Insurance and reinsurance in Australia: overview
A Q&A guide to insurance and reinsurance law in Australia.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in Australia.
To compare answers across multiple jurisdictions visit the Insurance and Reinsurance Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-mjg.
Market trends and regulatory framework
The insurance market in Australia comprises four main limbs:
Authorised life insurance and reinsurance companies. Around 32 life insurers operate in Australia, managing approximately A$235 billion as at September 2011 (as at 1 January 2012, the A$ was at approximate parity with the US$). Life insurance companies can be subdivided into two distinctive areas:
group life and superannuation business;
Authorised general insurance and reinsurance companies. There are approximately 126 general insurers, mainly in the private sector, including Lloyds which is authorised by virtue of a special provision in the Insurance Act 1973 (Cth) (Insurance Act). Some of these insurers also administer and participate in underwriting pools.
Registered health insurers. Australia has 35 registered private health insurance funds.
Insurance intermediaries, including:
a small number of foreign insurance agents.
The following statutes apply:
The Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act), which regulates contracts of insurance and proposed contracts of insurance, modifying and supplementing the common law.
The Insurance Act, which provides the system of authorisation and prudential regulation of the conduct of general insurance business.
The Life Insurance Act 1995 (Cth) (Life Insurance Act), which prudentially regulates the conduct of life insurance business through a system of registration.
The Marine Insurance Act 1909 (Cth) (Marine Insurance Act), which regulates marine insurance.
The Corporations Act 2001 (Cth) (Corporations Act), which contains uniform licensing, disclosure and conduct requirements for the financial services industry (including insurance).
The Insurance Acquisitions and Takeovers Act 1991 (Cth), which governs changes of ownership of authorised general insurers or registered life insurers.
The Health Insurance Act 1973 (Cth), which establishes the publicly available medical care (Medicare) and the Private Health Insurance Act 2007 (Cth), which regulates the health insurance business.
Industry codes of practice also govern the general and life insurance industries. These include the:
Code of Conduct for Advising, Selling and Complaints Handling in the Life Insurance Industry, which is recognised in the Life Insurance Act and regulations.
General Insurance Code of Practice, which is administered by the Financial Ombudsman Service Limited.
Both Codes are nominally self-regulatory, but have practical legal force due to legislative requirements that insurers subscribe to approved schemes of industry self-governance of which these are, at present, the only two available.
The Australian Prudential Regulation Authority (APRA) maintains a prudential regulatory scheme. APRA is responsible for promoting the safety and soundness of life and general insurance companies. The regulatory regime is strict and requires that all Australian insurers hold capital reserves adequate to meet their actual and expected claims costs.
The Australian Securities Investments Commission (ASIC), the market conduct regulator, administers the Insurance Contracts Act. ASIC also exercises consumer protection related functions under the Life Insurance Act and Insurance Act. ASIC is empowered to do all things that are necessary or convenient for the administration of insurance.
ASIC also has the power to supervise Australian financial markets, including the insurance market (Corporations Amendment (Financial Market Supervision) Act 2010 (Cth)). ASIC has broad power, with the consent of the Commonwealth Minister for Financial Services, to issue market integrity rules with regard to the activities or conduct of the insurance market.
The Treasurer oversees the Insurance Acquisitions and Takeovers Act 1991 (Cth), governing change of ownership of general insurers or life insurers. The Commonwealth Department of Health and Services and the Private Health Insurance Advisory Commission (PHIAC) regulate the health insurance industry. In Australia, a considerable regulatory distinction lies between health insurance, on the one hand, and life and general insurance, on the other.
Regulation of insurance and reinsurance contracts
Contracts of insurance
At common law a contract of insurance generally requires:
A binding contract creating a legal obligation to pay a sum of money or its equivalent on the happening of a specified event.
A legal entitlement on the part of an insured to receive money or money's worth under the contract on the happening of that event.
A specified future event that is uncertain as to whether it will occur, or if it will occur, as to when the event will take place.
The specified future event being outside the insurer's control or responsibility.
The insured having an insurable interest in the subject matter of the insurance.
The Insurance Contracts Act modifies the requirements for certain contracts of insurance by removing the need for an insurable interest. The Corporations Act applies to contracts that would ordinarily be regarded as a contract of insurance, even if some of their provisions are not by way of insurance. Likewise, it regards as a contract of insurance contracts that include provisions of insurance but which would not ordinarily be considered a contract of insurance.
Contract of reinsurance
A contract of reinsurance is also, at law, a contract of insurance but differs from a contract of direct insurance as it involves the original insurer (reinsured) taking out a contract of insurance with a second insurer. The position in Australia is similar to that in the UK, however, Australian case law tends to favour the interpretation of a contract of reinsurance as representing an insurance by the cedant of its liability under its policy, as opposed to the traditional UK common law view of reinsurance as a second insurance of the subject matter of the original policy.
The main difference between a contract of reinsurance and a contract of insurance is that, unlike in a normal insurance contract, there is no relationship between the original insurance customer and the reinsurer.
The Insurance Act regulates the conduct of general insurance and reinsurance businesses through a system of authorisation. The Life Insurance Act provides for prudential regulation of life insurers and reinsurers.
Some form of legislation applies, one way or another, to all Australian contracts of insurance and reinsurance, although the common law plays a more important role in the latter. The Insurance Contracts Act regulates contracts of insurance and proposed contracts of insurance. However, there are a number of contracts which are not regulated under the Insurance Contracts Act, including (section 9):
Insurance entered into (or proposed to be entered into) by a private health insurer (in respect of its business as a health insurer or health benefits fund).
Insurance entered into (or proposed to be entered into) by a friendly society.
