• Administration of the Act
  
• Exceptions to its application
  
• No contracting out of the Act
  
• Contracts of insurance
  
• Variation of insurance contracts
  
• Insurable interest
  
• Standard cover
  
• Notification of unusual terms
  
• Interim contracts of insurance
  
• Average provisions
  
• Other insurance provisions
  
• Pre-existing defects or imperfections
  
• Rights of a third party to recover against an insurer
  
• Subrogation
  
• Reasons for cancellation to be given

7. The Act generally

Insurance policies are a type of contract - hence the name Insurance Contracts Act.

The Insurance Contracts Act 1984 ("the Act") is the result of a referral by the Commonwealth Attorney-General to the Australian Law Reform Commission, which then produced a report in 1982. The Bill made its way through the parliamentary process and the Act was eventually made effective from 1 January 1986.

The Act has associated Insurance Contracts Regulations 1985 ("the Regulations"), which also commenced 1 January 1986. The insurance industry has produced a General Insurance Code of Practice, which although has approval from the Australian Securities and Investments Commission ("ASIC"), does not have the force of legislation.

The Act was intended to cover the field regarding insurance law, which comes under the Constitutional power of the federal government (making insurance issues fairly similar throughout Australia).

Some of the general, but important provisions in the Act will be dealt with here and the following important areas will be discussed in the next sections:

1. Duty of good faith
2. Duty of disclosure
3. Dishonesty and prejudice


7.1 Administration

Over time, several government departments have been responsible for supervising the application the Act. It is currently run by the Australian Securities and Investment Commissions ("ASIC"). The Australian Competition and Consumer Commission ("ACCC") has some influence also.

These administration duties differ with those of APRA (the Australian Prudential Regulation Authority), which monitors the financial (such as balance sheet and solvency) aspects of insurance company operations, which are governed under different legislation.

7.2 Exceptions to the application of the Act

Not all contracts of insurance fall within the Act's jurisdiction. The following are specifically excluded:

1. Reinsurance Contracts
2. Health Insurance Contracts
3. Insurance entered into by a friendly society or the Export Finance and Insurance Corporation
4. Marine Insurance
5. Worker's Compensation
6. Compulsory Third Party (CTP) personal injury insurance; and State and Territory insurance (for example, contracts of insurance to which the State government insurance office is a party).


7.3 Contracting out prohibited

It is not possible to agree to exclude the effect of the Act so its right and obligations will affect every relevant contract of insurance.

7.4 Contracts of Insurance

This provision both includes what would normally be seen as an insurance contract but extends the concept to include:

1. Those contracts of insurance which may not ordinarily be regarded as contracts of insurance but do contain insurance provisions. An example may be a contract to purchase property from an insurer, under which the insurer also agrees to insure the property to be purchased; and

2. Contracts first required by the insurer for the insured to enter into that affect the operation of an insurance contract.

A working definition of an insurance contract would be:-

A contract under which one party (the insurer) agrees, in return for a consideration to indemnify another (the insured) for loss suffered as a result of the occurrence of the specified events which caused the destruction, loss or injury of something in which the other party has an interest.


7.5 Variation of insurance contracts

It had been the case in some situations that an insurer after receiving a large or unusual claim from an insured would change the policy cover part-way through the term. This is no longer possible. The policy must continue in the terms agreed originally for its duration, which is usually a clear twelve months.

7.6 Insurable interest

In brief, a person has insurable interest if he or she will suffer financially if the insured property or thing suffers loss or damage.

Traditionally, to distinguish insurance from a bet or wager, a person must have an (insurable) interest in something in order to claim. For example, one must own something or have a mortgage over it to insure it against loss or damage.

The Act has modified Australian law. No longer is it the case that a person listed as "insured" could not claim if he/she had no insurable interest when the policy was originally taken out, nor even necessarily a strict insurable interest at the time of the claim.

