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May 13, 2013

Unfair terms in general insurance contracts

Treasury has released for comment exposure draft legislation and explanatory material to give consumers protection against unfair contract terms in general insurance contracts.

The key elements of the draft legislation are:

the new unfair contract terms regime will apply to general insurance contracts on an equivalent basis to the regime applying to other financial products or services in the Australian Securities and Investments Commission Act 2001. The new regime is modified appropriately for contracts of general insurance;
consumers and the Australian Securities and Investments Commission (ASIC) will be able to take action for unfair terms in a standard form consumer contract of general insurance, such as seeking a court declaration that a term is unfair. A court will have access to a range of remedies in such circumstances;
an insurer found by a court to have an unfair term will be in breach of the duty of utmost good faith and will not be able to rely on the term;
ASIC will be given powers to enforce unfair contract terms for general insurance contracts by reference to the enforcement and investigation powers it has in the Australian Securities and Investments Commission Act 2001;
the amendments will apply to standard form consumer contracts of general insurance entered into, or renewed, on or after the commencement day, and to terms varied on or after the commencement day. The commencement day will be 12 months after the day the Act receives Royal Assent, giving general insurers a transition period to review their standard form consumer contracts for unfair terms.

The draft legislation will apply to:

standard form consumer contracts of general insurance which are entered into, or renewed on, or after, commencement; and
a term in a standard form consumer contract of general insurance that is varied on or after commencement.

Insurers will be given a 12 month transition period to review their standard form consumer contracts for unfair terms before the commencement of the changes.

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Posted 13th May 2013 by admin in Consumer Law, Financial Services, Insurance

Chief Risk Officer requirement for ADIs and insurers

APRA has released for consultation a proposed cross-industry prudential standard to harmonise and consolidate its risk management requirements for ADIs and insurers– Prudential Standard CPS 220 Risk Management (CPS 220).

The proposed CPS 220 will replace the existing industry-specific risk management standards for general insurers and life insurers, and will include the risk management requirements for ADIs that are currently spread across a number of ADI prudential standards.

CPS 220 will not apply to the superannuation industry. Instead, RSE licensees must comply with the superannuation-specific risk management prudential standard due to commence on 1 July 2013.

The most important changes contained in CPS 220 are the requirements for:

a Chief Risk Officer (CRO) who is independent from business lines, the finance function and other revenue-generating capabilities. The CRO must not be the Chief Executive Officer, the Chief Financial Officer, Appointed Actuary or Head of Internal Audit; and
the establishment of a separate Board Risk Committee that provides objective non-executive oversight of the implementation and on-going operation of the institution’s risk management framework. The Committee must be chaired by an independent director who is not the chair of the Board.The chair of the Board Audit Committee may also chair the Board Risk Committee.

APRA is proposing that the Risk Committee must operate under a different charter than the Board Audit Committee, although APRA’s composition requirements will not prohibit the same people sitting on both committees.

The Board Risk Committee is required to provide prior endorsement for the appointment or removal of the CRO. If the CRO is removed from their position, the reasons for removal must be discussed with APRA as soon as practicable, and no more than 10 business days, after the Committee’s endorsement is agreed upon.

The Board Risk Committee must invite the CRO to attend all relevant sections of meetings of the Committee.

APRA proposes that the chair of the Board and the chair of the Board Risk Committee make an annual attestation as to the adequacy and effectiveness of its risk management framework.

Prudential Standard CPS 510 Governance will also be changed to require the Board Audit Committee to provide prior endorsement for the appointment or removal of the APRA-regulated institution’s auditor and Head of Internal Audit. If the auditor or Head of Internal Audit is removed from their position, the reasons for removal must be discussed with APRA as soon as practicable, and no more than 10 business days, after the Committee’s endorsement is agreed upon.

APRA expects to finalise the proposed CPS 220, updated CPS 510 and a prudential practice guide prior to their implementation date of 1 January 2014.

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Posted 13th May 2013 by David Jacobson in Financial Services, Insurance, Risk Management, Superannuation

March 19, 2013

Insurance contracts amendments

The Government has introduced the Insurance Contracts Amendment Bill 2013 into the House of Representatives.

UPDATE 21 March 2013: the Bill has been passed by the House and sent to the Senate.

