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Fish hooks in Insurance contract law review

Russell Hutchinson identifies four areas in the proposed Insurance Law Contracts bill that may cause problems.

Tuesday, May 23rd 2023, 6:00AM

by Russell Hutchinson

In October last year we examined the Insurance Contracts Bill and its possible impacts on the application process for advisers – although it is largely benign for most of you as you tend to offer fully underwritten cover, this quarter we examine how it may affect certain disputes.

That may have more of an impact on product design, and perhaps, on how you advise your clients. We contacted the Insurance and Financial Services Ombudsman Scheme for more details on the impacts that they are expecting if the bill passes in its current form, who were kind enough to give us an indication of the areas where we might expect the greatest change in how disputes might be handled. IFSO has been a supporter of change in this area for more than 20 years and identified the following as areas where they view possibly unfair terms lurking in contracts:

  • Incorrect statement in the application
  • Broad Pre-existing Conditions exclusions
  • Unreasonable claim notification periods
  • Unilateral changes to policies

What impacts might there be on current contracts?

Incorrect statements is an area which we dealt with in some detail in the last article. Most fully underwritten products would probably not struggle with new requirements as they are highly likely to meet requirements in the new law for clearly stating the importance of disclosure and having good, clear, question sets. If they do not already, they have good scope to meet these requirements.

Broad pre-existing conditions exclusions are more problematic for some non-underwritten contracts and some with very limited underwriting. Some of these products may require more detailed occupation and pastimes questions to avoid very extensive exclusions lists.

In Australia general mental health exclusions have also come under fire with the Australian Financial Complaints Authority (AFCA - the former Financial Ombudsman Service) ruling that a blanket mental health exclusion could not be applied. In effect, this amounts to prejudging a category of people, some with mild, presumably insurable, problems.

This may be a challenge for income protection contracts that have general mental health exclusions. 

Unreasonable claim notification periods, such as notification of hospitalisation within 48 hours is not a typical requirement in contracts you use, but similarly unrealistic notification periods are included in some benefit areas (such as in some clauses covering HIV infection through needle-stick injuries).

I expect that most life and health insurers do not enforce these short-term notification requirements. In medical insurance I know that most insurers either have no limit, or require notification within a year, all quite reasonable.

If the right to make unilateral changes to a policy is removed that would effectively move the health insurance industry to the position where everyone is required to offer a guaranteed wording, currently a feature offered by only a few insurers.

The others frequently claim that being unable to change terms in health insurance is detrimental to the sustainability of a product because it removes the ability to adapt to changing test and treatment methods that can substantially change the expected risks.

With the consultation on, options for a draft bill being concluded last year, we are looking forward to seeing the Bill introduced to Parliament, but it may have only even chances of making it before the next election.

Tags: Russell Hutchinson

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