply with this provision? 

Practitioners who are advising insurers or the insured about claims involving motor vehicle, home building, home contents, travel, consumer credit or certain types of accident and sickness policies should be aware of this, particularly if assisting them in relation to bushfire claims, COVID-19 or other natural disasters. 

What is standard cover?

Division 1 of the ICA discusses standard cover. This refers to specific terms such as a “prescribed contract”, a “prescribed event” and a “minimum amount”. 

A prescribed contract is defined as “. . . a contract of insurance that is included in a class of contracts of insurance declared by the regulations to be a class of contracts in relation to which this Division applies”.

A prescribed event is defined as “. . . in relation to a prescribed contract, means an event that is declared by the regulations to be a prescribed event in relation to that contract”.

The minimum amount means “. . . the amount declared by the regulations to be the minimum amount in relation to a class of claims in which that claim is included”.

The Insurance Contracts Regulations 2017 (Cth) (ICR)² set out the classes of contracts of insurance to which this applies:

• motor vehicle³
• home building⁴
• home contents⁵
• sickness and accident⁶
• consumer credit⁷
• travel.⁸

As evident, it generally applies to policies sold for personal purposes, although this is not a requirement. Of importance, for these policies, is that one of the insureds must be a natural person. 

Various subdivisions of the ICR relate to a class of contract. Each subdivision sets out the relevant class of contract, the events that are covered and the minimum amount payable. 

Of interest, the standard cover contains benefits that are greater than the industry generally offers. For example:

• there is no exclusion for pandemics under a travel policy – this is a typical exclusion in travel policies
• there is no monetary cap for a home building claim – in contrast, most insurers cap their liability to a sum insured
• flood is covered for a home building claim – policies vary as to whether they cover flood (be mindful that Part V, Division 1A contains specific protections for flood which is not covered by this article) 
• no pre-existing medical condition exclusion for consumer credit or sickness and accident policies – such exclusions are typical for these policies
• no cap for benefits under consumer credit or sickness and accident policies – this has significant advantage given most typically limit benefits between 12 to 24 months.

When does s35 apply?

Section 35(1) applies if there is a “prescribed event” under a “prescribed contract”. If these conditions are satisfied, the insurer cannot refuse to pay the minimum amount prescribed in the ICR unless sub-s2 is satisfied.

Sub-s2 states that sub-s1 does not apply if the insurer can prove that:

“before the contract was entered into, the insurer clearly informed the insured in writing (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise) or . . .”

The second aspect of this section discusses when the insured, or a reasonable person in the circumstances, knew about the effect of the contract. 

This article will focus on the obligation to clearly inform in writing.

The expression “before the contract was entered into” should be read in conjunction with s69 of the ICA. Section 69 discusses how this phrase may be complied with in circumstances where it is not reasonably practicable for the information to be given in writing before the contract is entered into. A good example is when a policy is arranged by phone.

In general, if it is not reasonably practicable to provide the information in writing before the contract is entered into, an insurer can do so within 14 days after the contract is entered into.

Be mindful that s35(2) is not applicable if the contract was arranged by a broker acting as the insured’s agent.⁹

Case law around s35(2)

There have been several cases that have looked at how an insurer can satisfy s35(2). 

The first case was Hams v CGU.¹⁰ In this case, arguments were raised about whether s35(2) required the insurer to prominently display certain terms, explain general principles of insurance law or explain the proper approach to the construction of policy provisions. 

Einstein J rejected this argument and made the following relevant comments about s35(2):¹¹

“In my view the words in parentheses in s35(2) ‘whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise’ are likely in most circumstances to result in the provision of such a document in and of itself satisfying the requirement to clearly inform. There may however be special circumstances in which the complexity of or confusions within the document containing the relevant provisions (which one would expect would usually be the Insurance Policy itself) could be such that the mere provision of the Policy did not establish that the insurer had effectively informed the insured of relevant limitations”.

This was supported by the Northern Territory Court of Appeal in Marsh v CGU.¹² In that case, Mildren J said:

“Even though s35 is plainly beneficial legislation, a fair reading of s35(2) does not warrant the conclusion that the result need go further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question”.

This provision was also considered in the Supreme Court of South Australia in Lockwood v IAL¹³ in context of an insurer seeking to rely on a policy provision that said it may refuse a claim if the vehicle is driven by a person who was unlicensed. 

In this case, the vehicle had been taken and damaged by the insured’s 14-year-old son without their permission. 

Kourakis J held that if the proper construction of the relevant provision was such that it could allow the insurer to deny the claim, then s35 of the Act prohibited the insurer from doing so. This is because he did not accept the insurer clearly informed the insured in writing that the contract would not provide cover in the event the car was stolen, or at least driven without the insured’s permission, by an unlicensed person.

The key reasons he provided were as follows:¹⁴

“Section 35(2) of the Act recognises that in some circumstances the provision of the policy may be enough, but it does not deem the provision of the terms of the policy to be a sufficient disclosure in all cases. The unlicensed exclusion clause would be read by a reasonable person in the position of the Lockwoods as more naturally referring to accidental damage occurring when the insured vehicle was driven by a person they had permitted to drive. It does not expressly refer back to the theft cover. There is no reference to the unlicensed exclusion in the column of the cover part of the policy where provision is expressly made for the limitations on the theft cover it provides. Indeed, as I have already observed, the unlicensed exclusion clause does not appear in the general exclusion part or the cancellation part of the policy”

What is the effect of these cases?