Insurance entered into (or proposed to be entered into) by the Export Finance and Insurance Corporation (other than short-term insurance contracts).
Anything to which the Marine Insurance Act applies (see below).
Insurance entered into (or proposed to be entered into) relating to workers' compensation or compensation for the death or injury arising from the use of a motor vehicle.
Insurance entered into (or proposed to be entered into) in the course of state insurance or Northern Territory insurance.
Therefore, for certain areas, such as workers compensation and reinsurance, state legislation and common law rules remain of importance; for example, in relation to the duty of utmost good faith (see Question 20, Duty of utmost good faith).
The Marine Insurance Act regulates contracts of marine insurance and defines a contract of marine insurance as being a contract under which the insurer "undertakes to indemnify the insured in manner and to the extent thereby agreed against marine losses, that is to say, the losses incident to marine adventure" (section 7, Marine Insurance Act 1909 (Cth)). A marine adventure includes, for example, where any ship, goods, or movables are exposed to maritime perils, namely "the perils consequent on, or incidental to, navigation of the sea" (section 9, Marine Insurance Act). However, it is the Insurance Contracts Act, and not the Marine Insurance Act, that governs the insurance of marine pleasure craft.
State and territory law governs primarily workers compensation and compulsory third party personal injury insurance for motor vehicles, along with insurance products issued by the various state and territory insurance offices.
Life insurers must be incorporated as companies and authorised by APRA. General insurers can operate in Australia either as locally incorporated companies authorised by APRA or as APRA-authorised branch offices of overseas insurers.
Non-life insurance business in Australia can only be carried out by a body corporate who is so authorised in writing by APRA (section 12, Insurance Act). The term body corporate is not defined by the Insurance Act. The term generally refers to any artificial legal entity having a separate legal personality.
The above applies unless the body corporate, or other legal person, is specifically exempted from the requirement to be so authorised by APRA (section 7, Insurance Act).
APRA has a general discretion to refuse an application, and to set criteria for determining an application (section 12, Insurance Act), and to determine whether the whole of the Insurance Act applies, or to elect that certain provisions not apply to a particular legal person or class of persons (section 7, Insurance Act). Those provisions include an obligation to comply with prudential standards and a requirement to have an auditor.
Subject to Part VII of the Insurance Act, Lloyd's underwriters are authorised to carry on business under section 93 of that legislation.
Where a general insurer is a subsidiary of another legal entity (the non-operating holding company (NOHC)) which doesn't itself carry on insurance business, APRA will supervise that NOHC. Section 4 of the Insurance Act reduces the normal threshold test, requiring only that the holding company:
Control the composition of the subsidiary's board.
Control more than one quarter of the votes to be cast at a general meeting of the subsidiary.
Hold more than one quarter of the subsidiary's issued share capital.
Mutual companies, and mutual aid societies, may apply to APRA for approval to carry out general insurance. APRA considers, in particular, the protections afforded to fund members in determining whether to exempt those applicants from the requirement that the insurer be a body corporate.
Only a company (including a company that is a friendly society) is able to apply to APRA for registration as a life insurer.
Regulation of insurers and reinsurers
In Australia the type of insurance business in which an insurer is engaged affects the way in which it is regulated:
General insurers are, mostly, regulated by a system of authorisation under the Insurance Act and are subject to prudential supervision by APRA. Reinsurers must also obtain authorisation from APRA.
Other types of non-life insurance, such as health insurance and workers compensation, are regulated by legislation specific to these insurance types.
Life insurers are regulated through a system of registration under the Life Insurance Act, administered by APRA.
The conduct and licensing of general insurance providers and insurance intermediaries who provide prescribed insurances to retail clients is also regulated under Chapter 7 of the Corporations Act, which is administered by ASIC (see Question 8). These provisions do not apply to contracts of reinsurance.
While there are no specific restrictions on insurers carrying on non-insurance business, APRA is unlikely to authorise a single entity which carries on both insurance and non-insurance business. However, APRA may provide authorisation to a separate entity within a conglomerate group of companies, where one or more other entities within the group carries on non-insurance business.
There are no statutory requirements relating to risk transfer.
The Life Insurance Act allows certain investment-linked contracts, the principal object of which is the provision of benefits calculated by reference to units. The value of the units relates to the market value of a specified class or group of assets of the party by whom the benefits are to be provided.
An insurer must have in place a reinsurance management framework to manage the selection, implementation, monitoring, review, control and documentation of reinsurance arrangements, having regard to such factors as the insurer's (APRA's Prudential Standard GPS 230 (Reinsurance Management)):
Complexity of operations.
An insurer must, as part of that framework, submit to APRA on an annual basis:
A reinsurance management strategy.
A reinsurance arrangements statement.
An annual reinsurance declaration that:
the insurer has placed its reinsurance arrangements;
those reinsurance arrangements are legally binding.
In terms of GPS 230, an insurer must obtain approval from APRA prior to entering into a Limited Risk Transfer Arrangement, which typically does not involve a significant transfer of insurance risk.
APRA prudential guidance on reinsurance management envisages that insurers will have a target of ceding no more than 60% of their total written premium over any 12-month period. For captives, the target is 90%.
APRA-regulated general insurers and life insurers can voluntarily transfer their insurance businesses to another APRA-regulated, appropriately authorised insurer, or amalgamate the business with another APRA-regulated insurer's business, only under a scheme confirmed by the Federal Court (section 17B, Insurance Act or Part 9, Life Insurance Act) or, in the case of a life insurer, with the approval of APRA under the Financial Sector (Business Transfer and Group Restructure) Act.
