UNDERSTANDING INSURANCE
Insurance investigation represents by far the largest segment of the investigation industry. Having an understanding of the Australian insurance landscape will assist investigators to place their activities and actions in context.
Insurance
A significant proportion of factual investigations are undertaken on behalf of Insurance companies. It is therefore important for you to have some background knowledge of the industry and the regulatory framework in which it operates.
1. Introduction
The concept of insurance began with marine insurance in the days when most trade was conducted by sea. In the late 1680's a man named Edward Lloyd opened a coffee house in London.
It became very popular with merchants and contracts of marine insurance were often arranged there. A merchant who wanted insurance would pass a piece of paper around to the other merchants in the café. The paper would include details of the ship, the cargo and the proposed voyage. Those who wished to accept a proportion of the risk of the voyage in return for a payment (now known as a premium) would write their names on the bottom of the paper (hence the development of the term "underwriter") and the percentage of the risk they were prepared to undertake.
These days Lloyd's of London is a commercial insurance broking establishment, although business is carried out in much the same way. The person or company with a risk to be insured goes to Lloyd's and provides details of the risk. An employee of Lloyd's (the "broker") takes the piece of paper with the risk details (the "slip") around to the various insurers on behalf of the potential insured. The potential insurers are no longer individuals, they are usually large syndicates. However, a representative of the syndicate still initials the bottom of the slip and indicates the percentage of risk their syndicate accepts, just as they did hundreds of years ago.
On 1 January 1986 the Insurance Contracts Act 1984 came into operation. This Act was the most important development in insurance law in Australia and remains the basis of insurance law today. The Act applies to insurance contracts entered into after 1 January 1986. It is not a code and is superimposed on the common law. The Act does not apply to contracts of reinsurance, health insurance, marine insurance, workers' compensation, or compulsory third party motor vehicle insurance.
The Insurance (Agents and Brokers) Act 1984 was also enacted to regulate the conduct of those arranging insurance for others, and particularly to modify the general rules of agency with respect to those people. The Act is another attempt by the government to protect consumers, this time specifically in relation to insurance transactions.
The main aim of insurance is to transfer risk. The basic idea is that if one person bears the whole loss arising out of some bad luck the result could be
catastrophic. However, if that loss is distributed between a large numbers of people, the loss to each of them as a result of the bad luck is likely to be
minimal. In modern insurance the risk is distributed amongst those who pay insurance premiums. Some people will pay premiums all their lives and never make a claim on their insurance. However, some people will have bad luck and make a claim on their insurance, which is much greater than the premiums, they themselves have paid. The balance is made up from other peoples' premiums. The insurance company is in the middle, acting as a sort of risk-banker, and just like the banks, takes a proportion of the money deposited as payment. It also has the opportunity to make money from the premiums that have not been redistributed.
2. Definitions
"Insurance contract"
assess the nature of the risk, when completed constitutes an offer by the intending insured.
"Policy" The document containing the terms of the contract.
"Cover note" An interim contract of insurance, short term, normal formation rules apply (eg. duty of disclosure).
3. Different types of insurance
General insurance:
Motor vehicle (comprehensive, CTP)
Products liability
Professional indemnity
Travel
Workers' Compensation
Life insurance
Personal accident and disability
4. The requirement for an "insurable interest"
(a) Common Law
For a contract of insurance to be valid at common law, the insured must have an insurable interest, that is some legal or equitable interest in the subject
matter of the insurance (otherwise it's more like a bet).
Common examples:
(b) Under the Insurance Contracts Act
The ICA modifies the common law:
s.16
- a contract of insurance is not void simply because the insured did not have an interest in the subject matter of the contract at the time it was entered
into.
s.17
- where an insured suffers monetary loss as a result of the damage or destruction of the subject matter, the insurer is not relieved of liability
under the contract simply because the insured does not have an insurable interest at the time of the loss.
Also note that an insurable interest is not required in life insurance - s.18 ICA.
