The duty when you apply for income protection

Where the duty sits

Section 20B belongs to a Division of the Act whose reach is set by section 20A:

The second limb reaches contracts that are only proposed, so the Division is already at work while an application is being made. Section 11AB(1) gives the test: “For the purposes of this Act, a contract of insurance is a consumer insurance contract if the insurance is obtained wholly or predominantly for the personal, domestic or household purposes of the insured.”

Section 20B, subsection by subsection

The section’s heading is “The insured’s duty to take reasonable care not to make a misrepresentation”. Each subsection is quoted below from the Act, with a plain reading under it.

1. (1)

   “Subject to this Act, an insured has a duty to take reasonable care not to make a misrepresentation to the insurer before the relevant contract of insurance is entered into.”

   PlainlyThe duty belongs to the insured, it is owed to the insurer, and it runs until the contract is entered into. Its measure is reasonable care, and it opens with “subject to this Act”, so it is read together with the rest of the Act.

2. (2)

   “Whether or not an insured has taken reasonable care not to make a misrepresentation is to be determined with regard to all the relevant circumstances.”

   PlainlyReasonable care is judged against everything relevant to the particular application.

3. (3)

   “Without limiting subsection (2), the following matters may be taken into account in determining whether an insured has taken reasonable care not to make a misrepresentation:”

   Among the matters the subsection lists are these three:

   “(c) how clear, and how specific, any questions asked by the insurer of the insured were;”

   “(d) how clearly the insurer communicated to the insured the importance of answering those questions and the possible consequences of failing to do so;”

   “(f) whether the contract was a new contract or was being renewed, extended, varied or reinstated.”

   PlainlySome of the weight sits with the insurer’s side of the form: how it worded its questions, and how clearly it said why the answers mattered. Whether the policy was new or being renewed, extended, varied or reinstated may also count. These matters “may” be taken into account; they do not limit subsection (2).

4. (4)

   “Any particular characteristics or circumstances of the insured of which the insurer was aware, or ought reasonably to have been aware, are to be taken into account in determining whether an insured has taken reasonable care not to make a misrepresentation.”

   PlainlyThis one is not optional: “are to be taken into account”. What the insurer knew, or ought reasonably to have known, about the person applying is part of judging their care.

5. (5)

   “The insured is not to be taken to have made a misrepresentation merely because the insured: (a) failed to answer a question; or (b) gave an obviously incomplete or irrelevant answer to a question.”

   PlainlyA blank, or an answer that is obviously incomplete or beside the point, is not by itself a misrepresentation. The word “merely” limits this to those facts alone.

6. (6)

   “To avoid doubt, a misrepresentation made fraudulently is made in breach of the duty to take reasonable care not to make a misrepresentation.”

   PlainlyA fraudulent misrepresentation always breaches the duty, whatever else the circumstances show.

What Moneysmart says about the questions

Moneysmart’s income protection page puts the applicant’s side in a few lines. Its advice is to answer honestly, and it warns that if important details are left out, the insurer may change or cancel the cover or refuse a claim. It adds that an insurer not asking for medical history may be a sign of more exclusions or narrower policy definitions.

Those consequences are Moneysmart’s summary. What the Act itself provides when a misrepresentation was made, and the conditions on each step, are set out section by section in the guide on what follows if something was not disclosed.