Changes in place from 1 January 2021
Historically, the handling and settlement of insurance claims was carved out from the definition of a 'financial service' under the Corporations Act, meaning it was exempt from a range of general obligations that otherwise applied to AFS licensees. However, this all changed from 1 January of this year, following recommendation 4.8 of the Financial Services Royal Commission. Under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), claims handling services have now been brought into the fold and given a broad definition, including:
- making a recommendation or stating an opinion that could influence a decision to make an insurance claim;
- assisting another person to make an insurance claim;
- assessing whether an insurer is liable under an insurance product;
- making a decision to accept or reject all or part of an insurance claim;
- quantifying an insurer’s liability under an insurance product;
- offering to settle all or part of an insurance claim; and
- satisfying a liability of an insurer under an insurance claim.
Insurer obligations
Claims handling is one of the most contentious aspects of the insurance process, and one of the most likely to result in litigation by aggrieved policyholders or in complaints to the regulator. For this reason, the application of various duties in Chapter 7 of the Corporations Act is significant and not to be underestimated. Of most pressing concern to insurance providers is likely to be the potent 'overarching' duty to ensure their services are provided efficiently, honestly and fairly (which we discuss further below). However, this is by no means the only additional obligation, with insurance providers also required to have:
- adequate resources and training to provide the services and supervise staff competently;
- an appropriate dispute resolution system, with compensation arrangements where mistakes are made;
- adequate arrangements to manage conflicts of interest and avoid adverse practices (such as linking remuneration to levels of accepted, declined or withdrawn claims); and
- adequate risk management systems and to take reasonable steps to ensure that representatives comply with the financial services laws.
Many of these obligations are now civil penalty provisions, with steep potential penalties for contravention (again, of up to $11.1 million, three times the value of the benefit derived, or 10% of annual turnover).
Further, insurers need to be aware of their breach reporting obligations under s912D of the Corporations Act, and to ensure that all employees are properly trained to identify breaches and report them to ASIC in a timely manner. Allens has reported on this issue recently. A failure to comply with s912D is itself an offence provision and one that has been a recent focus for ASIC.
While much could be written about all of the various duties in Chapter 7, perhaps the most significant obligation is s912A(1)(a) — the duty to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly — which Commissioner Hayne described as 'overarching and fundamental' and embodying community expectations of insurers and other AFS licensees.
Such a broad principles-based duty poses considerable challenges for insurers in understanding the scope of their legal obligations, and is only beginning to receive detailed consideration by the courts. In part, this is because of its nature as a normative standard, but also because it has only recently become a civil penalty provision, and allegations are yet to face intense scrutiny as defendants seek to avoid potentially eye-watering penalties.
Allens has reported on this duty in detail in recent publications. Among other things, courts have held that the words 'efficiently, honestly and fairly' require 'competence', 'even-handedness' in dealing with customers (or policyholders) and 'sound ethical values and judgment'.
In many ways, we expect the content of this duty will significantly overlap with the requirements of s13 of the Insurance Contracts Act (and indeed, ASIC suggested as much to the Financial Services Royal Commission). However, while the duty of utmost good faith is also available to policyholders, contraventions of s912A can only be enforced by the regulator, either through licensing action or litigation before the courts.
Having regard to ASIC's draft information sheet on Claims Handling and Settling (which provides useful guidance on the requirements of s912(1)(a) in this context), along with the new General insurance Code of Practice which came into effect on 5 October 2021, we set out below what we see as the key aspects for insurers in complying with their 'efficiency, honesty and fairness' obligations.
Key aspects to be considered
| Timeliness |
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ASIC notes that '[y]ou should act without undue delay, acknowledging and balancing the negative effects of delay on the claimant against your reasonable requests for information. This includes following up outstanding information, and reviewing the ongoing need for this information, on a regular basis.' We see timeliness as a key 'pressure point' for insurers. Self-evidently, the 'efficiency' requirement in s912A(1)(a) cannot require insurers to forgo proper process or to admit indemnity without due diligence. However, where claims take an extended period of time to resolve, it may be important for an insurer to show that it was being proactive and that the reasons for delay are a result of lack of cooperation on the part of the policyholder in withholding key information needed to progress the claim. Practically speaking, insurers should regularly review their outstanding requests for information and follow-up on requests where appropriate. Consistent with this focus on timeliness are certain obligations in the new Code of Practice. For example, the Code requires the assessment of urgent claims to be fast-tracked (clause 64), and imposes various time limits on claim decisions (clauses 76-78). Insurers should also keep in mind that the scope of 'claims handling and settling' activities can extend to the work carried out by service providers acting on their behalf (eg in carrying out repairs). Insurers should ensure they maintain sufficient oversight of the quality and timeliness of any work performed at their request. |
| Minimum intrusion and burden |
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ASIC advises that insurers should 'assess claims in the least onerous and intrusive way reasonably possible in the circumstances'. In practice, this means that in assessing a claim, insurers should:
Similarly, the Code of Practice limits insurer's inquiries to information relevant to the indemnity decision and requires insurers to explain why they need the information they request (clause 67). |
| Transparency and fairness |
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The 'fairness' duty under s912A(1)(a) does not require an insurer to accede to an unmeritorious claim. It does, however, require the insurer to keep the claimant abreast of the status of their claim and informed of material developments. According to ASIC, insurers should ensure that:
Again, similar obligations are reflected in the Code of Practice. For example, insurers should provide progress updates on claims 'at least every 20 Business Days' (clause 70) and make the complaints process 'readily available' to policyholders (clause 140). |
| Claimants experiencing vulnerability or financial hardship |
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ASIC's draft information sheet indicates that insurers ought to ensure that their service 'can be tailored to consumers who are experiencing vulnerability or financial hardship'. This includes age, disability, mental and physical health, family violence, language barriers, literacy, cultural background, Aboriginal or Torres Strait Islander status, remote location or financial distress. ASIC has identified the following strategies for insurers to consider:
This consideration of vulnerability is reflected in detail in Part 9 of the Code of Practice on 'Supporting customers experiencing vulnerability' and Part 10 on accounting for 'Financial Hardship'. |