The Act also makes special provision to protect purchasers of buildings in the time between contract of sale and completion - s.50 ICA.
5. Duty of Utmost Good Faith
A contract of insurance is a contract uberrimae fidei (of utmost good faith).
"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." (s.13 ICA).
This duty extends to all negotiations leading up to the formation of the contract, the conduct of the parties during the course of the contract (including any
claims made by the insured and the insurer's manner of dealing with those claims), and any circumstances, which have the effect of ending the contract.
The duty of utmost good faith overrides any specific terms of the contract. Where reliance on a term of the contract would not be acting in utmost good faith, it cannot be relied on (s.14 ICA).
One of the most important aspects of the duty of utmost good faith is the requirement that insurer and the insured must not conceal any material facts
relevant to the risk or the contract itself (the duty of disclosure).
6. Duty of Disclosure
The duty of disclosure requires both parties to the insurance contract to disclose to the other all facts material to the proposed insurance before the contract is entered into. The duty continues throughout the life of the contract, so if either party becomes aware of a material fact after the contract is entered into, they must disclose it. Most of the cases deal with the failure of the insured to disclose relevant information, but note that the duty is also imposed on the insurer.
This duty is a positive one and the parties are obliged to volunteer material facts even if the other party does not specifically ask about them (eg. it is no
excuse that the proposal form did not have questions relating to the particular material fact):
(a) What is a "material" fact?
At common law the "prudent insurer" test applies: "a fact is material if it would have reasonably have affected the mind of a prudent insurer in determining
whether he will accept the insurance, and if so, at what premium and on what conditions". Mayne Nickless Ltd v Pegler [1974]
1 NSWLR 228 at 239, approved in Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd (1976) 11 ALR 167 (PC). The duty is relevant to cover notes as well as the main insurance contract.
Under the ICA, the "reasonable insured" test applies: material facts are those which the insured either knows to be relevant to the decision of the insurer whether to accept the risk, or which a reasonable person in the circumstances could be expected to know are relevant (s.21 (1) ICA).
If the material fact is unknown to the insured, the insurer cannot rely on its non-disclosure: CIC Insurance Ltd v Midaz Pty Ltd (1998) 10 ANZ Insurance Cases 61-394.
Matters know by the insured's agent are deemed to be known by the insured: Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673.
The insured does not have to disclose matters:
Previous fires; Previous burglaries Previous accidents; Previous insurance claims made by the insured; The condition of the insured property; An insured's criminal record.
The insured must also inform the insurer of any material changes in the circumstances, which might affect the insured risk:
(a) The insurer is taken to have waived the requirement for the insured to comply with the duty of disclosure unless:
(i) Before the contract is entered into the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the
insurer whether to accept the risk and, if so, on what terms;
or
(ii) In addition to this, the insurer also expressly requests the insured to disclose each exceptional circumstance that the insured either knows to be
relevant to the decision of the insurer whether to accept the risk, or which a reasonable person in the circumstances could be expected to know are relevant
(s.21A ICA).
The insurer is also deemed to have waived compliance if the insured fails to answer a question or gives an obviously incomplete answer and the insurer does not ask for more information (s.21(3) ICA).
If a question in the proposal is ambiguous, it will be construed contra proferentem and will be given the meaning that a reasonable person in the circumstances would have understood it to have (s.23 ICA).
In contracts of joint insurance, non-disclosure by one insured will entitled the insurer to avoid the contract against both insured.
The insurer has a duty to clearly inform the insured in writing of the general nature and effect of the duty of disclosure (s.22 ICA). The Schedule to the ICA regulations includes a standard form of notice. The insurer is also required to notify the insured of any unusual terms (s.37 ICA).
(b) Remedies for breach of the duty
At common law, if the insured fails to disclose a "material fact" in the negotiations leading up to the contract of insurance, the insurer is entitled to
avoid the contract. Note that this duty is strict, so the insurer can avoid the contract whether or not the failure to disclose was intentional or innocent.
