Insurance implications of the Financial Sector Reform (Hayne Royal Commission Response) Act
It has been two years since Commissioner Kenneth Hayne delivered his Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. 
In this edition of Limelight we consider the implications of some of the recommendations from the Final Report that have been implemented with the enactment of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) (FSR Act).
The FSR Act commenced on 1 January 2021 and, from an insurance perspective, includes amendments to the following:
- Insurance Contracts Act 1984 (Cth) (ICA) – to replace the duty of disclosure for consumer insurance contracts with a duty to take reasonable care not to make a misrepresentation;
- Corporations Act 2001 (Cth) – to make claims handling and settling a ‘financial service’; and
- Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) – to amend its existing indemnification rules preventing superannuation trustees and their directors from using trust assets to pay criminal, civil or administrative penalties incurred in relation to a contravention of any Commonwealth law.
New duty to take reasonable care
The Final Report recommended that Part IV of the ICA be amended to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer in respect of consumer insurance contracts. This recommendation was effected by Part 2 of Schedule 2 to the FSR Act.
The key amendments to the ICA are that:
- An insured’s duty of disclosure is replaced with a new duty of to take reasonable care not to make a misrepresentation to an insurer when a ‘consumer insurance contract’ is entered into (New Duty). For contracts of insurance that are not consumer insurance contracts, the duty of disclosure under Part IV of the ICA continues to apply;
- A contract of insurance is a ‘consumer insurance contract’ if the insurance is obtained wholly or predominantly for personal, domestic or household purposes of the insured. It includes general insurance contracts (such as consumer credit, motor vehicle, home and contents, sickness and accident and travel insurances) and life insurance contracts;
- If a contract of insurance is for new business, an insurer may elect to notify the insured that it is considered as a consumer insurance contract;
- In determining whether an insured has fulfilled the New Duty, regard must be had to all the relevant circumstances of a particular case. The ICA specifies the range of matters that may be taken into account in determining whether an insured has fulfilled the New Duty. These include the type of consumer insurance contract in question and whether or not an agent was acting for the insured;
- Any representation made fraudulently is taken to be a breach of the New Duty;
- The remedies for non-disclosure and misrepresentation under the ICA continue to be available to the insurer if an insured breaches the New Duty. The remedies apply where there has been a ‘relevant failure’ by the insured, which is:
- If the contract is a consumer insurance contract – a misrepresentation made by the insured in breach of the duty to take reasonable care not to make a misrepresentation; or
- For other insurance contracts – a failure by the insured to comply with the duty of disclosure or a misrepresentation made by the insured before the contract was entered into.
These amendments will apply to consumer insurance contracts (other than life insurance contracts) entered into from 5 October 2021.
Claims handling now a financial service
The Final Report recommended that the handling and settling of insurance claims should no longer be excluded from the definition of ‘financial service’ under Chapter 7 of the Corporations Act. Schedule 7 of the FSR Act gives effect to this recommendation by making claims handling a ‘financial service’ and, therefore, subject to the regulatory regime found in Chapter 7 of the Corporations Act.
Claims handling and settling service
A person will provide a ‘claims handling and settling service’ if the person:
- makes a recommendation or states an opinion that could influence a decision whether to make an insurance claim;
- assists another person to make an insurance claim;
- assesses whether an insurer is liable under an insurance product;
- makes a decision to accept or reject all or part of an insurance claim;
- quantifies an insurer’s liability under an insurance product;
- offers to settle all or part of an insurance claim; or
- satisfies a liability of an insurer under an insurance claim.
Impact on insurers
Under the new regime, insurers and other people who provide claims handling services for insurers:
- must obtain an Australian Financial Services Licence (AFSL) covering claims handling;
- must provide appropriate disclosure to retail clients when offering to settle a general insurance claim using cash payments;
- can authorise representatives to provide claims handling services on their behalf;
- can continue to appoint service providers, such as tradespeople to fulfil insurance contracts on their behalf;
- must ensure insurance claims are handled and settled efficiently, honestly and fairly; and
- when providing claims handling services to retail clients, must have an internal dispute resolution process in place and be a member of the Australian Financial Complaints Authority (AFCA).
