The double-edged sword of adviser duty

From 1984, when the Insurance Contracts Act (“ICA”) was passed, consumers applying for life insurance cover were required to comply with a Duty of Disclosure. The need to comply with this Duty carried over to when a consumer had other dealings with an insurance company that involved an underwriting assessment, as will be detailed later in this article.

Under the Duty of Disclosure, which appeared as Section 21 of the ICA, the consumer was required to disclose to the insurer every matter they knew, or a reasonable person in their circumstances could be expected to know, to be relevant to the decision of the insurer to accept the risk for which application was being made and, if so, on what terms.

The Duty, which continued until the relevant contract of insurance was entered into, took into consideration:

• The nature and extent of the applied for insurance; thus, relevance for income protection insurance cover might differ from that for term insurance; and
• The class of person who would normally be expected to apply for insurance cover of that kind; thus, the disclosure bar would be higher for a financial adviser as distinct from someone who had less commercial understanding of insurance matters.

The ongoing concern was, however, that the responsibility was on the consumer to think like an insurance underwriter in order to assess relevance.

Further, the Duty could extend beyond the questions asked in the application form, for example, if the consumer was a Viking and engaged in village pillage, this arguably required disclosure even if the direct question was not asked.

In its February 2019 report, the Financial Services Royal Commission concluded that the Duty of Disclosure did not recognise the gap in knowledge between what an insurer knows is relevant to the assessment of an insurance risk and what a consumer knows is relevant.

The Commission recommended, and the Government took up the recommendation, that the Duty of Disclosure be replaced with a Duty to Take Reasonable Care Not to Make a Misrepresentation. This became Section 20b of the ICA

The Duty to Take Reasonable Care placed the burden on the insurer to ask questions in such a way as to elicit the information it needed to make the relevant assessment; the consumer was no longer required to “guess” what was relevant.

In part, the Duty reads:

“ …… an insured has a duty to take reasonable care not to make a misrepresentation to the insurer before the relevant contract of insurance is entered into”

Crucially, the Duty to Take Reasonable Care, like the Duty of Disclosure, applies until the contract is entered into.

For a contract to exist, there needs to be:

• An offer, for example, the completion of an application form or the request for a change to an existing policy that requires underwriting to undertaken;
• Acceptance of the offer; for example, the insurance underwriter accepting the risk or the applicant accepting the insurer’s counteroffer of a loading or exclusion;
• Consideration; payment of the initial or relevant premium; and
• Intent; the above actions occur with the intention of putting insurance cover in place or making the requested change.

To the extent the above is correct, arguably, once these requirements are satisfied, it could be asserted that the risk or revised risk under the policy starts and the Duty ends.

Notwithstanding this, insurers tend to represent that the relevant Duty continues until the policy document or revised policy schedule has been issued to the policy-owner. Pragmatically, there may be little time difference between the two events but, as unlikely as it may be that a material issue will arise in that window, the old Latin maxim Crapus Happens cannot be denied.

It is not the place of this article to enter into a legal debate about the merit or otherwise of each position other than to suggest that if a situation arises where the date of “entering into the contract” is relevant and the timeframes are tight, obtaining legal input may hold merit.

There is further merit when considering the above to give consideration to any “delays”, unreasonable or otherwise, that may have occurred during the assessment process.

Returning to the Duty to Take Reasonable Care, it continues:

“whether or not an insured has taken reasonable care …… is to be determined with regard to all the relevant circumstances ….”

The Act lists some examples of relevant circumstances, including:

• The type of contract and its target market, thus the reasonable bar might be higher for a product targeted at professional occupations;
• The explanatory material produced by the insurer; if material is clear, the reasonable bar would again be higher;
• How clear and specific were the questions asked; thus, compound, lengthy or confusing questions might result in the reasonable bar being lower; and
• Whether an adviser was involved; if an adviser was involved, the reasonable bar might be higher.

An assessment of the relevant circumstances might be such that a failure to disclose was not considered to be a breach of the relevant Duty. In saying this, however, it would be somewhat foolhardy of a consumer to intentionally seek to test this position especially in regard to the Duty to Take Reasonable Care which (it is understood) has not yet been legally tested in Australia.