Remedies for non-disclosure are modified by the ICA:
7. Misrepresentation
A statement made in connection with a contract of insurance, by or on behalf of the insured, with respect to the existence of a state of affairs has the effect
as though it was a representation made during the negotiations leading up to the contract being entered into (s.24 ICA).
However, a statement is not to be treated as a misrepresentation:
Remedies for misrepresentation:
8. The terms of the policy
Where the terms are ambiguous, they will be construed contra proferentem: Manufacturers' Mutual Insurance Ltd v Stargift Pty Ltd (1985) 3 ANZ Insurance Cases 60-615, Johnson v American Home Assurance Company (1998) 152 ALR 162.
Note the insurer's obligation to notify the insured of any unusual terms in the policy (s.37 ICA).
Many contracts of insurance used to commence with a clause to the effect that all statements made by the insured in the proposal and in writing form part of the contract of insurance. This type of clause was intended to allow the insurer to avoid the policy for any incorrect statement made by the insured, no matter how trivial. This is no longer possible due to s.24 ICA, which provides that any statement has effect as a pre-contractual representation, so the remedies above apply.
9. Refusing to pay the claim
If the risk insured against eventuates, the insurer must pay the claim. However, the risk must be the proximate cause of the insured's loss (that is, the direct,
dominant or effective cause of the loss). If there are two or more proximate causes of the loss, one insured peril and one excepted peril, insured is not
entitled to recover.
(a) Where the insured does not comply with a condition of the insurance contract - If the contract of insurance includes a condition requiring the insured to do something after the contract has been entered into and the insured fails to do it, the insurer may be able to refuse to pay the claim (for example, a failure to notify a change in the nature of the business on the insured premises). However, this right is modified by s.54 ICA.
Where some conduct by the insured or a third party after the contract of insurance was entered into would entitle the insurer (according to the contract) to refuse to pay the claim, although it did not cause or contribute to the loss, the insurer cannot do so. It can only reduce its liability in respect of the claim by an
amount that fairly represents the extent to which its interest were prejudiced as a result of that conduct (s.54 (1) ICA).
If the act or omission caused or contributed to the loss the insurer may refuse to pay. If the act or omission caused or contributed to only part of the loss, the
insurer may refuse to pay that part. (s.54 (2)-(4) ICA).
(b) Claims made and notified policies - "Claims made and notified" professional indemnity policies cover claims made during the period of the policy but they also have to be notified to the insurer during the period of the policy. If the insured fails to notify within the period of the insurance s.54 applies and the insurer can only reduce its liability according to the prejudice it suffered by the failure to notify: East End Real Estate Pty Ltd t/as City Living v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400.
(c) Pre-existing defects - The insurer cannot rely on pre-existing defects or imperfections in a thing insured if the insured was not aware of them and a reasonable person in the circumstances could not be expected to have been aware of them (s.46 ICA). There is similar provision with respect to sickness or disability (s.47 ICA).
(d) Fraudulent claims - Insurer can normally refuse to pay a fraudulent claim but may have to pay part of the claim if "just and equitable in the circumstances"(s.56 ICA).
10. Extending cover to third parties
Under the common law doctrine of privity a contract of insurance cannot normally affect the rights or obligations of third parties. Accordingly, if a contract of
insurance purported to cover a person not a party to the contract, they would not be able to enforce the contract as against the insurer.
The ICA modifies the common law in relation to insurance contracts. Where a third party comes within the class of persons expressed to be insured by the policy, they are covered (s.48 (1) ICA).
(Note that the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 created an exception to the general rule of privity of contract in respect of insurance contracts, but s.48 now restates the general principle in statutory form).
It does not matter that the insured third party is not specifically named in the policy (s.20 ICA).
Note that third party has same obligations to the insurer as the named insured (s.48 (2) ICA) and the insurer has the same rights against the third party (s.48 (3) ICA).
11. Double Insurance and Contribution
Sometimes there is more than one contract of insurance covering the same risk (either entered into by different people or the same person with different companies). However, a person is not allowed to profit out of insurance, so any claim will be restricted to the amount of the insured's loss (s.76 ICA).
