Further Submission to the Department of Treasury Review of the Insurance Contracts Act 1984 (Cth): Second Stage
(8 April 2004)
1. This is the third submission made by the Australian Law Reform Commission (ALRC) to the Department of Treasury Review of the Insurance Contracts Act 1984 (Cth) (the Review). The first, made in October 2003, related to s 54 only; the second, made in December 2003, was a broad submission in relation to provisions other than s 54. This submission focuses on a number of issues raised in the second submission that the ALRC wishes to highlight following publication of the Review’s Issues Paper on Second Stage (Issues Paper).
Review of the Marine Insurance Act 1909 (Cth)
Interface between the Insurance Contracts Act and the Marine Insurance Act
2. Our previous submissions noted the ALRC’s report ALRC 91 Review of the Marine Insurance Act 1909 (Cth). While the report is still under consideration by government, two of the recommendations are directed to amendment of the Insurance Contracts Act 1984 (Cth) (IC Act), which can be done in isolation to any changes to the Marine Insurance Act 1909 (Cth) (MI Act). The ALRC considers that it is important for the Review to consider these particular recommendations at the present time in conjunction with the broader review of the IC Act.
3. In the Issues Paper, the Review has identified the ALRC’s recommendation that the carriage by sea of domestic or household goods should be covered by the IC Act rather than the MI Act. A draft clause to insert s 9B in the IC Act can be found in the draft Marine Insurance Amendment Bill in Appendix C of the ALRC’s report.[1]
4. The Issues Paper asks (Issue 1.6) whether this amendment would have any negative consequences. The suggestion for the amendment was made by the Insurance Council of Australia in its submission to the ALRC inquiry. The Council noted that some member insurance companies already write contracts relating to sea carriage of household goods as if it were covered by the IC Act. This raises one possible negative consequence that might be considered—the uncertainty in relation to the respective coverage of the MI Act and the IC Act. However, as discussed by the ALRC, for as long as Australia has two statutes governing activities that may be underwritten as part of one insurance underwriting exercise, issues concerning the demarcation between the two systems will continue to arise. For various reasons, the ALRC has recommended retention of separate statutes. The ALRC considers that it is most appropriate to place non-commercial carriage by sea under the provisions of the IC Act, which provide greater consumer protection benefits than those of the MI Act.
Subrogation—s 67 of the Insurance Contracts Act
5. As part of the MI Act review, the ALRC considered the operation of s 67 of the IC Act and the recovery of money from third parties by subrogation. In considering the need for a similar provision in the MI Act, the ALRC highlighted two criticisms of s 67:
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the section does not refer to the situation where the insured (rather than the insurer) brings an action against the third party; and
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the working of s 67(2) gives the insurer the benefit of a recovery in excess of the insured’s actual loss, allowing the insurer to make a profit.
6. These criticisms are related to Issues 11.3–11.6 of the Issues Paper.
7. The ALRC set out statements of principle that should apply in relation to the order or priority in which the recovered money should be distributed.[2]
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First, the party taking the recovery action should be entitled to reimbursement for the administrative and legal costs of that action from any moneys recovered. If both parties contribute, they should be reimbursed, or share the reimbursement pro rata if there is insufficient recovered money to reimburse both in full.
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There are then three possibilities depending on who has funded the recovery action.
a) If the insurer funds the recovery action pursuant to its rights of subrogation, it is entitled to an amount equal to the amount that it has paid to the insured under the insurance contract. The insured is then entitled to any further amount that may be required so that it ultimately recovers from the insurer under the insurance contract or the third party in the recovery action, or both in combination, the full amount of its loss (not just the measure of indemnity under the policy). This entitlement does not diminish the insured’s right to receive payment promptly under the policy in accordance with its terms and the insurer’s obligation to pay promptly, subject to any contrary agreement between the parties.
b) If the insured funds the recovery action, the order in the preceding paragraph is reversed. The insured is entitled to retain an amount so that the total that it receives from the recovery action and under the policy is equal to its total loss. The insurer is entitled at this point to an amount equal to the amount that it has paid to the insured under the insurance contract.
c) If the action is funded jointly by both insurer and insured, they are entitled to the same amounts as those referred to in (a) and (b) above, pro rata if there are insufficient funds to reimburse them in full.
