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Guide 03 · Before cover · Insurance Contracts Act ss 27AA to 29, 31

If something was not disclosed on an income protection application

For a consumer insurance contract, the Insurance Contracts Act sets out what an insurer may do after a misrepresentation made in breach of the insured’s duty of reasonable care, with separate sections for general insurance (section 28) and life insurance (section 29). Which of the two reaches an income protection policy turns on whether it is a contract of life insurance or of general insurance. Where section 29 applies, a fraudulent failure lets the insurer avoid the contract; for a failure that was not fraudulent, avoidance is allowed only within 3 years after the contract was entered into, and only if the insurer would not have insured the person on any terms.

General information, not financial or legal advice. The official place to check is the Act on the Federal Register of Legislation; Moneysmart’s income protection page explains the product.

The route through the Act

Moneysmart’s summary is short: leave out important details and the insurer may change or cancel the cover or refuse a claim. The Act sets conditions at every step. Below, each step is read in order, in the Act’s words wherever the words carry the condition. Sections 28 and 29 both turn on what the Act calls a “relevant failure”. Under section 27AA, for a consumer insurance contract, a relevant failure is “a misrepresentation made by the insured in breach of the duty to take reasonable care not to make a misrepresentation”.

  1. Was the duty breached?

    The first question, then, is whether the insured breached the duty of reasonable care. Section 20B says this is judged with regard to all the relevant circumstances, and that leaving a question unanswered, or giving an obviously incomplete or irrelevant answer, does not by itself mean the insured made a misrepresentation. The guide on the duty when you apply reads section 20B in full.

  2. Does section 29 apply?

    “(1) This section applies if a relevant failure occurs in relation to a contract of life insurance, but does not apply if: (a) the insurer would have entered into the contract even if the failure had not occurred; or (b) the failure was in respect of the date of birth of one or more of the life insureds.”

    Insurance Contracts Act 1984, section 29(1)

    So if the insurer would have issued the contract anyway, section 29 does not apply at all.

  3. Avoiding the contract

    “(3) If: (a) the relevant failure was not fraudulent; and (b) the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms, if the relevant failure had not occurred; the insurer may, within 3 years after the contract was entered into, avoid the contract.”

    Insurance Contracts Act 1984, section 29(3)

    Both conditions must be met, and this right lasts 3 years after the contract was entered into. Subsection (2), just before it, deals with a failure that was fraudulent: “If the relevant failure was fraudulent, the insurer may avoid the contract.”

  4. Varying the contract by written notice

    Where the insurer has not avoided the contract, section 29(4) lets it, by notice in writing to the insured, substitute for the sum insured a sum no less than one worked out by a formula from the sum insured, the premiums that have become payable, and the premiums the insurer would likely have charged had the relevant failure not occurred. For a contract that provides for periodic payments, subsection (5) says the sum insured means each such payment.

    Where the insurer has not avoided the contract, or has not varied it under subsection (4), section 29(6) says it may vary the contract by notice in writing to the insured, so as to put itself in the position it would have been in had the relevant failure not occurred.

    Subsection (7) sets a limit. The insurer’s position under the varied contract “must not be inconsistent with the position in which other reasonable and prudent insurers would have been” had they entered into similar contracts of life insurance, with no relevant failure. Subsection (8) says a contract is similar if its cover is the same as, or similar to, the kind of cover the varied contract provides, and it was entered into at, or close to, the same time.

    A variation under subsection (4) or (6) takes effect from the time the contract was entered into. For a contract with a surrender value, or one covering the death of a life insured, subsections (6), (7) and (8) do not apply, and a variation under subsection (4) may be made only before 3 years have passed since the contract was entered into.

    Section 27A can treat one contract of life insurance as several for these remedies. Cover for two or more life insureds is treated as a separate contract for each of them, and cover for one person that is underwritten on particular terms is treated as separate from that person’s cover that is not underwritten, or is underwritten on different terms. The Act’s note to the section says different remedies may then be available to the insurer for each separate contract.

  5. A court’s power to disregard an avoidance

    Section 31 is headed “Court may disregard avoidance in certain circumstances”, and it reaches only a contract avoided on the ground of a fraudulent relevant failure. In proceedings by the insured, the court may disregard the avoidance if it would be harsh and unfair not to, and then allow the insured to recover all of what would have been payable, or the part it thinks just and equitable. The power may be used only where the court is of the opinion that, for the loss before it, the insurer has not been prejudiced by the relevant failure, or that any prejudice is minimal or insignificant.

    In using it, the court “shall have regard to the need to deter fraudulent conduct in relation to insurance”, and must weigh how culpable the insured was in the fraudulent conduct against the size of the loss the insured would suffer if the avoidance stood. The power covers only the loss before the court; disregarding the avoidance does not otherwise reinstate the contract.

Section 28, for general insurance

Section 28 is written for a contract of general insurance and section 29 for a contract of life insurance, so which one reaches a given income protection policy depends on which kind of contract it is. Section 28 does not apply if the insurer “would have entered into the contract, for the same premium and on the same terms and conditions, even if the failure had not occurred”; where it does apply and the insurer is not entitled to avoid the contract, or is entitled but has not, its liability on a claim is reduced to the amount that puts it where it would have been without the failure.

When the insured disagrees

Moneysmart says someone unhappy with a claims process or decision can complain to the insurer or super fund, and that where no agreement is reached, the Australian Financial Complaints Authority (AFCA) offers free, independent dispute resolution. The steps are in the guide to claims and complaints.