When there is more than one contract of insurance that cover exactly the same risk, the question often arises as to which of the insurers must pay the claim, or how much of the claim each of the insurers must contribute.
Any provision in a contract of insurance which attempts to limit or exclude the liability of an insurer by reason that the insured has entered into another
contract of insurance is void (s.45 ICA).
12. Subrogation
Where an insurer indemnifies the insured in respect of a loss caused by a third party, the insurer is entitled to "stand in the shoes" of the insured as regards its rights against the third party.
For example: A third party negligently crashes into the insured's car and causes $1000 worth of damage. The insured makes a claim on its policy and the insurer pays for the car to be repaired. The insurer is then entitled to sue the third party for the $1000, even though under tort law the insurer would have no right to do so. This is because the insurer is substituted for the insured for the purpose of the action.
The ICA restricts an insurer's right of subrogation in certain circumstances:
Agent
Broker (s.9 IABA)
Insurance intermediary (s.9 IABA)
ü a person who for reward and as an agent (for an insurer or an insured) arranges contracts of insurance
ü includes agents and brokers
The common law in relation to agency applies to both insurance agents and brokers. This is particularly relevant in the context of the duty of disclosure, where an agent may know of material facts but fails to disclose them to his or her principal.
The Insurance (Agents and Brokers) Act 1984 (Cth) adds to the common law but does not replace it. In particular, it extends the insurer's liability for the acts of
its agent far beyond that of the common law. An insurer is liable for any conduct of its agent, whether or not it occurred within the scope of the agent's
authority, if the conduct was such that:
(a) a person in the circumstances of the insured could reasonably expected to rely on it;
(b) the insured in fact relied on it in good faith (s.11 IABA).
15. Specific Types of Interest
(a) Vendor and purchaser - Once a valid contract of sale has been made, the purchaser will generally bear the risk of any loss to, destruction or deterioration of the thing sold. Accordingly the purchaser should take out insurance over the thing as soon as property passes.
However note that the purchaser should take out insurance prior to property passing, if he or she is likely to suffer economic loss if the thing purchased is lost or damaged (for example where the purchase price was advantageous to the purchaser and he or she will suffer financial detriment by having to buy the thing elsewhere at a higher price). Sections 16 and 17 ICA allows a purchaser to take out insurance without having a true "insurable interest" at the time.
(b) Bailor and bailee - Both a bailor and a bailee have an insurable interest in the goods bailed and can take out insurance over the goods.
Insurance
A significant proportion of factual investigations are undertaken on behalf of Insurance companies. It is therefore important for you to have some background knowledge of the industry and the regulatory framework in which it operates.
1. Introduction
The concept of insurance began with marine insurance in the days when most trade was conducted by sea. In the late 1680's a man named Edward Lloyd opened a coffee house in London.
It became very popular with merchants and contracts of marine insurance were often arranged there. A merchant who wanted insurance would pass a piece of paper around to the other merchants in the café. The paper would include details of the ship, the cargo and the proposed voyage. Those who wished to accept a proportion of the risk of the voyage in return for a payment (now known as a premium) would write their names on the bottom of the paper (hence the development of the term "underwriter") and the percentage of the risk they were prepared to undertake.
These days Lloyd's of London is a commercial insurance broking establishment, although business is carried out in much the same way. The person or company with a risk to be insured goes to Lloyd's and provides details of the risk. An employee of Lloyd's (the "broker") takes the piece of paper with the risk details (the "slip") around to the various insurers on behalf of the potential insured. The potential insurers are no longer individuals, they are usually large syndicates. However, a representative of the syndicate still initials the bottom of the slip and indicates the percentage of risk their syndicate accepts, just as they did hundreds of years ago.
