What would modify the original insurance contract?

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Following Government reforms passed in early 2020, unfair contract terms protections will apply to insurance contracts from 5 April 2021. The protections will apply to new insurance contracts that are entered into, or contracts that are renewed, on or after 5 April 2021. If a term of an existing contract is varied on or after 5 April 2021, the protections will generally apply to that term but not the rest of the contract.

In readiness for the start of this reform, ASIC has undertaken targeted supervisory work by reviewing a range of insurance contracts and has worked with insurers to encourage them to remove or qualify potential unfair terms. Through ASIC’s work many insurers have made important changes to insurance policies sold to consumers to help make them fairer.

Examples of changes made include:

• removing terms that gave insurers unilateral discretion to do something
• removing or qualifying terms to reduce barriers for an insured person to lodge a legitimate claim
• qualifying overly broad terms so that they only apply in specific situations
• extending certain timeframes that might be difficult for an insured person to meet
• removing or qualifying terms where compliance with preconditions was not feasible
• amending terms to provide greater collaboration between the insurer and the insured around decision-making processes
• amending insurance policies to provide greater transparency and clarity for consumers.

As a result of the reform, and ASIC’s work, many insurers have proactively identified terms and either removed, reworded or qualified them.

ASIC’s expectations of insurers

From 5 April 2021 ASIC expects all insurers to ensure that consumer and small business standard form contracts have been reviewed for fairness and that they obtain their own legal advice in relation to potential unfair contract terms where needed.

ASIC will continue to monitor insurance contracts for unfair terms and we will consider the range of our regulatory powers where we are concerned about non-compliance and consumer harm. ASIC will continue to liaise with consumer representatives and others to identify areas of ongoing consumer harm.

Obligations for fairness in small business loan contracts

ASIC reminds lenders that the unfair contract terms protections apply to all standard-form small business loan contracts entered into since November 2016, as well as to consumer loans.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. In the report, ASIC:

• identifies a range of terms in small business loan contracts that ASIC considers are at risk of being unfair; and
• provides general guidance to all small business lenders to help them assess whether their standard form loan contracts meet the requirements under the unfair contract terms law.

We expect all lenders (both ADI and non-ADI lenders) to meet their obligations and will consider taking action where it sees terms that appear unfair.

Find out more

In October 2020, ASIC released updated Information sheet 210: Unfair contract term protections for consumers and Information sheet 211: Unfair contract term protections for small businesses.

The general structure of an insurance contract is as follows:

Declarations 

The declarations section of an insurance contract identifies the parties to the contract and dictates that the following provisions constitute an insurance contract. It will generally state the intentions of the parties with regard to the subject-matter of the insurance, the term of the policy, the risks covered by the policy, the limits on payment in the event an insured risk occurs, and the financial obligations of the insured (premiums, deductibles, co-payments, etc.).

Definitions 

Most insurance contracts contain a defined terms section that provides the common understanding of certain terms or phrases used throughout the insurance agreement. This section can be very important for avoiding ambiguities in the agreement.

Terms of Insurance 

This section, often called the insuring agreement, lays out the promises of the insurance company to indemnify the insured against certain risks of loss. Specifically, it will describe the type of risks insured against and the person, property or subject matter covered under the policy. There are two basic forms of an insuring agreement:

Named Perils Coverage 

This form of agreement insures perils specifically listed in the policy. If the peril is not listed, it is not covered.

All-Risk Coverage 

This form of agreement insures all losses suffered to a person or specific property except those losses specifically excluded. If the loss is not excluded, it is covered.

Exclusions 

Exclusions are types of contingent risk that are not covered or insured under a policy. There are three major types of exclusions:

Excluded Perils or Causes of Loss 

For example, homeowners insurance may exclude damages caused by flooding.

Excluded Losses 

For example, an automobile policy may exclude normal wear and tear from everyday use.

Excluded property 

For example, a homeowners policy may not include certain personal property located within the home.

Conditions 

Conditions are contractual provisions that require a certain fact or circumstance come about before duties or obligations arise under the contract. If policy conditions are not met, the insurer is not obligated to insure against the loss that is subject to that condition. That is, the insurer will deny a claim for losses if an applicable condition in the policy is not satisfied. For example, the insurer may make filing a claim and providing proof of loss a condition to coverage.