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Thirdly, any excess or windfall recovery is then distributed to both parties in the same proportions as they contributed to the administrative and legal costs of the recovery action. Thus the party (or parties) shouldering the cost and risk of the recovery action for the benefit of all concerned receives the benefit of the windfall. Most commonly this would be the insurer—but the insurer only gets the benefit after the insured has received full recovery for all its losses as the insured would have been entitled to these losses as damages from the third party as a matter of principle, whether or not there was any insurance in place.
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Finally, any separate or identifiable component in respect of interest should be paid to the parties in such proportions as fairly reflects the amounts that they have each recovered and the periods of time for which they have each lost the use of their money.
8. The ALRC noted that these principles should apply subject to the express terms of the contract. The ALRC did not specifically consider whether or not it was appropriate to allow subrogation rights to be altered by agreement under the IC Act.
9. A draft clause for the MI Act encompassing these principles can be found in the draft Marine Insurance Amendment Bill in Appendix C of the ALRC’s report.[3] While the ALRC suggested that the highlighted criticisms of s 67 of the IC Act should be remedied,[4] it did not provide drafts of these amendments since they fell outside the terms of reference of the inquiry.
Protection of Human Genetic Information
10. Previous ALRC submissions have provided an overview of the joint inquiry by the ALRC and the Australian Health Ethics Committee (AHEC) of the National Health and Medical Research Council into the Protection of Human Genetic Information. In particular, the Joint Inquiry considered the use of human genetic information in relation to applications for risk-rated, mutual insurance (such as life insurance).
11. In the final report Essentially Yours: Protection of Human Genetic Information in Australia (ALRC 96, 2003) many of the Joint Inquiry’s recommendations were aimed at development of or changes to policies and practices within the industry. However, there was one area where the Joint Inquiry recommended amendment of the IC Act.
Reasons for unfavourable underwriting decisions—s 75 of the Insurance Contracts Act
12. The Joint Inquiry received a number of submissions expressing, from the applicant’s point of view, that the reasons provided by insurers for unfavourable underwriting decisions are often inadequate. Moreover, the mechanisms for obtaining reasons were seen in some circumstances to be unduly onerous.[5] While s 75 of the IC Act imposes a duty on insurers to ‘give to the insured a statement in writing setting out the insurer’s reasons’ upon request, it says nothing of the adequacy of timeliness of those reasons nor the statistical or actuarial basis for the adverse decision.
13. Transparency and accountability of decision making has the benefit of building public confidence in the way in which insurers make underwriting decisions, and is likely to generate a better decision making process. It also creates checks and balances by providing consumers with the means of ensuring that the discriminatory acts of insurers fall within the specific exemptions permitted by law.
14. The reasons provided must be effective for the purposes of consumer understanding and possible review—and they may fail to be so if an insurer provides either too little or too much information. A bare statement that an applicant has been denied insurance because of his or her family medical history of a particular genetic disorder is unlikely to satisfy a consumer’s wish to understand the basis of an adverse decision. On the other hand, the provision of vast quantities of raw statistical or actuarial data is unlikely to offer an applicant any better understanding.
15. The submissions received by the Joint Inquiry were in the context of the handling of genetic information, primarily in relation to life insurance and disability policies. However, the Joint Inquiry considered that the highlighted problems had broader application, and therefore recommended that s 75 of the IC Act be amended to clarify the nature of the information that must be provided to applicants.[6] The broader application was specifically supported by submissions from the Anti-Discrimination Board of NSW and the Institute of Actuaries of Australia.[7]
16. The ALRC considers that if the insurance industry is required to provide better information about the reasons for adverse decisions, there will be less need for applicants to seek redress under relevant discrimination legislation.
17. The ALRC urges the Review to consider this issue as part of the current review of the IC Act.
[1] ALRC 91 Review of the Marine Insurance Act 1909 (Cth) (2001), Appendix C: see Sch 1.
[2] ALRC 91 Review of the Marine Insurance Act 1909 (Cth) (2001), [12.17].
[3] ALRC 91 Review of the Marine Insurance Act 1909 (Cth) (2001), Appendix C: see Sch 2, cl 68 containing proposed s 87A.
[4] ALRC 91 Review of the Marine Insurance Act 1909 (Cth) (2001), [12.18].
[5] ALRC 96 Essentially Yours: The Protection of Human Genetic Information in Australia (2003), [27.71]–[27.83].
[6] ALRC 96 Essentially Yours: The Protection of Human Genetic Information in Australia (2003), [27.84]–[27.93] and Rec 27–5.
[7] ALRC 96 Essentially Yours: The Protection of Human Genetic Information in Australia (2003), [27.93].