It is proposed that the regulations under the Electronic Transactions Act 1999 (Cth) will be amended so that the ETA will apply to permit electronic communication of notices or documents required to be given in writing under the Insurance Contracts Act.

Failure to comply with the duty of utmost good faith will be a breach of the Insurance Contracts Act.

There will be changes reinforcing the duty of disclosure by insureds however on renewal, insurers may choose to seek updates to answers previously provided by insureds, rather than asking specific questions again.

There will also be changes to third party rights: third party beneficiaries will have access to particular rights and obligations currently held by insureds.

Also third parties with damages claims against an insured or third party beneficiary who has died or cannot be found will be able to recover directly against the insurer.

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Posted 19th March 2013 by David Jacobson in Consumer Law, Financial Services, Insurance

January 15, 2013

Insurance for directors’ legal defence costs

In Steigrad v BFSL 2007 Ltd [2012] NZCA 604 the New Zealand Court of Appeal allowed appeals in two separate actions relating to insurance coverage of legal costs of directors of companies which became insolvent.

Both policies contained a single limit of liability covering both liability and defence costs claims. The issue was how a third party’s claim on a policy affects such policies, in particular in relation to the payment of defence costs after the claim has arisen and been notified.

Steigrad’s appeal related to the Bridgecorp group, previously discussed here.

In relation to Bridgecorp the NZ High Court decided that the Bridgecorp directors were prevented from having access to their company’s D & O policy to meet their defence costs because there were civil claims by investors relating to the collapse of Bridgecorp that were potentially in excess of the $20 million limit of the D&O policy. That decision has been reversed.

In the other action Chartis Insurance sought a declaration whether it could pay defence costs of former Feltex directors notwithstanding notice of a charge by Feltex investors on the prospectus liability policy. The Court of Appeal made that declaration.

In allowing the applications the Court of Appeal said:

“In our judgment Mr Steigrad’s appeal must succeed on two interrelated grounds:
(a) s 9 [the charge] does not by its terms apply to insurance monies payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit of liability; and

(b) s 9 has limited effect and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement….

We conclude that the statutory charge does not prevent QBE from meeting its obligation under the policy to reimburse defence costs. The only reason that the contrary can be argued is that there is a single, aggregated limit of liability in the policy. In our view, that factor – the existence of a single, aggregated limit – cannot operate to deprive Mr Steigrad of the right to obtain reimbursement for his defence costs as that would render his defence costs cover, in practical terms, useless. That is not what s 9 was intended to achieve. … s 9 is simply a legal mechanism to divert to a third party funds that would otherwise be available to settle a contractual obligation to indemnify the insured for liability to that third party. The amount of the funds available in Mr Steigrad’s case will be determined once the other cover provided by the policy – defence costs cover – has been determined….

In the present case, the statutory charge created by s 9 has not crystallised – it remains contingent. It will not crystallise unless and until QBE becomes legally liable to meet any damages or compensation that Mr Steigrad must pay Bridgecorp, whether as a result of judicial decision, arbitration or settlement. That requires, first, that Mr Steigrad’s liability to Bridgecorp be established; and second, that QBE’s liability to Mr Steigrad under the policy be established. In the meantime, the amount, if any, of the insurer’s contingent liability is unknown. At present QBE’s only crystallised liability is to pay Mr Steigrad’s defence costs.”

Because of the similarity of the NZ legislation to that of some Australian states, Australian directors should keep these issues in mind when next reviewing their cover.

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Posted 15th January 2013 by David Jacobson in Business Planning, Corporate Governance, Insurance

December 24, 2012

Unfair contract terms laws to be extended to general insurance contracts

The Government has announced that unfair contract terms laws for insurance will be introduced into the Insurance Contracts Act 1984, based on the UCT regime that applies under the Australian Securities and Investments Commission Act 2001 (ASIC Act).

Draft legislation will be released for consultation in 2013.

The UCT regime will not apply to life insurance contracts at this stage.