On 1 January 1986 the Insurance Contracts Act 1984 came into operation. This Act was the most important development in insurance law in Australia and remains the basis of insurance law today. The Act applies to insurance contracts entered into after 1 January 1986. It is not a code and is superimposed on the common law. The Act does not apply to contracts of reinsurance, health insurance, marine insurance, workers' compensation, or compulsory third party motor vehicle insurance.
The Insurance (Agents and Brokers) Act 1984 was also enacted to regulate the conduct of those arranging insurance for others, and particularly to modify the general rules of agency with respect to those people. The Act is another attempt by the government to protect consumers, this time specifically in relation to insurance transactions.
The main aim of insurance is to transfer risk. The basic idea is that if one person bears the whole loss arising out of some bad luck the result could be
catastrophic. However, if that loss is distributed between a large numbers of people, the loss to each of them as a result of the bad luck is likely to be
minimal. In modern insurance the risk is distributed amongst those who pay insurance premiums. Some people will pay premiums all their lives and never make a claim on their insurance. However, some people will have bad luck and make a claim on their insurance, which is much greater than the premiums, they themselves have paid. The balance is made up from other peoples' premiums. The insurance company is in the middle, acting as a sort of risk-banker, and just like the banks, takes a proportion of the money deposited as payment. It also has the opportunity to make money from the premiums that have not been redistributed.
2. Definitions
"Insurance contract"
- A contract by which one party ("the insurer"), in consideration of a sum of money ("the premium"), undertakes to pay to another person ("the
insured"), a sum of money or its equivalent, on the happening of a specified event; - The event must involve some element of uncertainty (whether or when it will happen); and
- The event must be of a character more or less adverse to the interests of the insured (that is, the insured must have an insurable interest): Prudential Insurance Co v Inland Revenue Commissioners (1904) 2 KB 658.
- Compare wagers, guarantees, and contract for services.
assess the nature of the risk, when completed constitutes an offer by the intending insured.
"Policy" The document containing the terms of the contract.
"Cover note" An interim contract of insurance, short term, normal formation rules apply (eg. duty of disclosure).
3. Different types of insurance
General insurance:
- All risks
- Aviation
- Business interruption and consequential loss
- Credit
- Goods in transit
- Fire
- Farm produce and livestock
- Household contents
- House "bricks and mortar"
Motor vehicle (comprehensive, CTP)
Products liability
Professional indemnity
Travel
Workers' Compensation
Life insurance
Personal accident and disability
4. The requirement for an "insurable interest"
(a) Common Law
For a contract of insurance to be valid at common law, the insured must have an insurable interest, that is some legal or equitable interest in the subject
matter of the insurance (otherwise it's more like a bet).
Common examples:
- Property owners can insure the property;
- Trustees and beneficiaries can insure the trust property;
- Mortgagees and mortgagors can insure the mortgaged property;
- Landlords and tenants can insure the rented property;
- People responsible for the care and safety of another's goods can insure the goods (eg. common carriers, repairers, hirers, bailees).
- Purchasers of goods have an insurable interest in the goods at the time property passes (where there is an enforceable contract).
- Unsecured creditors and shareholders do not have insurable interests.
(b) Under the Insurance Contracts Act
The ICA modifies the common law:
s.16
- a contract of insurance is not void simply because the insured did not have an interest in the subject matter of the contract at the time it was entered
into.
s.17
- where an insured suffers monetary loss as a result of the damage or destruction of the subject matter, the insurer is not relieved of liability
under the contract simply because the insured does not have an insurable interest at the time of the loss.
Also note that an insurable interest is not required in life insurance - s.18 ICA.
The Act also makes special provision to protect purchasers of buildings in the time between contract of sale and completion - s.50 ICA.
5. Duty of Utmost Good Faith
A contract of insurance is a contract uberrimae fidei (of utmost good faith).
"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." (s.13 ICA).
This duty extends to all negotiations leading up to the formation of the contract, the conduct of the parties during the course of the contract (including any
claims made by the insured and the insurer's manner of dealing with those claims), and any circumstances, which have the effect of ending the contract.
