Insight Series | The Contract of Insurance Part 2

In part one of this insurance insight series we explored the steps for entering a contract of insurance – in particular – proposal, offer, acceptance and consideration. Now, in part 2, we explain some of the obligations between the insurer and insured arising from entering the contract of insurance that you should be aware of as the broker.

Understanding Legal Obligations

Duty of Disclosure

A consumer insurance contract is a contract of insurance obtained wholly or predominantly for the personal, domestic or household purposes of the insured.

If your client is entering into a contract of insurance that is not a consumer insurance contract, then before entering the contract of insurance they have a duty to tell the insurer anything they know (or could reasonably be expected to know) that may affect the insurer’s decision to insure the proposed risk and on what terms. This is the insured’s duty of disclosure.

The insured must comply with the duty until the insurer agrees to insure them. The duty also applies before renewing, extending, varying or reinstating a contract of insurance.

As the broker, you play an important role in supporting your client to understand and comply with their duty of disclosure by guiding them to provide accurate and complete disclosure in application/proposal forms. If your client does not comply with their duty of disclosure, the insurer may be permitted to decline a claim or cancel the contract of insurance.

Duty of Utmost Good Faith

A contract of insurance is based on the duty of utmost good faith. This duty is implied into every contract of insurance and applies to all aspects of the relationship between the insurer and the insured. It is relevant to all stages of the contract of the insurance lifecycle.

There is no prescriptive definition of the duty. However, the High Court of Australia has described the duty of an insurer towards an insured as the requirement to “act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured.” The scope of the duty is very broad and may include the following:

• the failure of the insurer to handle claims with full and frank disclosure, or in a timely manner
• the insured must be honest with the insurer during the claims process, provide complete disclosure of facts and co-operate with reasonably necessary investigations

Insurers often need to conduct reasonably necessary investigations if there is insufficient evidence to make a decision about whether a claim is covered by the contract of insurance. They may appoint external experts to assist the insured in defending a liability claim or assess the level of damage to the property. While these investigations can be inconvenient and time-consuming, an insured’s refusal to cooperate with the investigation can lead to delays in assessing the claim and possibly a breach of their duty of utmost good faith to the insurer.

As the broker, you can assist your client by explaining the importance of providing the requested information in a timely manner so that the insurer may give full consideration to the claim made against them and how their policy may respond. The more information the insurer or their appointed service providers have, the faster they can come to a decision. The door is always open to bring new information to the attention of the insurer in circumstances where you, as the broker, believe the insurer has not given your client’s claim the correct consideration.

Claims Handling

On and from 1 January 2022 insurers can only provide claims handling and settling services if they hold an Australian Financial Services Licence authorised to provide this financial service, unless an exemption applies. Claims handling and settling services must be provided efficiently, honestly, and fairly. This means, amongst other things, insureds must be kept up to date about the status of their claim and claims must be dealt with in a timely manner by the insurer.

Considerable delays in processing claim payments can cause distress and inconvenience. Whenever there is likely to be a delay or interruption in the handling of a claim, the insurer should always inform the insured.

At Berkley Insurance Australia, we try to make your claims experience as easy as possible for you. That’s why our motto is “play fair, pay early”. It’s this approach to claims handling that has earned us a reputation for being fair and reasonable.

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Insurance Insight Series: The Contract of Insurance | Part 1

Presenting a Risk to an Underwriter