7.7 Standard Cover

The Insurance Contracts Regulations provide minimum standard cover for several classes of business including:

1. Motor vehicle insurance
2. Home buildings insurance
3. Home contents insurance
4. Sickness & accident insurance
5. Consumer credit insurance
6. Travel insurance

Coverage generally must not be lower than those standards of cover described in the regulations.

7.8 Notification of unusual terms

There is consumer protection for non-Standard Cover policies too: an insurer will not be able to rely on any provision not usually included in a contract of insurance unless before the contract was entered into, the insurer clearly informed the insured in writing as to the effect of the particular provision.

For example, if policy coverage was excluded in all cases except where two mullet were contained in the insured's trousers pocket at the time of loss, such exclusion would need to be notified to the insured in writing prior to the insured entering into the contract.

7.9 Interim contracts of insurance

The Law Reform Commission was critical of the fact that in some cases an insurer's liability under a cover note was dependant upon completion of a satisfactory proposal form. This position has been changed by the Act so that the insurer is "on risk" until anyone of the following events occur:

1. The insured enters into another contract of insurance intended as replaced from cover.
2. The cover note is cancelled; or
3. The insured withdraws the proposal.

It is therefore very important to insurers that such interim covers are converted into a normal policy as soon as possible.

7.10 Average provisions

It has traditionally been the case, and continues to be so especially in respect of commercial insurance, that where the insured is under-insured he or she is effectively a "co-insurer" of the insurance subject matter. Such "average" or "co-insurance" causes are valid only if prior to the contract being entered into the insurer clearly informs the insured in writing as to the nature of the effect of the provision.

In respect of what ordinarily would be considered the insured's home dwelling, a tolerance of 20% is allowed. Only in the case where the sum insured is less than 80% of the insurance value of the property the insurer may invoke such a clause.

7.11 Other insurance provisions

Provisions in an insurance contract excluding cover by reason only of another relevant policy of insurance are void.

However, this does not apply to insurance contracts such as "layered" policies where the first policy may cover liability up to $1,000,000, and the next policy covers the same risk from $1,000,001 to $10,000,000.

Depending on the circumstances, should dual insurance (or co-insurance) apply different calculations of contribution and / or recovery between insurers will take place.


7.12 Pre-existing defect or imperfection

If the insured, and any such reasonable person in the circumstances, could not be expected to have known of a defect or imperfection, an insurer may not rely on a policy provision which excludes or limits cover under the policy.

In general terms, insured persons are not expected to be experts in all areas, which for example would alert them to matters such as engineering defects in roofs which may contribute to loss or damage from a storm.

7.13 Right of Third Party to recover against insurer

Some cases exist where an insured in the ordinary course of things would be liable to a third party but the insured cannot, after reasonable enquiries, be found. If both of these elements are met, the third party may recover direct from the insurer without the insured themselves needing to submit a claim for cover.


7.14 Subrogation

Where an insurer pays a claim, it is normally allowed to exercise any right the insured themselves might have against another party - particularly as to recovery against a third party. This process where the insurer effectively 'stands in the shoes' of the insured in recovery is called "subrogation".

The Act limits the effect of subrogation against persons that a reasonable insured person would not recover from, such as family or employees.

It is normally possible for an insured, even though having received indemnity payment under an insurance policy, for themselves to recover against the other party. However, the insured then has a duty to account back to the insurer. If the insurance policy limits this right of the insured, this must be notified in writing to the insured prior to the insured taking out a policy.

7.15 Reasons for cancellation etc to be given

Insured persons or businesses are entitled to a written reason, if the insurer:

1. Does not accept an offer to enter into a contract of insurance;
2. Cancels the policy of insurance;
3. Indicates that it does not wish to renew the insurance cover; or
4. By reason of some special risk relating to you or to the subject matter of the contract, offers you insurance cover on terms that are less beneficial than the terms it would usually offer.

The Australian Security and Investment Commission ("ASIC") is able to fine an insurer for not providing such reasons.