The original Duty of Disclosure was amended on several occasions with the most material occurring in 2013 and 2014. These changes impacted the rights of an insurer to take corrective actions arising out of breaches of the Duty.

The amended Duty of Disclosure then applied until on or around October 2021 when the Duty to Take Reasonable Care came into effect. The phrase “on or around” applies because, whilst the new Duty was designated to apply from October 2021, some insurers made the change at an earlier date.

When the question is asked about whether a consumer has met the relevant Duty, the first thing to identify is which is the relevant Duty with the answer being dictated by when underwriting was required. There are numerous occasions when underwriting may be required, including:

• An application is made for new insurance cover
• A Declaration of Continued Good Health is required due to the delayed completion of an underwriting assessment;
• Amended terms such as an exclusion or loading are offered;
• There is an increase or reinstatement of cover;

and sometimes when there is an alteration in cover such as:

• The premium type changes from level to stepped;
• The removal of an exclusion;

and for income protection insurance, a reduction in the waiting period or increase in the benefit period.

Bearing the above in mind, it is quite possible that part of a consumer’s cover may be subject to the Duty of Disclosure and part to the Duty to Take Reasonable Care.

Another relevant question is what the client’s responsibility is if their circumstances materially change between when disclosure is made and the “risk” has been entered into by the insurer.

Under the Duty of Disclosure, it was well known that the insurer had to be advised but the Elephant in the Room is whether the same applies for the Duty to Take Reasonable Care.

This question was put to a solicitor recently. The response was less than definitive ie the suggestion was that if there was a change in regard to information already provided, for example, the client had answered “Yes” to a particular health event and that condition had deteriorated, the insurer should be advised but if something new arose, it was arguably not necessary to advise the insurer.

The conundrum for the adviser is what advice should be given to the client. If the adviser indicates the insurer should be advised and this proves to be erroneous advice, the adviser could be risk exposed but the opposite could also apply.

Again, it is not the place of this article to enter into a legal debate, but the suggestion is that every effort should be made to ensure speedy completion of the assessment process but if there is a material change in the consumer’s circumstances, and the Duty to Take Reasonable Care applies, the adviser should seek qualified advice prior to instructing the client about what to do in regard to informing the insurer.

Having considered various matters related to disclosure, yet another question arises

“What should an adviser do if they become aware, or they have a reasonable suspicion, that there has been a failure to meet the Duty to Disclose or Take Reasonable Care?

The answer is “it depends” on several factors:

• Which duty applied at the time when disclosure was made – refer above;
• When the adviser become aware of an issue in regard to disclosure, for example within or more than 3 years after the relevant Duty applied; and
• For whom was the adviser acting when disclosure was made and potential non-disclosure was discovered.

The options for the last are the adviser was:

• Acting on behalf of the insurer;
• Acting on behalf of the consumer:
• Not acting for either and therefore acting in the public interest; and
• A mix of the above, for example, a different adviser may be involved on each occasion with different circumstances applying for each.

Again, the above machinations do not give rise to a clear and consistent way to proceed.

Within a business environment, a financial adviser has several compelling priorities with the main and obvious ones being their fiduciary duty to the client but similarly the duty to ensure the continuance of a “healthy” business. In the same way that airline staff direct that people put their own mask on first, an adviser will be of little use to clients if their business is financially bereft.

Notwithstanding the above, there is one other priority which both overrides and encompasses the previous two priorities, and that is Safety.

No matter how well qualified, well intentioned and well prepared the adviser might be, mistakes can happen and sometimes mistakes do not happen but a client and/or their solicitor may believe one has happened.

The purpose of this article is therefore not to bamboozle or make relevant considerations overly complex but rather, in the interests of safety, to encourage hesitation and contemplation so that relevant issues can be identified and appropriate actions taken including, if necessary, the seeking of qualified legal advice.

In this way, the call to Do Your Duty will better ensure the adviser does so both to the client and also to the continuance of a healthy business.

MANDATORY DISCLAIMER – The author of this article is not legally qualified. As such, the article should not be taken as providing legal advice.