Insurance complaints: Key learnings from notable cases

Duty of disclosure vs duty to take reasonable care…

Here are a few notable Australian cases related to insurance complaints that compare the duty of disclosure and the duty to take reasonable care.

Understanding Duty of Disclosure vs. Duty to Take Reasonable Care 

Duty of Disclosure: Traditionally, the duty of disclosure required clients to disclose all relevant information that could affect the insurer’s decision to provide coverage. This duty significantly burdened clients, often leading to disputes when non-disclosure was discovered. 

Duty to Take Reasonable Care: Recent reforms have shifted the focus to the duty to take reasonable care not to make a misrepresentation. This duty requires clients to answer questions from insurers honestly and to the best of their ability, considering their circumstances. This change aims to balance the responsibilities between insurers and clients, reducing the likelihood of disputes. 

Key Differences: 

• Burden of Responsibility: The duty of disclosure places more responsibility on clients, while the duty to take reasonable care emphasises a shared responsibility. 
• Nature of Information: Under the duty of disclosure, clients had to volunteer information. The duty to take reasonable care focuses on responding accurately to specific questions posed by insurers. 

These cases and legislative changes reflect the evolving landscape of insurance law in Australia, focusing on fairer and more transparent practices for insurers and clients. Feel free to ask if you need more detailed information on these cases. 

1. Australian Securities and Investments Commission v. Zurich Australia Limited (No 2) [2023] FCA 1641: 

• Summary: This case involved Zurich Australia Limited, which rejected an income protection claim based on the insured’s non-disclosure of a history of mental health issues. The Federal Court ruled that Zurich did not breach its duty of utmost good faith, as the non-disclosure was deemed fraudulent. The court emphasised that Zurich’s actions were reasonable given the clear questions in the application form regarding mental health history¹. 

• Key Takeaway: This case highlights the importance of clear and specific questions in insurance applications and the insurer’s right to act promptly based on the information provided. 

2. Changes to the Duty of Disclosure for Retail Insurance (2021): 

• Summary: Following the recommendations of the Financial Services Royal Commission, the Insurance Contracts Act 1984 (Cth) was amended to replace the duty of disclosure with the duty to take reasonable care not to make a misrepresentation for retail insurance contracts. This change aims to reduce the burden on consumers and ensure that insurers ask clear and specific questions². 

• Key Takeaway: This legislative change underscores the shift towards a more balanced approach, where both insurers and clients share responsibility for accurate information disclosure. 

3. AFCA Rulings on Duty of Disclosure: 

• Summary: The Australian Financial Complaints Authority (AFCA) has handled numerous disputes related to the duty of disclosure. In one notable case, AFCA ruled in favour of an insured, highlighting a major insurer’s lack of understanding regarding the duty to take reasonable care not to make a misrepresentation³. 

• Key Takeaway: This case illustrates the industry’s ongoing challenges and misunderstandings regarding the new duty, emphasising the need for clear communication and education for insurers and clients.