It is fair to say that an insurer can satisfy the requirement to clearly inform the insured if:

• it provides a copy of the policy to the insured
• the relevant provision is expressed in clear and unambiguous terms such that a person of average intelligence and education can readily understand it.

For the first aspect, the insurer must be able to prove that the insured was given a copy of the policy either:

• before the contract was entered into 
• if it was impractical to do so, within 14 days after the contract was entered into. 

The insurer can give a copy of the policy in a manner set out in s72A of the ICA. This can include sending the policy by post to the insured’s last known address or by electronic communication that complies with the Electronic Transactions Act 1999 (Cth).

For the second aspect, this shows that if there is any potential ambiguity surrounding the relevant term, there is a real risk the insurer will be paying a claim by reference to the prescribed contract.

This means provisions must be expressed in clear and unambiguous language and in such a way that a person of average intelligence and education would readily understand it. 

What does this mean for lawyers who represent insurers?

Most insurers have a large market. This often requires them to send documents as part of a large batch which are generally processed by a third-party provider. 

For those situations, lawyers should ensure their clients have systems in place that:

• record their policies and procedures about sending documents to customers
• record what documents were sent to a specific policyholder and when
• set up a robust process to record any changes to a customer’s details (eg, change of email or postal address, consent to receive electronic communications)
• record any mail or email returned to them
• be able to produce documents showing how and when a particular document was sent.

This is to ensure their clients are in a position to demonstrate that a policy was sent to the customer. This is important as the onus is on the insurer to show it complied with s35(2). 

Regarding the policy provisions itself, there are several ways to ensure the provisions can satisfy the requirements of s35(2) including:

• making sure the policy is properly indexed
• having provisions located in their logical setting (eg, in the Lockwood case, the relevant provision was under a heading “Things that may put claim or insurance cover at risk” rather than the general exclusions)
• using plain English
• avoiding language that can create ambiguity (eg, using “and/or”).

What does this mean for lawyers representing consumers?

Section 35 should be considered when a claim has been made under one of the six prescribed contracts listed above and the insurer has either denied or limited its liability.

In these cases, consider whether:

• the policy is a prescribed contract
• there has been a prescribed event 
• the minimum amount payable under the ICR. 

If the outcome is better than the insurer’s claim decision, then the following inquires should be made.

First, identify if the client ever received the policy. 

In doing this, it is important to note that an insurer is not required to send the policy at each renewal. Pursuant to s11(10)(a) of the ICA, if the insurer has given information to the insured as required under s35, then this requirement is deemed to be satisfied at or before any subsequent renewal.

Therefore, the last policy (including any supplementary policy document) the client received would be applicable even if it was sent years ago. 

If the client has not received any policy, then make a submission that the claim is payable by reference to s35(1) of the Act.

Second, if a policy was received, then consider if the relevant provision the insurer is relying on was expressed in clear and unambiguous language and in a manner that a person of average intelligence and education can readily understand. 

If there is any argument the provision does not satisfy this, then the client should submit an argument that the insurer has not complied with s35(2) of the Act. This would mean the claim is payable by reference to s35(1) of the ICA. 

Historically, when there is a potential ambiguity in the relevant provision, the argument raised is about the proper construction of the policy. This will involve application of construction contractual principles. However, a further and/or alternative submission involving s35(2) of the ICA would have greater force. This is because, even if the proper construction of the policy favours the insurer’s position, s35(2) may still prevail. 

Conclusion

Many claims are lodged under policies that are subject to s35. Further, with COVID-19 and the number of natural disasters affecting Australia, it is likely insurers and insureds will seek legal advice about claim disputes or potential claim disputes. These claim disputes will likely involve policies which are subject to s35.

The standard cover is broader on key points compared to the standard industry policies issued. Therefore, any failure to comply with s35(2) of the ICA could result in a beneficial outcome to the insured.

Accordingly, lawyers advising either side should consider whether:

• there is a prescribed contract and a prescribed event
• the insurer has sent a copy of the policy to the insured at any stage and it can demonstrate this
• the relevant provisions are clearly and unambiguously expressed in such a way that a person of average intelligence and education would readily understand them. ?

Chris Liamos is an ombudsman at the Australian Financial Complaints Authority specialising in insurance disputes. He sits on the LIV ADR Committee, which is part of the Litigation Lawyers Section. In addition, he is a Tribunal and Appeals Board member of Football Victoria and a board member of the Eastern Volunteers Resource Centre.

1. Part 5, Division 1 of the ICA.
2. Part 3, Division 1.
3. Subdivision B of Part 3, Division 1.
4. Subdivision C of Part 3, Division 1.
5. Subdivision D of Part 3, Division 1.
6. Subdivision E of Part 3, Division 1.
7. Subdivision F of Part 3, Division 1.
8. Subdivision G of Part 3, Division 1.
9. Section 71(1) of the ICA.
10. Hams & Anor v CGU Insurance Limited [2002] NSWSC 273.
11. Paragraphs 242 and 244.
12. Marsh v CGU Insurance Ltd t/a Commercial Union Insurance [2004] NTCA 1.
13. Lockwood & Lockwood v Insurance Australia Ltd (t/as SGIC Insurance) [2010] SASC 140.
14. Paragraph 34.

Views expressed on liv.asn.au (Website) are not necessarily endorsed by the Law Institute of Victoria Ltd (LIV).