The Contract of Insurance

Insurance law involves Commonwealth legislation and the common law. The Insurance Contracts Act (Cth) 1984 is the major statute discussed in this chapter. Other relevant legislation includes the Life Insurance Act 1995 (Cth).

Insurance law is so complicated, that any short statement about the law must be inaccurate in some respects. This chapter is therefore only a general statement. If you have a dispute with an insurance company you should seek legal advice or approach the Financial Ombudsman Service.

Insurance policies are contracts of the utmost good faith. This means that the proposer (the person wishing to insure their life or property) must disclose to the insurer (the person accepting the risk) every fact that may reasonably affect the decision to accept the risk.

Insurance rests on the concept of an insurable interest. A person wishing to take out insurance on a life or on property must have some legally recognised interest in that life or property.

What the Insurance Company Must be Told

In a word, everything. A more precise answer would be long and complicated because the common law has one test, and the Insurance Contracts Act 1984 (Cth) uses a different test. Also, what a person must tell the company varies, depending upon the type of insurance, and their personal circumstances.

The only safe course is to answer every question in the proposal form, as accurately and in as much detail as possible. If in any doubt, a person should tell the insurance company everything. Not doing so may mean that their policy is worthless, and their premiums entirely wasted, although when the Insurance Contracts Act applies, the position will be less harsh.
Fundamentally there are two categories of facts which a person must tell the insurance company about.

Facts About the Physical Hazard

This includes facts that will put the insurance company at greater risk than usual such as:

• in the case of fire insurance, anything which makes a fire more likely, harder to extinguish, or fiercer;
• in relation to motor vehicle insurance, anything which makes the vehicle more likely to be involved in an accident, or more expensive to repair; and
• in life insurance, any illness or disability which adversely affects of person’s life expectancy.

Facts About the Moral Hazard

This includes facts which, in the eyes of the insurance company makes the insured (or people closely associated with them and with the risk insured against) a person who might possibly make a dishonest claim. For example, if a person insures the contents of their house against theft, the fact that they, or their spouse or anyone else living in the house has a criminal record, might make the insurance company reluctant to insure them, except at a higher premium. Similarly, the fact that they have had half a dozen prior theft claims on insurance companies, or that another insurance company has previously refused to insure them, might have the same effect upon the insurance company.

It is of course unpleasant to have to tell an insurance company about these kinds of facts, but the rule is justified by the view that the insurance company is simply spreading the risk of loss over a large number of people. If some of those people ‘rip off’ the insurance company, people who make honest claims may find that the company’s funds have been exhausted by the dishonest claims.

If in doubt, the insured is advised to tell the insurance company, in writing, so that there can be no dispute about it. The fact that the proposal form does not ask the relevant question may not help. The insured’s duty is to volunteer all facts which might affect the company’s decision to insure them or not, and if so, upon what terms.

What the Insurer Must Advise

The insurer must give written notice describing the nature and effect of duty of disclosure before the contract of insurance is entered into. The insurer must advise in the proposal form what is relevant and important to it. If the insured receives advice from someone in the insurance firm, they should take a note of the employee’s name and what was said, just in case there is a dispute about it at a later date. If the matter is important, it is even better to confirm it by writing to the insurer.

The insurer must also give the insured, when requested, a statement of reasons for not accepting an offer to enter into a contract, cancelling a contract, or non-renewal of a contract of insurance. The insurer must also give reasons for offering to cover an insured on less advantageous terms on the subject matter of the contract.

Losses Deliberately Caused

It is an implied term of all insurance contracts that they do not cover losses wilfully caused by the insured. Some policies expressly say so. The practice did grow up in life insurance policies, however, that the company would pay following a suicide if the insured lived for more than, say, 12 months after the policy was taken out. Section 228 of the Life Insurance Act 1995 (Cth) states that a company need not pay in the case of suicide if the policy specifically stated as such. In other words, the right of the insured (or rather, their personal representatives) will depend on the specific conditions of the policy.