Section 29(3) of the Insurance Contracts Act permits a life insurer to avoid a life insurance policy within three years of an insured’s non-disclosure or misrepresentation - even if the insured’s non-disclosure or misrepresentation was not fraudulent.
This did not sit well with the Royal Commission into Misconduct in Banking, Superannuation and Financial Services Industry. It recommended that Section 29(3) be limited. The insurer can still avoid the policy in the face of an innocent non-disclosure or misrepresentation but only if it can show that it would not have entered into the policy on any terms if the relevant matters had been disclosed or properly represented.
Draft legislation capturing the Royal Commission’s sentiments has now been released. The Federal Government proposes that section 29(3) be amended to read as follows:
a) the failure was not fraudulent or the misrepresentation was not made fraudulently; and
b) the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms, if the duty of disclosure has been complied with or the misrepresentation and not been made;
the insurer may, within three years after the contract was entered into, avoid the contract.
There is now a further hurdle for the insurer to pass. It must show that all been properly revealed, it would not have entered the policy at all. I stress ‘at all’.
So, let’s assume that these amendments are passed. What is the practical implication for life insurers?
Insurers’ paperwork needs to be solid. They need to review their underwriting manuals to make sure that any examination supports their position. If they would not have entered into the policy ‘at all’, the manuals need to say so credibly.