Authorisation or licensing
General insurers and reinsurers. Insurance and reinsurance companies must be authorised in Australia (Insurance Act and relevant regulations). Lloyd's underwriters are specifically authorised to carry on insurance business in Australia (Division 6, Section 93, Insurance Act).
An applicant, other than a Lloyds underwriter, seeking authorisation must be incorporated and apply in writing to APRA. APRA can authorise a life or general (but not combined) insurance business, on appropriate conditions relating to prudential matters.
Applicants should consult APRA's Guidelines on Authorisation of General Insurers (www.apra.gov.au/GI/Documents/GI-authorisation-guidelines-December-2007_1.pdf) for further information on the authorisation process, including the:
Documentation to be supplied with the application.
The application process involves providing APRA with detailed information about the prospective applicant and its proposed business.
Typically, the overall authorisation process takes between three and 12 months, depending on the:
Complexity of the proposed business.
Extent to which the applicant can base its operations on an existing, well-established and sound business model.
APRA has discretion to either authorise the application or refuse the application. Section 12 of the Insurance Act provides a non-exhaustive list of circumstances in which APRA can refuse an application. APRA will only authorise suitable applicants who have the capacity and commitment to conduct insurance business with integrity, prudence and professional skill, on a continuing basis. Applicants must comply with the prudential requirements outlined in the Insurance Act and Prudential Standards. APRA can authorise applicants subject to conditions relating to prudential matters, assessed on a case-by-case basis. For example, more rigorous prudential requirements may be set for newly authorised insurers in their formative years, or for those in monoline specialist or unusual market niches.
Life insurers. Companies carrying on the business of life insurance must be registered under the Life Insurance Act. Applications for registration must be made to APRA and accord with the Life Insurance Regulations 1995 (Cth). Applicants should consult APRA's Guidelines on Registration of Life Companies (www.apra.gov.au/lifs/Documents/Guidelines-on-registration-of-life-companies-2.pdf) for further information on the authorisation process. The process is comparable to that for general insurers (see above).
APRA can refuse to register the company if a registration requirement is not fulfilled. APRA may impose conditions on the registration of a company by written notice of their terms. There are also provisions for cancellation of registration.
Any person who carries on a financial service business must either (Chapter 7, Corporations Act):
Hold an Australian financial services licence (AFSL) covering the provision of the relevant financial services.
Be an authorised representative of such an AFSL holder.
A person will be providing financial services if they:
Provide financial product advice.
Deal in a financial product.
Make a market for a financial product.
Operate a registered scheme.
Engage in other conduct prescribed by regulations to be a financial service.
An insurer that is a pure product issuer and does not provide any financial advice, may be exempt from holding an AFSL.
"Dealing", for example, issuing or arranging, in connection with contracts of insurance, may also constitute a financial service requiring an AFSL. Therefore, the Corporations Act requirement applies to both insurance brokers and insurance agents.
ASIC regulates the marketing of financial products and licensing of financial service providers. Persons, bodies corporate or partnerships requiring an AFSL must lodge an application with ASIC. Applications can be completed online at www.asic.gov.au. Regulatory guides are provided online to assist applicants with the application process.
To grant the AFSL, ASIC must be satisfied that the applicant or the applicant's responsible officers are of "good fame or character". ASIC must impose conditions on the licences granted limiting the:
Financial services that the AFSL holder is authorised to provide.
Specific types of financial products for which those financial services may be provided.
Therefore, applicants must specify in their application the type of business for which they seek to be licensed and the particular financial products they will be dealing with.
General insurers carrying on "insurance business" in Australia must be authorised by APRA, or their business must be exempted by legislative provisions relating to "direct offshore foreign insurers" (DOFIs).
DOFIs carrying on insurance business in Australia must generally be authorised under the Insurance Act and comply with the same prudential regime as local insurers. However, the legislative provisions relevant to DOFIs do not apply to reinsurance or to:
Insurance contracts for high value insureds that satisfy one of the following tests (based on average figures over a three-year period):
consolidated gross operating revenue of A$200 million;
consolidated gross assets of A$200 million; or
500 or more employees.
Insurance contracts for atypical risks (for example, nuclear, biological risk, and war).
Insurance contracts for unique risks that cannot reasonably be placed with an Australian insurer due to:
lack of market capacity;
a substantial difference in terms or price; or
other circumstances leading to substantially less favourable insurance.
Contracts of insurance that are required by the law of a foreign country.
There are some mutual discretionary funds operating in Australia which provide benefits that do not constitute insurance. APRA does not currently regulate these.
Persons who provide a financial service may be exempt from the requirement to obtain an AFSL in a number of prescribed circumstances. The most common exemption relied on is that available to a person who provides a financial service as an authorised representative of an AFSL holder.
Restrictions on ownership or control
The following limitations apply (Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA)):
Shareholdings of an individual shareholder or group of associated shareholders in an insurer are limited to 15% of the insurer's voting shares (subject to approval by the Treasurer for a higher percentage).
Any foreign parent that acts as an insurer must have a diverse portfolio of ownership (subject to any exemptions provided by the Act).
APRA requires any substantial shareholder of an applicant to show that they are "fit and proper". Therefore, each substantial shareholder must be able to demonstrate that it is well-established, financially sound and of good reputation.
APRA also has "fit and proper" requirements for directors and senior managers of insurers, including provisions requiring the independence of some directors.
Appropriate qualification requirements and a "fit and proper" test also apply to the granting, by ASIC, of an AFSL.
The Treasurer's approval is required for a person to hold more than a 15% stake in a financial sector company (FSSA). A financial sector company includes an authorised deposit-taking institution, life or general insurance company.
The Foreign Acquisitions and Takeovers Act 1975 (Cth) also governs foreign investment in Australia.
There are no restrictions on ownership of marketing and media companies or insurance intermediaries.
