Duty to take reasonable care

From 27 September 2021, applicants for life insurance (and indeed all types of ‘consumer insurance contracts’) will no longer be bound by a Duty of Disclosure. Instead, customers entering into a consumer insurance contract will have a duty ‘to take reasonable care not to make a misrepresentation’. 

The purpose of the original Duty of Disclosure was to protect customers in an insurance pool by ensuring that new customers entering the pool do so on the price and terms which accurately reflected their risk.

In assessing the current duty of disclosure, the Financial Services Royal Commission found the existing approach to disclosure is no longer relevant for modern consumer contracts of insurance. It was concluded that the duty does not recognise the breadth and depth of the gap between what a consumer knows and what an insurer knows is relevant.

The Financial Services Royal Commission concluded that the duty to take reasonable care not to make a misrepresentation to an insurer is more appropriate for consumer contracts of insurance and is substantially less complex than the current disclosure duty.

The new duty to take reasonable care places a greater obligation on insurers to collect the information they need, rather than requiring applicants to guess what information might be important to an insurer.

As such this is a positive development, which should strengthen customer - and adviser - confidence that insurers will honour their promise and be there when it matters most, claim time.

From a practical perspective, this change will be reflected in documents currently containing the Duty of Disclosure, including PDSs, application forms and underwriting questionnaires.

When applying for insurance, there is a legal duty to take reasonable care not to make a misrepresentation to the insurer before the contract of insurance is entered into. To meet this duty, each person whose life is to be insured must also take reasonable care not to make such a misrepresentation.

A misrepresentation is a false answer, an answer that is only partially true, or an answer which does not fairly reflect the truth.

This duty also applies when extending or making changes to existing insurance, and reinstating insurance.

Not meeting your legal duty can have serious impacts on your insurance. Your cover could be avoided (treated as if it never existed), or its terms may be changed. This may also result in a claim being declined or a benefit being reduced.

Please note that there may be circumstances where we later investigate whether the information given to us was true. For example, we may do this when a claim is made.

When you apply for life insurance, we conduct a process called underwriting. It’s how we decide whether we can provide cover, and if so on what terms and at what cost.

We will ask questions we need to know the answers to. These will be about personal circumstances, such as health and medical history, occupation, income, lifestyle, pastimes, and current and past insurance of each life to be insured. The information given to us in response to our questions is vital to our decision.

When you apply for insurance benefits through a superannuation fund or ask to extend or make changes to existing insurance benefits, the fund trustee passes on your personal information to us.  You also therefore need to take reasonable care not to make a misrepresentation when providing this information to the fund trustee.