No more duty of disclosure for ‘consumer insurance contracts’: important changes to the Insurance Contracts Act 1984

By Liam Campion

Following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, important changes have been made to the Insurance Contracts Act 1984. From 5 October 2021, an insured entering into a ‘consumer insurance contract’ will no longer be subject to a duty of disclosure. Nor will they face a general prohibition against making a misrepresentation. Instead, an insured entering into a consumer insurance contract will owe a duty ‘to take reasonable care not to make a misrepresentation’.

If an insurance policy is not a consumer insurance contract, an insured will still owe a duty of disclosure and will still face a general prohibition against making a misrepresentation. This will remain the case, for example, when an insured enters into a business, professional indemnity or Industrial Special Risks policy.

The key issue therefore is the meaning of the term ‘consumer insurance contract’. Unless an insurer specifically nominates a policy to be a consumer insurance contract, a policy will be so if it is ‘obtained wholly or predominantly for the personal, domestic or household purposes of the insured.’

The Insurance Contracts Regulations have not yet been amended to provide clarity on the scope of such contracts. However, the Explanatory Memorandum of Parliament indicated that consumer insurance contracts would probably include contracts that have previously been classified as ‘eligible contracts of insurance’ (being motor vehicle, home buildings, home contents, ‘sickness and accident’ and travel insurance policies for natural persons). Parliament also indicated that the scope would go beyond this, to include such contracts as pet insurance.

How the obligation of an insured to ‘take reasonable care not to make a misrepresentation’ is interpreted remains to be seen. At a high level, we make the following observations:

1. The amendments invoke the language of negligence. It will not be sufficient for an insurer to simply prove that a representation made by an insured was factually inaccurate. To exercise remedies, an insurer will need to prove that an insured’s misrepresentation was the result of their failure to exercise reasonable care.
2. The amendments are remedial in nature, arising out of the Hayne Royal Commission.
3. If an insured asserts that a policy is a consumer insurance contract, it is presumed to be one, unless an insurer can prove that it is not.

As a result, we expect it will be more difficult for insurers to exercise remedies for misrepresentations made by insureds prior to entering into consumer insurance contracts after 5 October 2021. It will be important for insurers to ensure that all questions asked of insureds prior to entering into such contracts are clear and unambiguous, and that the potential consequences of any misrepresentation are clearly explained.