Ongoing requirements for the authorised or licensed entity
The requirements for life and general insurers are similar, but not identical. The reporting and statutory management requirements with which each insurer must comply are extensive, and only a brief summary of the most important ones can be given here.
The key ongoing requirements that the authorised or licensed entity must comply with are as follows:
An authorised insurer must have in place sufficient capital reserves to meet the minimum capital requirements.
An authorised insurer must have assets in Australia that are more than its liabilities in Australia. Where an asset comprises a chattel or real property (or equitable interest in that property) it is only considered an asset in Australia if either:
it is located in Australia; or
the legal title is held by:
the insurer or the insurer's custodian (in the case of an Australian-authorised insurer);
the insurer's authorised Australian agent (in the case of a foreign insurer).
APRA requires regular audited financial reporting and the preparation of a Financial Condition Report by the appointed insurer's actuary. An insurer must also have:
An appropriate risk management framework in place.
A reinsurance risk management framework (see Question 8).
Although an authorised insurer can outsource some of the above obligations, it must first obtain the approval from APRA to do so and must notify APRA of any outsourcing agreements to which it has become party. In addition, APRA regularly conducts on-site supervisory reviews of authorised entities and assigns a confidential risk rating to that entity.
An insurance intermediary must comply with the requirements of the Corporations Act, relating to the holding of an AFSL (see Question 9, Insurance/reinsurance intermediaries).
Penalties for non-compliance with legal and regulatory requirements
There are the following penalties for operating without a licence:
Up to A$110,000 for carrying on life insurance without a licence.
Up to A$33,000 for carrying on general insurance without a licence.
Up to A$110,000 for failing to hold an AFSL.
The Corporations Act also provides for possible imprisonment for certain offences.
There are a number of enforcement avenues open to APRA and ASIC for breaches of the legislation, including:
Cancellation or suspension of licences/authorisations and the imposition of licence conditions.
The personal liability of the entity's directors and officers.
The legislation allows the regulators to take enforcement action on behalf of policyholders who have been adversely impacted.
Where there is a major prudential compliance failure and perceived threat to policyholders, APRA also has powers to suspend the board and management and take control of life and general insurers.
Regulatory breaches by insurers do not affect the validity or enforceability of contracts of insurance entered into by them. Contracts entered into with a non-approved entity should be enforceable at common law.
An insurance intermediary which breaches the terms of its AFSL risks having the licence cancelled, effectively terminating its business.
Restrictions on persons to whom services can be marketed or sold
Reinsurance monitoring and disclosure requirements
This will depend on the provisions of the relevant reinsurance agreement. In practice, there is usually a high level of communication about claims, settlements and underwriting between reinsurers and cedants.
Australian law imposes no positive obligation on reinsurers to monitor or exercise direction over claims, settlements or underwriting of cedants. However, the terms of reinsurance treaties and facultative agreements often give reinsurers extensive contractual entitlements to do so. The extent to which they exercise those contractual rights, where conferred, will affect their legal rights in the event of any material non-disclosure or misrepresentation, breach of contract or other misfeasance on the part of the cedant.
Apart from certain state legislation which is relevant mainly to arbitrations, and federal statutes prohibiting misleading, deceptive and anti-competitive conduct, reinsurance contracts in Australia are not subject to any prescriptive statutory regime such as the Insurance Contracts Act (which governs cedants' policies in most lines of business). The Australian common law of reinsurance contracts is similar in many respects to that of England and Wales and precedents from both UK and US jurisdictions have considerable persuasive authority. "Follow the fortunes", "follow the settlements" and "claims control" clauses are common in Australian reinsurance treaties and facultative agreements and are given full force and effect under Australian law.
Reinsurance contracts are contracts of insurance under Australian law and the common law duty of disclosure applies to them just as to a primary policy. However, the content of the information required to be disclosed and the provisions as to materiality and remedies for breach of it may vary. Section 21 of the Insurance Contracts Act, which sets out the content of the insured's duty of disclosure in a contract of insurance (in summary, the insured must disclose matters that he knows to be relevant to the decision of the insurer whether to accept the risk, or that a reasonable person in the circumstances could be expected to know to be relevant), does not apply to a contract of reinsurance. The parties to a reinsurance contract are free to agree, however, that for the purposes of disclosure, the reinsurer is entitled to no better or wider scope of information concerning the underlying risk than the reinsured can require from the insured.
Alternatively, the parties can require that the common law "prudent underwriter" definition of the duty of disclosure govern their relationships with cedants and may well do so in the context of reinsurance arrangements where the claims history and profitability of an underlying book of business are material. In that event all of the UK and Australian case law dealing with the prudent underwriter test, materiality and the availability of the remedy of avoidance becomes relevant.
In Australia reinsurance, like insurance itself, is a contract requiring utmost good faith on both sides. The statutory implied term to that effect, which is inserted into contracts of direct insurance by section 13 of the Insurance Contracts Act, does not apply to reinsurance (see Question 20, Duty of utmost good faith).
Insurance and reinsurance policies
Content requirements and commonly found clauses
Form and content requirements
The Insurance Contracts Act creates a standard insurance cover regime for certain prescribed contracts:
Motor vehicle insurance.
Home buildings insurance.
Home contents insurance.
Sickness and accident insurance.
Consumer credit insurance.
An insurer must bring to the attention of an insured terms of the insurance contract that differ from the standard terms of a prescribed contract before the contract is entered into (section 35, Insurance Contracts Act). Where a contract is not prescribed, insurers must inform insureds of unusual policy terms before the insured enters the contract (section 37).