The duty of utmost good faith overrides any specific terms of the contract. Where reliance on a term of the contract would not be acting in utmost good faith, it cannot be relied on (s.14 ICA).
One of the most important aspects of the duty of utmost good faith is the requirement that insurer and the insured must not conceal any material facts
relevant to the risk or the contract itself (the duty of disclosure).
6. Duty of Disclosure
The duty of disclosure requires both parties to the insurance contract to disclose to the other all facts material to the proposed insurance before the contract is entered into. The duty continues throughout the life of the contract, so if either party becomes aware of a material fact after the contract is entered into, they must disclose it. Most of the cases deal with the failure of the insured to disclose relevant information, but note that the duty is also imposed on the insurer.
This duty is a positive one and the parties are obliged to volunteer material facts even if the other party does not specifically ask about them (eg. it is no
excuse that the proposal form did not have questions relating to the particular material fact):
(a) What is a "material" fact?
At common law the "prudent insurer" test applies: "a fact is material if it would have reasonably have affected the mind of a prudent insurer in determining
whether he will accept the insurance, and if so, at what premium and on what conditions". Mayne Nickless Ltd v Pegler [1974]
1 NSWLR 228 at 239, approved in Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd (1976) 11 ALR 167 (PC). The duty is relevant to cover notes as well as the main insurance contract.
Under the ICA, the "reasonable insured" test applies: material facts are those which the insured either knows to be relevant to the decision of the insurer whether to accept the risk, or which a reasonable person in the circumstances could be expected to know are relevant (s.21 (1) ICA).
If the material fact is unknown to the insured, the insurer cannot rely on its non-disclosure: CIC Insurance Ltd v Midaz Pty Ltd (1998) 10 ANZ Insurance Cases 61-394.
Matters know by the insured's agent are deemed to be known by the insured: Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673.
The insured does not have to disclose matters:
- that diminish the risk;
- that are of common knowledge;
- that the insurer knows or in the ordinary course of business ought
to know; - in relation to which the insurer has waived the duty of disclosure
(s.21 (2) ICA).
Previous fires; Previous burglaries Previous accidents; Previous insurance claims made by the insured; The condition of the insured property; An insured's criminal record.
The insured must also inform the insurer of any material changes in the circumstances, which might affect the insured risk:
(a) The insurer is taken to have waived the requirement for the insured to comply with the duty of disclosure unless:
(i) Before the contract is entered into the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the
insurer whether to accept the risk and, if so, on what terms;
or
(ii) In addition to this, the insurer also expressly requests the insured to disclose each exceptional circumstance that the insured either knows to be
relevant to the decision of the insurer whether to accept the risk, or which a reasonable person in the circumstances could be expected to know are relevant
(s.21A ICA).
The insurer is also deemed to have waived compliance if the insured fails to answer a question or gives an obviously incomplete answer and the insurer does not ask for more information (s.21(3) ICA).
If a question in the proposal is ambiguous, it will be construed contra proferentem and will be given the meaning that a reasonable person in the circumstances would have understood it to have (s.23 ICA).
In contracts of joint insurance, non-disclosure by one insured will entitled the insurer to avoid the contract against both insured.
The insurer has a duty to clearly inform the insured in writing of the general nature and effect of the duty of disclosure (s.22 ICA). The Schedule to the ICA regulations includes a standard form of notice. The insurer is also required to notify the insured of any unusual terms (s.37 ICA).
(b) Remedies for breach of the duty
At common law, if the insured fails to disclose a "material fact" in the negotiations leading up to the contract of insurance, the insurer is entitled to
avoid the contract. Note that this duty is strict, so the insurer can avoid the contract whether or not the failure to disclose was intentional or innocent.
Remedies for non-disclosure are modified by the ICA:
- Where innocent, the insurer can reduce its liability as if the
non-disclosure had not occurred - s.28 (1), (3).
- Where fraudulent, the insurer may avoid the contract (s.28 (2)) or
reduce its liability as if the non-disclosure had not occurred (s.28 (3)).