Impact on insureds
Further, the new regime provides that people who represent an insured to pursue an insurance claim in exchange for a monetary or non-monetary benefit, known as a ‘claimant intermediary’:
- must hold an AFSL covering claims handling;
- must represent the insured efficiently, honestly and fairly; and
- when representing a retail client to pursue an insurance claim, must have an internal dispute resolution process in place, be a member of AFCA and give the client a Financial Services Guide.
The following people who provide claims handling services must hold an AFSL covering claims handling or be authorised by another person with an AFSL covering claims handling:
- an insurer;
- a tradesperson (referred to as an ‘insurance fulfilment provider’) who has authority to reject all or part of a claim. An ‘insurance fulfilment provider’ is a person who provides goods or services to consumers to fulfil insurance contracts. This includes smash repairers, builders and any other tradespeople contracted by an insurer to fulfil a claim;
- an ‘insurance claims manager’, who is a person carrying on the primary business of providing claims handling services on behalf of one or more insurers. In practice, insurers may outsource the entire claims handling process to an insurance claims manager. These claims managers are required to either obtain an AFSL covering claims handling, or be authorised by a person with an AFSL covering claims handling;
- an ‘insurance broker’, within the meaning of the ICA and who carries on the business of arranging insurance contracts; and
- a financial adviser who provides claims handling services on behalf of the insurer.
There are notable exemptions under the new regime, including the following:
- Lawyers will not be required to obtain an AFSL for activities undertaken in their professional capacity as a lawyer. For example, lawyers providing coverage advice to insurers or insureds in relation an insurance claim;
- Chapter 7 of the Corporations Act contains a number of exemptions for certain foreign insurers and wholesale insurers from the requirement to obtain an AFSL. These exemptions are extended for the purposes of the Schedule 7 amendments, so those foreign insurers and wholesale insurers are not required to obtain an AFSL for claims handling;  and
- The amendments do not require a trustee of a registrable superannuation entity to obtain an AFSL covering claims handling.
The amendments made by Schedule 7 do not apply to any person providing claims handling services before 30 June 2021. There is a transition period between 1 July 2021 and 31 December 2021, where claims handling services can only be provided if a complete application was lodged by 30 June 2021, and it has either been granted or is still pending. From 1 January 2022, claims handling services can only be provided if the application has been granted.
Extension of indemnification prohibition on superannuation trustees and directors
Previously, sections 56 and 57 of the SIS Act prevented superannuation trustees and their directors from using trust assets to pay a liability for breach of trust if they:
- failed to act honestly in a matter concerning the entity; or
- intentionally or recklessly failed to exercise, in relation to a matter affecting the entity, the required degree of care and diligence.
Schedule 9 to the FSR Act now extends these sections to include a prohibition on indemnifying superannuation trustees and their directors from trust assets to pay criminal, civil or administrative penalties incurred in relation to a contravention of any Commonwealth law.
The amendments will apply in relation to liabilities imposed on or after 1 January 2022 and amounts that become payable under infringement notices given on or after 1 January 2021.
Potential implications for insurers and insureds
There are a number of potential implications for insurers and insureds by reason of the above amendments made by the FSR Act:
- insurers and insureds should be aware of an insured’s new duty to take reasonable care not to make a misrepresentation to an insurer when a consumer insurance contract is entered into on or after 5 October 2021.
- insurers and insureds should review their current claims handling arrangements well before 30 June 2021. Entities that already hold an AFSL will need to apply to ASIC for a variation to their licence so it covers the new financial service of claims handling. New entities providing claims handling services will need to apply for an AFSL covering such services.
- on the SIS Act amendments, the only prohibition on indemnification is from trust assets. The amendments to sections 56 and 57 of the SIS Act do not expressly provide that the superannuation entity and its directors cannot purchase insurance. However, if premium for an insurance policy is paid from the assets of the trust, then the trustee or its directors could potentially have an issue.