The principles for extending unfair contract terms laws to general insurance contracts are:

the regime will apply to consumer contracts that are standard form insurance contracts;
it will be included as part of the duty of utmost good faith: if a term is found to be unfair, the insurer will be in breach of the duty of utmost good faith;
the remedy available where a term is found to be unfair will be that the party may not rely on the term;
in addition to the above remedy, a court may consider whether there is another more appropriate remedy;
ASIC and consumers will both have the right to take action under UCT laws;
ASIC will have the range of enforcement powers that are currently available to it to administer the UCT laws in the ASIC Act;
the UCT regime will not apply to a term to the extent it defines the main subject matter of the contract, sets the upfront price payable under the contract or is a term required, or expressly permitted by a law of the Commonwealth or a State or Territory;
the definition of an unfair term is that the term:
*would cause a significant imbalance in the parties rights and obligations under the contract;
*would cause detriment to a party if relied on;
*is not reasonably necessary to protect the legitimate interests of the party advantaged by the term. For the purposes of determining whether a term in an insurance contract is reasonably necessary to protect a legitimate interest, a term will be reasonably necessary if it reflects the underwriting risk accepted by the insurer.
the insurer will have the onus of proof that a term is reasonably necessary to protect their legitimate interests.

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Posted 24th December 2012 by David Jacobson in Insurance

December 12, 2012

Unclaimed Moneys Regulations

The following regulations have been made to implement the unclaimed moneys changes:

Banking Sector Legislation Amendment Regulation 2012 (No. 1) amends the Banking Regulations 1966 and the First Home Saver Accounts Regulations 2008 to specify conditions for a number of bank accounts or deposits and First Home Saver Accounts to become unclaimed moneys.
Retirement Savings Accounts Amendment Regulation 2012 (No. 3) amends the Retirement Savings Accounts Regulations 1997 to introduce a 12 month inactivity test for uncontactable members of a super fund. This will clarify the amendments to the unclaimed monies legislation, ensuring that accounts of uncontactable members, which have been active in a 12 month period, are not unnecessarily transferred to the ATO .

UPDATE
The RSA test stipulates that the RSA holder is uncontactable if and only if:
(i) either:
(A) the RSA provider has never had an address for the RSA holder; or
(B) 2 written communications have been sent, or, if the RSA provider so chooses, one written communication has been sent, by the RSA provider to the RSA holder’s last known address and returned unclaimed; and
(ii) the RSA provider has not received a contribution or rollover in respect of the RSA holder within the last 12 months of the RSA holder’s being an RSA holder.

Comlaw has also published a consolidated Superannuation (Unclaimed Money and Lost Members) Act 1999.

Background

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Posted 12th December 2012 by David Jacobson in Financial Services, Insurance, Superannuation, Tax

November 29, 2012

Insurance Contracts Amendment Bill

Treasury has released for consultation an exposure draft Insurance Contracts Amendment Bill 2013 which contains the measures previously contained in a 2010 Bill (which lapsed because of the election) with four proposed refinements.

The key measures in the Bill include:
•removing impediments to the use of electronic communication for statutory notices and documents;
•giving powers to the regulator, Australian Securities and Investments Commission, to take action to address breaches of the duty of utmost good faith by insurers, including in respect of claims handling; and
•making the duty of disclosure easier for consumers to understand and comply with, especially at renewal of household/domestic insurance contracts.

The proposed refinements address concerns raised by key stakeholders in relation to:
•the insured’s duty of disclosure;
•remedies of the insurer: life insurance contracts;
•the application of duty of disclosure changes; and
•bundled life insurance contracts.

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Posted 29th November 2012 by David Jacobson in Insurance

November 28, 2012

Unclaimed Moneys Bill passes House of Reps

The Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012 has been passed by the House of Representatives, with amendments relating to transitional procedures.

The Government has also announced details of new Regulations.

The Bill will now be sent to the Senate for passage this week. UPDATE: Passed by Senate on 29 November 2012.

UPDATE 6 December: Royal Assent given on 4 December 2012. Download the Act as passed.

The Bill will bring forward the time at which money is recognised under the relevant law as lost or unclaimed.

Amounts held by ADIs will become unclaimed moneys three years after the last deposit or withdrawal (other than fees or interest), instead of seven years. Amounts held by FHSA providers become unclaimed moneys three years after the last contribution or withdrawal (other than fees, taxes or interest). Amounts held by insurers will become unclaimed moneys three years after the policy matures, instead of seven years. Superannuation funds will transfer funds of unidentifiable members after 12 months instead of five years.