Otherwise, insurers are free to offer their own preferred contractual terms, including one-off bespoke policies if appropriate. However, the Insurance Contract Act will govern how these contracts operate, and it significantly modifies the common law in this respect.
Commonly found clauses
There are no prescribed terms for insurance contracts in Australia, other than those referred to above. However, in most classes of insurance there are commonly used clauses specific to the business line which generally reflect those found in London market policies in the same classes, including cross liabilities clauses (liability lines), reasonable precautions clauses (property lines) and subrogation provisions. Notification of Circumstance deeming clauses are often omitted from "claims made" policies due to case law which distorts their effect. Insureds may rely on a statutory provision to similar effect - section 40(3) of the Insurance Contracts Act.
Both facultative and treaty reinsurance exist in Australia in all their many and varied forms, although generally the terms of reinsurance agreements are similar to those used in the UK.
Commonly found clauses
There are three common clauses that arise in Australian reinsurance policies: "follow the settlement", "pay as may be paid" and "follow the fortune" clauses.
A "follow the settlement" clause attempts to bind the reinsurer (in the absence of fraud) to good faith settlements made by the reinsured in a situation where, as a matter of law, the settlement falls within the risks covered by the policy. Accordingly, the reinsured is not required to prove its loss to the reinsurer, provided the reinsured has acted honestly and in a business-like manner in reaching such a settlement. A "pay as may be paid" clause may also restrict the reinsurer from challenging the settlement entered into between the parties. A "follow the fortune" clause is designed to preclude the reinsurer from refusing to pay its fair share of a judgment on the policy against the reinsured, including damages, interest and costs, where the case has been run for the reinsurer's benefit as well as that of the reinsured.
Duty of utmost good faith
A duty of utmost good faith is implied by law into contracts of insurance under section 13 of the Insurance Contracts Act and applies to categories of insurance falling within that legislation. The duty is described as a duty "requiring each party to [the contract of insurance] … to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith".
The duty also exists at common law in relation to categories of insurance not regulated under the Insurance Contracts Act, for example, health insurance contracts (see Question 18, Form and content requirements). Its application at common law is problematic in a number of respects. For example, the only remedy for breach is avoidance of the contract, which is not much use to the insured.
Parties cannot rely on a provision of a contract of insurance where to do so would be to fail to act with the utmost good faith. In determining whether an insurer's reliance on a provision of a contract of insurance would constitute a failure to act with utmost good faith, the court must consider any notification of the provision that was given to the insured (section 14(3), Insurance Contracts Act) (see Question 18, Form and content requirements).
Other implied terms
The following terms are also implied, depending on the type of contract:
In contracts for health insurance, there is an implied condition that an insurer will not be liable for medical expenses incurred in respect of professional services for which a Medicare benefit is payable (section 126, Health Insurance Act 1973 (Cth)). Any term that purports to exclude, restrict or modify (or has that effect) the application of all or any provisions of section 126 (including the implied condition in respect of Medicare benefits) is void.
In an eligible insurance contract (such as property and liability insurance over commercial and religious property), a terrorism exclusion will have no effect in relation to a loss or liability to the extent to which the loss or liability is an eligible terrorism loss (section 8(1), Terrorism Insurance Act 2003 (Cth)). A terrorism exclusion means an exclusion or exception for acts described using the word terrorism, terrorist or words of similar effect, or other acts substantially similar to terrorist acts defined in further detail under section 5 of the Terrorism Insurance Act. A contract of reinsurance is not an eligible insurance contract for the purposes of the Terrorism Insurance Act. The Terrorism Insurance Regulations prescribe a list of contracts which are excluded from the definition of eligible insurance contract, including, for example, a:
contract of professional indemnity insurance;
life insurance contract;
contract which contains provisions of insurance where the contract would not ordinarily be regarded as a contract of insurance.
A scheme established under the Terrorism Insurance Act provides reinsurance for insurers whose policies are affected by the legislation.
Reinsurance through the Australian Reinsurance Pool Corporation (ARPC) (a statutory government body dealing with terrorism-related insurance claims and protection) is not automatic. It only applies where the insurer has chosen to reinsure some or all of its terrorism risk with the facility. The pool is supplemented by a retrocession programme and a Commonwealth government guarantee, which is capped at A$10 billion. If the responsible Minister considers that the amount payable under the Commonwealth guarantee will exceed A$10 billion, the Minister must also announce a reduction percentage at the time a declared terrorist incident is announced, effectively capping the insured loss. An insurer which does not have any reinsurance with the ARPC will not have the benefit of this reduction percentage applying to its policies.
Consumer protection has been the subject of recent law reform following the new Australian Consumer Law (ACL) enacted in the Competition and Consumer Act 2010 (Cth). The ACL (which took effect from 1 January 2011) creates a single, national law concerning consumer protection and fair trading.
Significantly, new unfair contract terms provisions incorporated in the ACL do not apply to contracts of insurance (section 15, Insurance Contracts Act). The exclusion of contracts of insurance is currently the subject of legislative review and consultation. This may result in an amendment to the ACL and/or further amendments to the Insurance Contracts Act (see Question 36).
At present, a number of consumer protection provisions are included in the Insurance Contracts Act, the most important of which are that:
In any proceedings where there is an allegation of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation, the court may allow the insured to recover the (section 31, Insurance Contracts Act):
whole of the amount that would have been payable if the contract had not been avoided; or
such part as the court thinks just and equitable in the circumstances.
The operation of the Act cannot be excluded, restricted or modified to the prejudice of a person other than the insurer, by a provision of a contract of insurance (section 52, Insurance Contracts Act).
Any provision permitting an insurer unilaterally to vary a contract of insurance is ineffective (section 53, Insurance Contracts Act).
