Important things you must do when you are about to get insurance and when you have insurance, including when you make a claim

Contributed by Greg Pynt and current to 1 September 2005

THE DUTY OF DISCLOSURE

Section 21 of the ICA imposes a duty on the insured to disclose to an insurance company, before a contract of insurance is made, whatever they know that:

• they know is relevant to the decision of the insurance company whether to offer insurance and, if so, on what terms (a subjective test); or
• a reasonable person would know is so relevant (an objective test).

Section 21A of the ICA provides that in relation to domestic insurance (for example, house, motor vehicle, etc.), an insurance company cannot rely on a breach of this duty to disclose (commonly described as nondisclosure), unless:

• the insurance company asks the insured specific questions relevant to its decision whether to offer insurance, and, if so, on what terms; or
• the insurance company:
– asks specific questions relevant to its decision whether to offer insurance, and, if so, on what terms; and
– expressly asks the insured to disclose each exceptional circumstance relevant to the risk.

An example of failure to disclose

For example, is a travel insurance company obliged to pay your claim for a recurrence of a shoulder injury while you are travelling if you innocently failed to disclose to it before taking out the insurance, that you had a similar injury 2 years ago?

The insurance company will be obliged to pay the claim if it would have issued you with the travel insurance policy on the same terms even if you had told it about the previous shoulder injury. But as long as the insurance company has complied with sections 21A and 22 of the ICA and asked you the right questions in the Proposal, it will not have to pay the claim if it proves that it would have incorporated an Exclusion for shoulder injuries into the policy if, before taking out the policy, you had told it about your previous shoulder injury.

Section 22 of the ICA prevents an insurance company from relying on non-disclosure unless, before the insurance contract is made, the insurance company clearly informs the insured in writing of the nature and effect of the duty of disclosure and, if section 21A applies, also clearly informs the insured in writing of the general nature and effect of section 21A. This information is often contained in the Proposal or the Policy, sometimes both.

An insurance company cannot rely on nondisclosure if the insurance company would have provided the insurance for the same premium and on the same terms and conditions, even if the duty of disclosure had not been breached s. 28(1) of the ICA.

If the insurance company would not have offered the insurance, or would not have offered insurance on the terms it did if the duty of disclosure had not been breached and the non-disclosure:

• is fraudulent, the insurance company can avoid the insurance contract: s.28(2) of the ICA;
• is not fraudulent or it is fraudulent but the insurance company decides not to avoid the insurance contract, the insurance company cannot avoid paying the claim. But, in this second scenario, it can reduce the amount of the claim to the amount that the insurance company would have paid if the duty of disclosure had not been breached: s.28(3) of the ICA.

If an insurance company attempts to avoid an insurance contract for fraudulent nondisclosure, the Court may, if it would be harsh and unfair not to do so, disregard the avoidance and allow the insured to recover such part of the claim as the Court thinks just and equitable in the circumstances: s.31 of the ICA.

OTHER CONDITIONS

Condition that requires you to take all reasonable precautions to prevent bodily injury or damage to property

Most insurance contracts contain a Condition that requires the insured to take all reasonable precautions to prevent bodily injury or damage to property.

You will not be in breach of this Condition just because you have been careless. To breach the Condition you must at least be reckless, in other words, you must recognise the danger, but not care whether or not it is avoided.

What are reasonable precautions to prevent damage to property?

For example, if someone steals your laptop computer when you absentmindedly leave it on the roof of your car whilst it is parked in your driveway, you will not be held to have breached this Condition. But you might be held to have breached the Condition if 2 minutes after you leave the laptop on the roof of your car you realise that is what you have done, but you decide not to retrieve it until you have finished vacuuming the pool, raking the leaves in the back yard and watching the second half of the AFL preliminary final between Carlton and the West Coast Eagles on television.

If you breach this Condition, the insurance company will be entitled to refuse to pay your claim for the stolen laptop, unless you can rely on section 54 of the ICA (see below).

Notification to insurance company of circumstances that might give rise to a claim

All insurance contracts contain a Condition that requires the insured to immediately notify the insurance company of a circumstance that might give rise to a claim on the insurance contract. Prompt notification of such a circumstance allows the insurance company to fully investigate the circumstance whilst it is fresh in everyone’s mind and when steps might be taken to minimise any loss.

Taking more than a week or so to inform the insurance company of circumstances that might give rise to a claim might constitute a breach of this Condition. In such a case the insurance company will be entitled to refuse to pay the claim, unless the insured can rely on section 54 of the ICA (see below).

Admission of liability without the insurance company’s consent

All insurance contracts contain a Condition warning the insured not to make any admission of liability or settle a claim with a third party without the insurance company’s consent.

The purpose of the Condition is to prevent the insurance company’s interests being prejudiced by the insured admitting liability or settling a claim without its consent, particularly where it might be tempting to do so (for example, where the third party is a relative or a friend of the insured).

If you settle a claim without the insurance company’s consent, you will be in breach of this Condition, although the Court will excuse the breach if section 41 of the ICA applies.

Section 41 requires the insurance company, if you ask it to do so, to make a decision as to whether it intends to indemnify you against the third party’s claim and take over the conduct of your defence of the third party’s claim. If the insurance company does not make a decision to that effect within a reasonable time of you asking it to do so, the insurance company will not be able to refuse to pay the claim or reduce the claim just because you are in breach of this Condition.

Even if you cannot rely on section 41, you may be able to rely on section 54 of the ICA for the purpose of making the insurance company pay your claim (see the discussion of section 54 below).

Conditions upon making a claim

If an event happens that might give rise to a claim, the Conditions in the insurance contract will probably require you to:

• take reasonable steps to limit any loss arising out of the happening of the event;
• immediately tell the police if a criminal act might be involved;
• immediately tell the insurance company about the event and send the insurance company any communications or Court documents that you receive about the event, including any claims made against you arising out of the event;
• provide the insurance company with any information and help it may seek for the purpose of dealing with the matter.

In due course, you might make a claim against the insurance company arising out of the event. In the meantime, you must not, without the insurance company’s consent:

• repair or dispose of any damaged property until you have given the insurance company the chance to inspect it;
• admit liability to anyone else;
• negotiate, pay or settle a claim by you against anyone else or by anyone else against you.

Getting a claim for damage to your property accepted by an insurance company will be much easier if you keep up-to-date written records or evidence of ownership and value and a detailed description of property insured. Photographs of the insured property can be very helpful.

The onus is on the insurance company to prove the event falls within an Exclusion clause.

If a fraudulent claim is made, the court may, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair, still order the insurance company to pay such amount as is just and equitable in the circumstances: s.56 of the ICA.