Transition
The amendments will provide more time to ADIs, FHSAs providers, life insurers and superannuation funds to implement the changes. They will now have until 31 May 2013 to report on and transfer lost accounts and other lost moneys to Australian Securities and Investments Commission or the ATO as appropriate.

ADIs are required to make a supplementary assessment and payment by 31 May 2013 in addition to the seven year assessment and payment currently required by 31 March 2013. The default assessment date for supplementary payment is 30 May 2013. However, ADIs could pick any date as their assessment date, between 31 December 2012 and 29 May 2013.

ADIs do not need to assess the seven-year unclaimed amount again in the supplementary assessment as they already did so in the original assessment. This means that the supplementary assessment does not need to include the seven-year unclaimed amount to avoid double counting.

The amendments include:

The date for assessment of unclaimed moneys for ADIs has been set as 31 December each year.
the minimum unclaimed money amount that is required to be reported and transferred to ASIC will be $100 or such other amount as may be prescribed

Regulations
To avoid capturing accounts unintentionally, the Government will introduce regulations so that children’s accounts will still need to be inactive for seven years before being treated as lost. In addition, regulations will specify that First Home Saver Accounts will be excluded until the requirement to make a deposit in four years has been met.

The regulations will also clarify that term deposits remain excluded and sub-accounts will continue to be treated as part of a parent account when determining whether there has been activity on an account in the last three years. Linked accounts (that is, an account that a customer must hold as a condition of holding another account with the same bank, building society or credit union) and mortgage offset accounts will be treated similarly.

The regulations will also clarify that accounts that are frozen by a court order or other legal requirement will also be excluded while they remain frozen and that the three year inactivity period will restart when the freeze is lifted.

The regulations will also clarify that superannuation accounts that have been active in the last 12 months, but where the member is uncontactable, will not be transferred to the ATO.

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Posted 28th November 2012 by David Jacobson in Corporations Act, Financial Services, Insurance, Superannuation

November 27, 2012

Directors’ insurance update

In our July 2011 article one of the questions we recommended directors ask their insurers was “Are directors entitled to payment as legal defence costs are incurred (or in advance) or only as reimbursement?”

We also observed that as a policy usually has an overall aggregate limit of liability covering all the different types of cover, unless there are sub-limits a high claim in one area of the policy in one year may limit the amount available in other areas of the policy in that year.

In Steigrad v BFSL 2007 Limited [2011] NZHC 1037 (the Bridgecorp decision) the NZ High Court decided that the Bridgecorp directors were prevented from having access to their company’s D & O policy to meet their defence costs because there were civil claims by investors relating to the collapse of Bridgecorp that were potentially in excess of the $20 million limit of the D&O policy. The D&O policy aggregated cover for liability and defence costs.

The Bridgecorp receivers argued that the full amount of insurance should come to the receivers. By pooling the policy proceeds, rather than separating how much could be allocated to defence costs and how much to liability, secured creditors had priority.

The directors argued that a claim could not be made on the policy until it was quantified, which could only happen after any defence.

The appeal of that decision to the NZ Court of Appeal has been heard and judgment reserved.

The decision is relevant to all directors’ liability insurance providing coverage for civil compensation in which defence costs are within the aggregate limit.

The case has also highlighted the issue of whether when there are either multiple claims and/or multiple claimants, an insurer may be precluded from making compensation payments until all claims have been resolved.

While there have been no similar cases in Australia different insurers have responded in different ways.

Directors should review their policies in advance of renewal.

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Posted 27th November 2012 by David Jacobson in Corporate Governance, Corporations Act, Insurance

November 16, 2012

Stronger Super Regulations – Insurance and MySuper

Treasury has released exposure draft Superannuation Legislation Amendment Regulation 2012 for consultation.

The regulations give effect to changes arising from legislation implementing MySuper and governance reforms. The proposed regulations will amend the Corporations Regulations 2001, Superannuation Guarantee (Administration) Regulations 1993, and Superannuation Industry (Supervision) Regulations 1994.

The remaining regulation changes for Stronger Super MySuper and Governance will be released in coming months.

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Posted 16th November 2012 by David Jacobson in Insurance, Superannuation