When a claim is made fraudulently, the insurer cannot avoid the contract but may cancel the contract and refuse payment of the claim. The court has the power to order an insurer to pay such portion of a fraudulently made claim that it assesses as just and equitable in the circumstances (section 56, Insurance Contracts Act).
In classes where it is customary to renew cover is automatically extended if an insurer fails to notify the expiration of the policy (section 58, Insurance Contracts Act).
Except as provided by the Insurance Contracts Act, an insurer cannot cancel a contract of general insurance and any reported cancellation in contravention of this section has no effect (section 63, Insurance Contracts Act).
Standard policies or terms
Numerous bodies and trade associations in Australia produce standard policies and terms that can be used by individuals and businesses in the Australian insurance sector, including the:
Insurance Council of Australia (ICA).
National Insurance Brokers Association (NIBA).
Australian Insurance Law Association (AILA).
Insurance Advisors Association of Australia (IAAA).
These associations are easily contactable through their respective websites. Leading examples of a standard policy, for example, are the NIBA Mark IV and Mark V Industrial Special Risks (ISR) wordings.
Insurance and reinsurance policy claims
Establishing an insurance claim
The trigger for a claim depends on the terms of the policy. The onus of proof of claim lies with the insured, who must show that on the balance of probabilities:
There is a valid contract of insurance.
An event occurred within the cover provided by policy.
The insured has suffered insured loss as a result of the event.
The event is the dominant or effective cause of the loss.
The insurer bears the burden of proving that a policy exclusion applies and, in contracts to which the Insurance Contracts Act applies, must establish prejudice in order to reduce a claim because of breach of a policy condition, for example, late notice.
Third party insurance claims
Under Australian law, it is important to draw a distinction between third parties with claims against the insured, claiming directly against the insurer, and noted interest beneficiaries claiming on the policy. Noted interest beneficiaries are a sub-species of insured rather than third parties proper.
A range of insurance covers provide cover to third parties. Traditionally, third parties could not claim under an insurance policy at common law with limited exceptions (see Trident General Insurance Co Ltd v McNiece Bros Ltd (1988) 165 CLR 107) because of the doctrine of privity. Section 51 of the Insurance Contracts Act provides that a third party to a contract of insurance has the right to proceed directly against the insurer where the insured has died or cannot, after reasonable enquiry, be found.
In respect of noted interest beneficiaries (third parties referred to as beneficiaries of the policy), section 48 of the Insurance Contracts Act for general insurance policies, and section 48A for life insurance policies, provide that if a third party is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover applies, an insurer is prevented from raising lack of privity of contract as a defence. It does not, however, create a right or cause of action for noted interest parties against the insurer above or beyond the rights conferred by the policy, and they have the same obligations to the insurer as the contracting insured would have. The insurer has the same defences as it would have to a claim by the insured.
The application of these provisions is not straightforward. Since their introduction, there have been many disputes and litigations over the rights and obligations of beneficiaries.
In addition, in certain circumstances a third party can recover from the insurer of a company that has been deregistered an amount that would have been payable to the company under the insurance contract (section 601AG, Corporations Act 2001).
There is no specific statutory time limit for making a claim under a contract of insurance/reinsurance. A contract of insurance may specify the time in which a claim must be made. Insurance contracts are also subject to the normal limitation periods for causes of action founded on breach of contract (normally six years, but three years in the Northern Territory). However, time only starts to run once there has been a breach of contract by the insurer; for example, refusing to pay a claim covered by the policy.
Section 54 of the Insurance Contracts Act also provides potential relief for late notification and other omissions (see Question 27, Circumstances where an insurer cannot refuse to pay claims).
Normally, an original policyholder or other third party cannot enforce the reinsurance contract against a reinsurer. A reinsurance contract is between the reinsurer and the cedant and the law of privity of contract applies to it in the same way as to other commercial agreements. Australia does not have general legislation similar to the UK's Contracts (Third Parties) Act 1999.
There are, however, certain circumstances under which the proceeds of reinsurance can be collected and applied directly to the liabilities of cedants toward policyholders, where the cedant itself is no longer in a position to discharge them. In the insolvency of an insurer, proceeds of reinsurances collected by the liquidator may be applied in priority to the insurer's liability under the relevant contracts of insurance to which they relate, rather than going into the general distribution (section 562A, Corporations Act).
An indicative statutory formula for determining payment amounts is provided, and case law determines how it is to be applied to the complexities of particular treaty and facultative reinsurance arrangements.
So-called "cut through" clauses in captive insurance arrangements sometimes purport to create privity of contract between the original insured and reinsurer, giving the insured a right to proceed directly against the reinsurer in the event of a disputed claim. These, however, are essentially tripartite contractual arrangements and derive their enforceability from the validity of that particular arrangement, rather than from legislation.
There is no general, government guarantee of compensation to policyholders in the event of insurer failure. However, such schemes have been set up in the past on a one-off basis.
Insurer's cancellation of a contract of general insurance
An insurer is not able to cancel a contract of general insurance except in accordance with the provisions of the Insurance Contracts Act (section 63, Insurance Contracts Act).
An insurer can cancel a contract of general insurance, subject to the operation of other provisions in the Act, in a number of circumstances (section 60):
A breach of duty of utmost good faith.
A breach of duty of disclosure.
A breach of a provision of the contract.
A fraudulent claim under the contract, or under some other contract in effect at the same time.
The insurer can also cancel the contract because an act or omission of the insured or some third party, if:
The contract provides for it.
The act or omission occurs after the contract has been entered into.
There is no equivalent to section 60 of the Insurance Contracts Act for contracts of life insurance. However, life insurers assume that they are entitled, under some circumstances, to cancel a contract in accordance with common law principles.
