From 5 October changes to the Insurance Contracts Act came into effect, replacing the Duty of Disclosure with the obligation to take reasonable care not to make a misrepresentation when entering into, renewing, extending or varying life insurance policies.

The Financial Services Royal Commission concluded that the current regime for allowing insurers to avoid contracts of life insurance is unfairly weighted in favour of insurers. The new the duty to take reasonable care not to make a misrepresentation better safeguards consumers against having claims denied if they inadvertently failed to disclose past circumstances or because the insurer failed to ask the right questions. The new duty places the burden on an insurer to ask for the information that it needs.

What this means?

When a person applies for insurance or increases their cover they have a legal duty to take reasonable care not to make a misrepresentation to the insurer before a contract for insurance is entered into. A misrepresentation is a false answer, an answer that is only partially true, or an answer which does not fairly reflect the truth. A misrepresentation may also be fraudulent if the person gave an answer knowing it to be false or not caring whether it was true or false.

If the person does not take reasonable care not to make a misrepresentation, an insurer has different remedies available to them. Cover could be avoided, or the amount or terms of the cover may be varied. The remedy will depend on factors including whether the misrepresentation was fraudulent, when the policy commenced, and whether the insurer would have offered cover (and if so, on what terms) if the misrepresentation did not occur. Life insurers can only avoid a life insurance contract on the basis of non-fraudulent misrepresentation if the insurer would not have been prepared to enter into the contract on any terms.

Updates to the SoA

The SoA has been updated to replace the Duty of Disclosure with the Duty to take reasonable care. The update has been made in Compass and the SoA templates on Centrepoint Connect will be updated shortly.

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