- Note that the remedies available to an insurer under the ICA for failure to disclose are exclusive (s.33 ICA).
7. Misrepresentation
A statement made in connection with a contract of insurance, by or on behalf of the insured, with respect to the existence of a state of affairs has the effect
as though it was a representation made during the negotiations leading up to the contract being entered into (s.24 ICA).
However, a statement is not to be treated as a misrepresentation:
- Unless the insured (or a reasonable person in the circumstances) could be expected to have known that the statement would have been relevant
to the insurer's decision to accept the insurance and, if so, on what terms - s.26 (2). - Where it was made on the basis of a belief held by the insured, being a belief, which would have been held by a reasonable person in the circumstances - s.26 (1).
- Simply because the person failed to properly answer a question in the proposal form - s.27.
Remedies for misrepresentation:
- Where innocent, the insurer can reduce its liability as if the misrepresentation had not occurred - s.28 (1), (3).
Where fraudulent, the insurer may avoid the contract (s.28 (2)) or reduce its liability as if the misrepresentation had not occurred (s.28 (3)). - Note that the remedies available to an insurer under the ICA for misrepresentation are exclusive (s.33 ICA).
8. The terms of the policy
Where the terms are ambiguous, they will be construed contra proferentem: Manufacturers' Mutual Insurance Ltd v Stargift Pty Ltd (1985) 3 ANZ Insurance Cases 60-615, Johnson v American Home Assurance Company (1998) 152 ALR 162.
Note the insurer's obligation to notify the insured of any unusual terms in the policy (s.37 ICA).
Many contracts of insurance used to commence with a clause to the effect that all statements made by the insured in the proposal and in writing form part of the contract of insurance. This type of clause was intended to allow the insurer to avoid the policy for any incorrect statement made by the insured, no matter how trivial. This is no longer possible due to s.24 ICA, which provides that any statement has effect as a pre-contractual representation, so the remedies above apply.
9. Refusing to pay the claim
If the risk insured against eventuates, the insurer must pay the claim. However, the risk must be the proximate cause of the insured's loss (that is, the direct,
dominant or effective cause of the loss). If there are two or more proximate causes of the loss, one insured peril and one excepted peril, insured is not
entitled to recover.
(a) Where the insured does not comply with a condition of the insurance contract - If the contract of insurance includes a condition requiring the insured to do something after the contract has been entered into and the insured fails to do it, the insurer may be able to refuse to pay the claim (for example, a failure to notify a change in the nature of the business on the insured premises). However, this right is modified by s.54 ICA.
Where some conduct by the insured or a third party after the contract of insurance was entered into would entitle the insurer (according to the contract) to refuse to pay the claim, although it did not cause or contribute to the loss, the insurer cannot do so. It can only reduce its liability in respect of the claim by an
amount that fairly represents the extent to which its interest were prejudiced as a result of that conduct (s.54 (1) ICA).
If the act or omission caused or contributed to the loss the insurer may refuse to pay. If the act or omission caused or contributed to only part of the loss, the
insurer may refuse to pay that part. (s.54 (2)-(4) ICA).
(b) Claims made and notified policies - "Claims made and notified" professional indemnity policies cover claims made during the period of the policy but they also have to be notified to the insurer during the period of the policy. If the insured fails to notify within the period of the insurance s.54 applies and the insurer can only reduce its liability according to the prejudice it suffered by the failure to notify: East End Real Estate Pty Ltd t/as City Living v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400.
(c) Pre-existing defects - The insurer cannot rely on pre-existing defects or imperfections in a thing insured if the insured was not aware of them and a reasonable person in the circumstances could not be expected to have been aware of them (s.46 ICA). There is similar provision with respect to sickness or disability (s.47 ICA).
(d) Fraudulent claims - Insurer can normally refuse to pay a fraudulent claim but may have to pay part of the claim if "just and equitable in the circumstances"(s.56 ICA).