Circumstances where an insurer cannot refuse to pay claims
Section 54 of the Insurance Contracts Act deals with the situation where according to the policy, an insurer may refuse to pay a claim because the insured, or a third party, has done some act (or omitted to do some act) after the contract was entered into. If the act or omission could not reasonably be regarded as capable of causing or contributing to a loss for which insurance cover is provided, the insurer cannot refuse to pay the claim. The insurer can, however, reduce its liability by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act or omission.
By contrast, the insurer can refuse to pay the claim where the act or omission could be reasonably regarded as being capable of causing or contributing to a loss for which cover is provided.
For section 54 to come into play the "effect of the contract of insurance" must be that the insurer can refuse to pay a claim. This "effect" must come from the contract of insurance.
There has been considerable judicial scrutiny of what constitutes a "claim" and an "omission" for the purpose of section 54(1), particularly, in the context of an insured's failure to notify the insurer of a circumstance within the period of insurance cover under a claims-made policy, for the purpose of attaching cover to a claim subsequently arising from it.
With respect to an insured's failure to notify facts (circumstances), the High Court has held that failure to give notice of facts that might give rise to a claim, in accordance with the contractual requirement to do so, was an "omission" within the meaning of section 54 where the effect of the contract was that the insurer could refuse to pay the claim. Accordingly, in Australia a claims-made policy which contains a circumstance notification or "deeming" provision becomes, in effect, a "known-circumstance" policy. By contrast, a claims-made policy which does not contain a deeming provision will operate in the normal manner and the insured will still be able to notify circumstances within the policy period to attach coverage, by virtue of section 40(3) of the Insurance Contracts Act.
Failure to pay a claim promptly
An insurer that unreasonably withholds payment of money to a person under a contract of insurance may be liable to pay interest at the rate prescribed in the regulations (section 57, Insurance Contracts Act). Further, in some cases compound interest can be recovered representing the borrowing or opportunity cost in excess of the statutory interest (assuming that such a loss can be established on the evidence).
Punitive damage claims
In Australia punitive damages are more commonly referred to as exemplary damages. As a matter of Australian law, the question of insurability of exemplary damages depends on considerations of public policy. There is very little case law directly on point, but it is likely that exemplary damages will be insurable provided that the conduct of the insured is not deliberate or so reckless that it would be against public policy to permit an indemnity. Although as a matter of theory an insurer may be able to indemnify an insured for liability for exemplary damages, whether or not they are covered by insurance depends on the specific terms of the contract of insurance and there is no standard practice by the insurance market in Australia. In terms of reinsurance, if the contract of reinsurance is governed by Australian law, there is no legal rule against insurability, but again the terms of the contract will determine if the liability is reinsured.
Insolvency of insurance and reinsurance providers
APRA has power to supervise general insurers, including determining prudential standards and monitoring and investigatory powers, including the power to appoint a judicial manager (Insurance Act). The Life Insurance Act also provides for judicial management. As life insurers utilise statutory funds for policyholder funds, insolvency presents complex priority issues.
Australian law provides a number of methods for the external administration of insolvent companies generally (including insurance and reinsurance companies), both judicial and non-judicial.
The most frequently utilised non-judicial methods are:
Creditors' voluntary liquidation or winding-up.
The judicial methods involve judicial management and liquidation.
In the event of insurer insolvency, there is no "drop-down" of excess insurance to fill the gap, unless the excess policies themselves provide for it.
Section 562A of the Corporations Act sets out the manner in which the application of proceeds of contracts of reinsurance are to be paid. That section applies where:
The company was insured under a contract of reinsurance against liability to pay amounts in respect of a relevant contract of insurance (which includes a contract of reinsurance).
An amount in respect of that liability is received by the company or its liquidator under the contract of reinsurance.
If the amount received, after deducting expenses of or incidental to getting in that amount, equals or exceeds the total of all the amounts payable by the company under relevant contracts of insurance, the liquidator must, out of the amount received, pay the amounts payable under those contracts of insurance in priority to all payments in respect of other debt (section 556, Corporations Act). Priority must be given to Australian liabilities in the winding-up of an authorised insurer (section 116, Insurance Act).
Excess coverage can drop down in the case of an insolvent primary insurer if the terms of the excess insurance contract provide for it. There is no statutory or common law provision for drop-down and the normal effect of primary insurer insolvency is that the insured itself must bear losses up to the prescribed excess policy attachment point.
Taxation of insurance and reinsurance providers
Insurance and reinsurance dispute resolution
Both insurance and reinsurance contractual arrangements are subject to the jurisdiction of the Australian courts, in the same manner as any other commercial activities. In addition, policyholders and other insurance consumers with grievances (claims or underwriting) under life or general insurance contracts can refer their disputes to the Financial Ombudsman Service (FOS). The FOS has jurisdiction to resolve insurance disputes involving prescribed maximum amounts, agreed by the insurance industry with the approval of ASIC.
Determinations in such disputes are binding on the insurer, by virtue of its contractual agreement to participate in the FOS Scheme, but not on the consumer who, if dissatisfied with the outcome, retains the right to take court proceedings in the normal manner. Most insurers agree to apply the FOS Scheme only to domestic, consumer and small business classes of insurance, which is all that the ASIC requires. The FOS Scheme is free to the consumer, however, the insurers pay a fee in respect of each referral.
Both insurance and reinsurance disputes in Australia can be the subject of arbitration, mediation or other alternative dispute resolution procedures. However, in the case of direct insurance this must be agreed to by both parties after the dispute has arisen. Section 43(1) of the Insurance Contracts Act strikes down compulsory arbitration provisions in insurance contracts to which that Act applies. Arbitration clauses in reinsurance contracts are generally enforceable in Australia (see Question 34).