Endorsements 

These are forms attached to the main insurance policy used to modify the duties or obligations under the policy. Often endorsements will place some condition on the insurers duty to indemnify the insured or cover a particular type of loss. They may also modify or delete express clauses present within the core of the insurance policy. This is the primary method by which underwriters tailor a specific policy to cover a particular insured.

Policy Riders 

Policy riders are amendments to an existing policy. The rider contains the amended terms and becomes part of the original insurance contract. An insurer will use a rider any time that the terms of coverage change under an insureds policy.

Policy Jackets or Binders 

Insurers often issue a policy within a policy jacket. The jacket is a cover, binder, envelope, or folder containing the policy. The binder will often contain boilerplate provisions of the insurance policy. Some insurers now append material to the insurance policy that contains the standard boilerplate provisions, instead of including those provisions on the jacket.

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You will notice that an insurance contract follows a similar format to most contracts, but it contains several insurance-specific provisions. Why do you think that insurance contracts employ endorsements and riders to modify the terms of the existing agreement and the duties of the parties? How do you feel about the use of exclusions and conditions in the insurance policy? How do you balance the insureds need for these policies against the potential abuse of insured parties?

ABC Corp has a general liability policy with 123 Insurance. What terms are likely covered in the policy? ABC wants to modify the policy by increasing the coverage limits. What will ABC need to complete to modify the policy?

Ordinarily, the intentions of insurers and insureds as to the terms of cover available under any insurance policy are to be interpreted solely from the written terms of the policy as they appear on the page.

This is sometimes called the “four corners rule“, meaning that it is not permissible to go outside the boundary of the words on the page in trying to interpret the policy (such as asking the policy underwriter to say what he or she actually intended in drafting a particular clause).

There are some exceptions to this rule which insurers need to bear in mind when making coverage decisions based on the policy wording and schedule. One such exception is where it can be proved that both the insurer and insured had an intention as to the inclusion of a particular entity as an insured, or the wording of a particular term, but the policy documents do not in fact reflect that intention.

If both parties agree that the policy documents do not reflect their common intention, this can be easily resolved by re-issuing the policy documents in the correct form.

However, in a situation where coverage is disputed by the insurer based upon the contents the policy documents, the insured may say that the policy documents do not reflect the common intention of the parties. The insured can apply to the Court for an order seeking rectification of the policy to reflect what it says was in fact the common intention of insurer and insured.

In order to have a policy rectified, it must be established that the parties formed and continued to hold a “single corresponding intention on the point in question” and that this intention “continued to exist in the minds” of both parties right up until the moment the policy came into force. Accordingly, if there were negotiations between the insurer and insured in the lead up to policy inception which resulted in the insurer changing its original intention as to the terms of cover, rectification will not be available to the insured.

A fertile ground for rectification is where the insured argues that the policy documents fail to name an entity which was in fact intended by both insurer and insured to be covered by the policy.

In Laksamana Pty Ltd & Ors v Co-operative Insurance Co of Australia1, four companies operating under different names, making up the John Hughes Motor Group, sold cars from 10 different properties. The broker for the Group had mistakenly only identified one of the members of the Group to the insurer. The broker gave the insurer the details of each property, but not the details of the other individual owners of each property. The policy named a single company as the insured. The Western Australian Supreme Court was satisfied that despite the insurer’s submissions to the contrary, the parties had intended to extend cover under the policy to all the companies in the Group and ordered rectification of the policy accordingly.

Similarly, in Austcan Investments Pty Ltd v Sun Alliance Insurance Ltd & Anor2, rectification of an insurance policy was granted by the Full Court of the Supreme Court of South Australia so that an additional insured party was added to the policy. This case again involved several properties owned by a group of companies. One of the properties was insured in the name of one particular company in the group but it was not the company that actually owned it. The Court held that there was evidence indicating a willingness by the insurer to insure whichever of the companies in the group owned the particular property. The policy was rectified so that the actual owner of the property was included as an insured.

In situations therefore where a coverage decision is based upon a particular entity not being a named insured under a policy, it is advisable for insurers to review their underwriting files to ensure that the policy documents as originally drawn can fairly be said to have reflected the true common intention of the parties as to the extent of cover.

This article was written by Keith Thomas, Partner.

1(1984) 3 ANZ Ins Cas 60-570

2(1992) 7 ANZ Insurance Cases 60-116