1. CHAPTER 21
INSURANCE
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2. INSURANCE CONTRACTS
In a contract of insurance, one party (the insurer) promises another party (the insured) to indemnify or compensate the insured if a specified event, the risk, occurs.
The consideration paid by the insured in return for this promise is called the “premium”.
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3. FOUR SPECIAL ELEMENTS OF INSURANCE CONTRACTS
Only persons with an insurable interest can make a contract with an insurer.
2. There is a duty of disclosure upon the insured to volunteer to the insurer all information relevant to the risk.
3. The principle of subrogation applies. An insurer who fully pays an insured’s claim inherits all the legal rights of the insured over the insured property.
4. The doctrine of indemnity prevents the insured from making a profit if the risk insured against takes place.
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4. CLASSIFICATION OF INSURANCE CONTRACTS
Indemnity insurance
the loss suffered is made good
the insured will be returned to the financial position that was held before the loss
An example of indemnity insurance is motor vehicle insurance, where the vehicle is insured for an agreed sum.
Contingency insurance
upon the happening of an event such as death, an agreed sum of money is paid
An example of contingency insurance is life insurance, where payment of an agreed sum would be made if a nominated event occurs.
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5. INSURABLE INTEREST
The insurer must have an insurable interest in the risk insured.
This means that the person must have a real interest in the preservation of the thing insured.
That person must stand to lose by its loss, theft or destruction.
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6. THE PRINCIPLE OF INDEMNITY AT WORK
Example
Chrissie has a house with a value of $300,000. If a fire completely destroys it, Chrissie’s loss is $300,000. There are several possibilities:
1. normal insurance
2. over insurance
3. double insurance
4. under insurance
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7. NORMAL INSURANCE
Chrissie insures the house for $300,000 (its value) with insurer A and pays premiums based upon insurance for $300,000. If:
a fire destroys the house
Chrissie should receive the full insurance of $100,000 from insurer A.
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8. OVER INSURANCE
Chrissie insures the house for $350,000 with insurer A and pays premiums based upon this. If:
a fire destroys the house
the principle of indemnity allows Chrissie to receive only $300,000 from insurer A; if Chrissie were to receive more, Chrissie would be making a profit on the loss
Chrissie cannot recover the additional premiums paid
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9. DOUBLE INSURANCE
Chrissie insures the house for $300,000 with insurer A and insures with insurer B for $150,000 and pays premiums on both.
The principle of indemnity allows Chrissie to receive only a maximum of $300,000 for the loss. Chrissie can claim all of it from insurer A, who can then recover a proper proportion from insurer B. A should pay two-thirds of the claim and B one-third.
OR Chrissie can claim $150,000 from insurer B and the balance from insurer A. Here, B can recover a proportion from A.
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10. UNDER INSURANCE
Chrissie insures the house for $150,000 with insurer A and pays premiums based upon insurance for $150,000. If:
a fire destroys the house
Chrissie should receive only $150,000 because that is the amount insured for BUT:
there could be a further problem for Chrissie. Some insurance policies contain an average clause, which makes the insured their own insurer for any amount under-insured. This is also called co-insurance.
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11. UNDER INSURANCE CONT’D
Suppose in Chrissie’s case that the house suffered only partial damage, the loss was $130,000 and the policy contained an average clause. The house is worth $300,000 and Chrissie was insured for $150,000.
An average clause would make Chrissie her own insurer for half the risk.
This means that Chrissie would have to carry the risk for half the loss, $65,000. The insurer would have to carry the risk for the other half of the loss ($65,000). Chrissie would only receive $65,000.
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12. SECTION 44 AND AVERAGE CLAUSES
Section 44 of the Insurance Contracts Act applies to average clauses in policies relating to residential properties or the contents of residential properties:
Where the amount covered by the policy is 80% or more of the value, an average clause is ineffective
Where the coverage is less than 80%, the claim is calculated according to a formula:
A S P
A = $ amount of loss/damage
S = $ sum insured under the contract
P = 80% of value of property
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13. NEW DEVELOPMENTS IN INSURANCE IN AUSTRALIA
Passage of Financial Services Reform Act 2001 (FSRA) means that brokers and agents must hold a financial services licence with ASIC.
A consortium of insurers have formed “the Hub” to give insurance agents who join it access to online centralised compliance with FSRA requirements.
An Act, the Terrorism Insurance Act 2003 (Cth), which was passed to deal with problems generated by the September destruction of the World Trade Centre in New York, seeks to re-establish a reinsurance pool of $300 million which will be funded by an additional premium on insurance of commercial buildings.
The Unfair Contracts regime (introduced on 1 July 2010) does not apply to insurance contracts: see AGBL, Ch 21 at [21.110].
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14. INSURANCE CONTRACTS AMENDMENT BILL 2010
There are a number of proposed changes to the present Act, including:
Changes to the duty of disclosure
Changes to ASIC’s powers
Remedies for insurers
Third party remedies
Subrogation
Electronic communication
For more detail, see AGBL, Ch 21 at [21.80].
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15. INDUSTRY DISPUTE RESOLUTION
A number of separate bodies look after dispute resolution in relation to insurance matters:
The Financial Ombudsman Service - FOS
Superannuation Complaints Tribunal
Insurance Brokers Disputes Ltd – IBD
ASIC
APRA
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