In Australia, arbitration clauses in insurance contracts to which the Insurance Contracts Act applies are rendered void by the operation of section 43 of that Act. However, where there is an agreement between an insured and an insurer after the dispute arose to resolve the dispute by arbitration, such an agreement to arbitrate is enforceable (section 43(2), Insurance Contracts Act).
Reinsurance contracts are expressly excluded from application of the Insurance Contracts Act. Accordingly, arbitration clauses in reinsurance agreements are generally enforceable, subject to any separate state regulation. There is (or has been) legislation in some states which precluded arbitration clauses in reinsurance contracts (see HIH Casualty & General Insurance (in liq) v Wallace (2006) 68 NSWLR 603). However, the Wallace decision has been overridden by the legislation.
In relation to insurance contracts, Australian courts are inclined to hold commercial parties to their contractual bargains and seek to enforce a valid choice of court agreement and stay proceedings commenced in breach of the agreement. However, given the overriding discretionary nature of the jurisdiction of superior courts, the enforcement of a choice of court or foreign jurisdiction clause is not automatic. This is due to the distinction drawn between exclusive and non-exclusive jurisdiction clauses.
However, Australian courts may override the parties' express intention to litigate in another forum even in the case of an exclusive jurisdiction clause where there are strong or countervailing reasons against the application of the clause. For example, in Lewis Construction Pty Ltd v Tichauer Societe Anonyme  VR 341, the Supreme Court of Victoria refused to stay proceedings, despite the existence of an exclusive jurisdiction clause for the matter to be litigated in France. It was held that the questions to be litigated where much more closely connected with Victoria than with France and therefore there were strong causes for refusing to enforce the exclusive jurisdiction clause.
In classes of insurance to which the Insurance Contracts Act applies, choice of law clauses are made subject to section 8. The effect of that provision is that where the proper law of the contract of insurance, determined according to common law principles, would be that of an Australian state or territory, then that law governs the contract regardless of whether the contract itself provides for some other governing law to apply (see Akai Pty Ltd v Peoples' Insurance Co Ltd (1997) 9 Insurance Cases 61-347). By contrast, choice of forum clauses may be upheld.
In the case of a non-exclusive jurisdiction clause, the clause is a mere submission to the selected jurisdiction, rather than a contractually binding requirement to litigate in that forum. Where there is an application for a stay of a local proceeding, the claim will be based on forum non conveniens. The applicant is required to show the local court is "clearly inappropriate" by reference to "connecting factors". Connecting factors between the action and the forum include:
The law governing the relevant transaction.
Parties' places of residence or business.
The wording of the non-exclusive jurisdiction clause.
Whether a party will suffer a substantial injustice in the foreign forum.
Whether a jurisdiction clause is exclusive or non-exclusive is a question of construction and courts look to circumstances surrounding the contract to ascertain the nature of the jurisdiction agreement. Australian courts are inclined towards finding choice of jurisdiction clauses exclusive (see FAI General Insurance Co Ltd v Ocean Marine Mutual Protection and Indemnity Association (1997) 41 NSWLR 117).
The law regarding jurisdiction clauses in reinsurance contracts differs from general insurance. All reinsurers must comply with GPS 230 Reinsurance Management. This mandates that all reinsurance contracts commencing on or around 31 December 2008 must have the governing law as Australian with any disputes to be heard in an Australian court of competent jurisdiction. This does not prevent the contract requiring overseas arbitration; however, any arbitration proceedings must apply Australian law.
A draft bill to amend the Insurance Contracts Act, the Insurance Contracts Amendment Bill 2010 (Cth), was introduced into Parliament but lapsed as a result of a federal election. It will likely be reintroduced to Parliament in 2012. The principal amendments will:
Allow electronic communications.
Amend some aspects of non-disclosure law.
Clarify third party rights and duties.
Enhance ASIC's enforcement rights.
Render a breach of utmost good faith a breach of the Act (see Question 20, Duty of utmost good faith).
A separate draft bill to amend the Insurance Contracts Act, the Insurance Contracts Amendment Bill 2011 (Cth), was introduced into Parliament on 23 November 2011. If the bill passes through Parliament without amendment it will introduce a standard definition for flood along with various requirements related to the provision of insurance coverage for flood.
The distribution of insurance products will be affected by amendments to the Corporations Act which are set to take effect on 1 July 2012. These amendments include the introduction of a statutory "best interests" duty which will apply in circumstances where retail clients receive personal advice about an insurance product. There will also be a ban on certain types of remuneration (including certain commission and volume based payments) in connection with life insurance products sold with superannuation.
There is continued focus on prudential regulation and capital changes are currently being considered by APRA for both life and general insurers and reinsurers.
Main insurance/reinsurance trade organisations
National Insurance Brokers Association (NIBA)
NIBA is the national trade organisation for licensed life and general insurance brokers in Australia. NIBA is the national voice of insurance brokers and an advocate for insurance consumers.
Insurance Council of Australia (ICA)
ICA represents the interests of the Australian general insurance industry. It represents members' interests in both domestic and international issues and represents the general insurance sector to government and the community.
Australian Health Insurance Association (AHIA)
AHIA is the Australian private health industry's peak representative body that represents 21 health funds throughout Australia and collectively covers about 93% of the private health insurance industry.
Insurance Advisors Association of Australia (IAAA)
The IAAA represent the interests of insurance advisers throughout Australia. It negotiates on behalf of its members with insurers, legislators and other relevant bodies.
Australian Insurance Law Association (AILA)
AILA is a national non-profit organisation formed to provide a forum for the promotion, review, development and debate of insurance law through seminars, workshops and conferences.