Insurance agents, brokers and contracts

When the inquiry into the law governing contracts of insurance was given to the ALRC in September 1976, the law regulating insurance contracts had not kept pace with the growth of a national insurance industry. Considerable confusion surrounded an agent’s authority when contracting on behalf of insurance companies. Some companies were using contracts as a means of evading responsibility for information communicated by their agents. For this reason, more powerful measures were needed to attach responsibility to insurers.

With brokers, however, the appropriate course of action was not as clear. In many cases, brokers acted as agents for the insured. However, it was also possible for a broker to function as an agent of the insurance company. This made it difficult to decide who should bear responsibility for the broker’s actions.

It was accepted that legislative mechanisms were needed to protect the insured against the loss of their funds through the wrongful actions of their brokers.

The inquiry resulted in two final reports: ALRC Report 16 and ALRC Report 20.

ALRC Report 16 deals with responsibility for, and occupational regulation of, insurance intermediaries. The main questions examined are:

• whether insurers should be responsible for mistakes made by agents and brokers
• whether there should be occupational regulation of agents and brokers to ensure
• protection of the insuring public against the negligence of an agent or a broker
  
  • the eradication of practices harmful to the insuring public
  • the maintenance of standards of conduct of, and quality of advice offered by, agents and brokers

ALRC Report 20 examined the adequacy and appropriateness of the law of insurance contracts, given that it was a mixture of common law principles and a number of imperial, federal and state statutes.

In particular, ALRC Report 20 considered:

1. Conduct before the contract:
   1. the information that the insurers and the prospective insured should provide to one another;
   2. what kind of interest is able to be insured; and
   3. the circumstances where an insurer may refuse to insure a person.
2. Cancellation and renewal of the contract:
   1. the consequences of a failure by an insured to comply with the terms of the contract; and
   2. the circumstances in which an insurer may cancel a contract.
3. Where a claim is made:
   1. what limits should be placed on the rights of the insurer and the insured; and
   2. ways of allowing the insured to protect and enforce their interests.

The Commission observed that in some cases the interests of an insured person acting honestly were not adequately protected. An insured’s duty of disclosure, which required them to give the insurer all information that a prudent insurer would think relevant, imposed a standard that was too difficult for a lay person to understand. Where an insured person breached the contract, the insurer was able to refuse to pay a claim, even if the insurer did not suffer any loss as a result of the breach. In addition, where the insurer became insolvent, the insured may have suffered a disastrous loss.

In deciding whether to recommend intervening in the market place to address these problems, the Commission balanced the economic costs of reform and the importance of ensuring fairness in the relationship between insurer and insured.

Key recommendations

ALRC Report 16

• The insurer should be held liable for loss arising from misrepresentations made by agents to consumers.
• It should be made an offence for agents to misrepresent the nature of an insurance policy.
• In general, the question of the insurer’s liability for the actions of brokers should be left to the common law.
• The insurer should be responsible for the receipt of premiums by a broker.
• It should be made an offence for brokers to misrepresent the nature of an insurance policy.
• A system of occupational control of brokers should be introduced regulating the withdrawal of registration, implementing more rigorous accounting requirements and requiring brokers to act impartially on their clients’ behalf.
• Brokers should be compelled to obtain professional indemnity insurance.

ALRC Report 20

• A new scheme of uniform national legislation should be introduced.
• The rights of the insured and the insurer should be distributed more fairly; the insurer should also have an obligation to act with the utmost good faith towards the insured.
• The Human Rights and Equal Opportunity Commission should be given jurisdiction to receive complaints regarding discrimination in insurance.
• The new legislation should allow a person considering their insurance options to make an informed decision. Standard terms should be included in most types of insurance and the laws prohibiting misleading conduct should be extended.
• Except in the case of life insurance, the requirement that the insured have an insurable interest should be abolished.
• The insured’s duty to disclose information should be based on what they knew themselves, or what a reasonable person in their position would have known. Where this duty has been breached, the wide-ranging rights presently given to the insured should be restricted.
• The insurer should be entitled to reduce any claim to a degree that reflects any loss they suffered from a breach.
• Measures should be implemented to safeguard an insured person’s interests where an insurer becomes insolvent.

Implementation

ALRC Report 16

The Insurance (Agents and Brokers) Act 1984 (Cth), which was passed on 25 June 1984, implemented the Commission’s recommendations. It provides that all insurance intermediaries apart from brokers should operate under written authorisation from insurers and that an insurer is responsible for the conduct of their agents. It sets out a registration scheme for insurance brokers requiring them to be registered by the Life Insurance or General Insurance Commissioner. It also imposes duties on brokers in relation to money received by them from clients and imposes duties of disclosure on both brokers and insurance intermediaries.

The Financial Services Reform Act 2001 (Cth) repealed the Insurance (Agents and Brokers) Act and replaced it with a single licensing regime which applies to a product issuers—including life insurance and general insurance companies, friendly societies, banks and superannuation funds—who carry on a financial service business and who sell products to clients.

ALRC Report 20

The Insurance Contracts Act 1984 (Cth) substantially implemented the Commission’s recommendations regarding the duties owed by the insurer and the insured. Instead of stating what terms should be included in each type of contract, the Insurance Contracts Act 1984 prevents insurers from attempting to avoid paying a claim where the terms of the contract are not typical for that kind of contract.

Under the Sex Discrimination Act 1984 (Cth) and the Disability Discrimination Act 1992 (Cth) discrimination in the provision of insurance is unlawful apart from situations where the discrimination is based on reliable actuarial data. Discrimination in the provision of insurance on the grounds of race is also unlawful under the Racial Discrimination Act 1975 (Cth).

Continuing issues

The Australian Law Reform Commission considered the specific area of marine insurance, in its 2001 report, Review of the Marine Insurance Act 1909 (ALRC Report 91).

The Australian Law Reform Commission, in conjunction with the Australian Health Ethics Committee of the National Health and Medical Research Council, considered issues relating to insurance as part of its inquiry into the use of human genetic information culminating in the final report, Essentially Yours: The protection of human genetic information in Australia (ALRC Report 96).