10. Extending cover to third parties
Under the common law doctrine of privity a contract of insurance cannot normally affect the rights or obligations of third parties. Accordingly, if a contract of
insurance purported to cover a person not a party to the contract, they would not be able to enforce the contract as against the insurer.
The ICA modifies the common law in relation to insurance contracts. Where a third party comes within the class of persons expressed to be insured by the policy, they are covered (s.48 (1) ICA).
(Note that the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 created an exception to the general rule of privity of contract in respect of insurance contracts, but s.48 now restates the general principle in statutory form).
It does not matter that the insured third party is not specifically named in the policy (s.20 ICA).
Note that third party has same obligations to the insurer as the named insured (s.48 (2) ICA) and the insurer has the same rights against the third party (s.48 (3) ICA).
11. Double Insurance and Contribution
Sometimes there is more than one contract of insurance covering the same risk (either entered into by different people or the same person with different companies). However, a person is not allowed to profit out of insurance, so any claim will be restricted to the amount of the insured's loss (s.76 ICA).
When there is more than one contract of insurance that cover exactly the same risk, the question often arises as to which of the insurers must pay the claim, or how much of the claim each of the insurers must contribute.
Any provision in a contract of insurance which attempts to limit or exclude the liability of an insurer by reason that the insured has entered into another
contract of insurance is void (s.45 ICA).
12. Subrogation
Where an insurer indemnifies the insured in respect of a loss caused by a third party, the insurer is entitled to "stand in the shoes" of the insured as regards its rights against the third party.
For example: A third party negligently crashes into the insured's car and causes $1000 worth of damage. The insured makes a claim on its policy and the insurer pays for the car to be repaired. The insurer is then entitled to sue the third party for the $1000, even though under tort law the insurer would have no right to do so. This is because the insurer is substituted for the insured for the purpose of the action.
The ICA restricts an insurer's right of subrogation in certain circumstances:
- Where there is a family or other personal relationship between the insured and the third party (s.65 ICA);
- Where liability arises in respect of an insured vehicle and the insured consented to its use by the third party (s.65 ICA); and
- Where the third party is an employee of the insured (s.66 ICA).
Agent
- acts on behalf of a particular insurer (either as employee or contractor)
- only sells that insurance company's products
- is the agent of the insurer
Broker (s.9 IABA)
- runs an independent business
- principal activities are to arrange contracts of insurance on behalf of their clients
- are an agent for the client, not the insurer (even though they may receive commission from the insurance companies)
- owes a duty to the insured to exercise reasonable care and skill.
Insurance intermediary (s.9 IABA)
ü a person who for reward and as an agent (for an insurer or an insured) arranges contracts of insurance
ü includes agents and brokers
The common law in relation to agency applies to both insurance agents and brokers. This is particularly relevant in the context of the duty of disclosure, where an agent may know of material facts but fails to disclose them to his or her principal.
The Insurance (Agents and Brokers) Act 1984 (Cth) adds to the common law but does not replace it. In particular, it extends the insurer's liability for the acts of
its agent far beyond that of the common law. An insurer is liable for any conduct of its agent, whether or not it occurred within the scope of the agent's
authority, if the conduct was such that:
(a) a person in the circumstances of the insured could reasonably expected to rely on it;
(b) the insured in fact relied on it in good faith (s.11 IABA).
15. Specific Types of Interest
(a) Vendor and purchaser - Once a valid contract of sale has been made, the purchaser will generally bear the risk of any loss to, destruction or deterioration of the thing sold. Accordingly the purchaser should take out insurance over the thing as soon as property passes.
However note that the purchaser should take out insurance prior to property passing, if he or she is likely to suffer economic loss if the thing purchased is lost or damaged (for example where the purchase price was advantageous to the purchaser and he or she will suffer financial detriment by having to buy the thing elsewhere at a higher price). Sections 16 and 17 ICA allows a purchaser to take out insurance without having a true "insurable interest" at the time.
(b) Bailor and bailee - Both a bailor and a bailee have an insurable interest in the goods bailed and can take out insurance over the goods.