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1 Introduction

The handling of insurance claims can be a long and complex process, involving factual investigations, consideration of the application of policy conditions, the engagement of external service providers and negotiated forms of settlements. Unsurprisingly, the claims handling process can frequently give rise to disputes between policyholders expecting the timely settlement of their claim, and insurers being mindful of managing their liabilities within the scope of their contractual obligations. This chapter discusses how insurance supervisory authorities in the United Kingdom and in Australia have used a variety of approaches over the recent years to regulate the handling of insurance claims to ensure fairness for policyholders.

Section 2 reviews the relevant international standards for regulating the handling of insurance claims, with a particular focus on the Insurance Core Principles developed by the International Association of Insurance Supervisors which articulate the standards that national supervisors should implement to ensure a fair balance between the expectations of insurers and policyholders. From this basis, Sect. 3 examines the legal framework for regulating insurance claims handling in the United Kingdom under the various rules developed by the Financial Conduct Authority (FCA). It discusses how the FCA has worked to ensure fair outcomes for consumers through both thematic reviews to encourage insurers to improve their practices, and formal enforcement action involving the imposition of financial penalties against a major insurer in 2018.

The remainder of the chapter discusses the regulation of insurance claims handling in Australia. Section 4 provides an overview of the Australian legislation relating to claims handling and the key cases in which insurers’ claims handling practices have been challenged. It then discusses the functions of the Australian Securities and Investments Commission (ASIC) in regulating the insurance industry, with a particular focus on the key findings from ASIC’s reviews of insurers’ claims handling practices. Section 5 examines the significant reforms to the regulation of insurance claims handling resulting from the recommendations of the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (FSRC). These include bringing insurance claims handling within the ambit of being a ‘financial service’; making industry codes of practice legally enforceable and extending the existing unfair contract terms regime to insurance contracts. As well as considering how these new measures might apply in practice, Sect. 5 also reviews two recent cases where ASIC has taken action against insurers in the courts for unsatisfactory claims handling practices. Section 6 draws together the key observations in the preceding parts and concludes that the approaches to regulating insurance claims handling in Australia and the United Kingdom could provide a model for similar jurisdictions to consider.

2 International Standards for Regulating the Handling of Insurance Claims

At an international level, a good starting point when examining national arrangements for the regulation of insurance claims handling are the Insurance Core Principles (ICPs) which have been progressively developed by the International Association of Insurance Supervisors (IAIS) since its establishment in 1994.Footnote 1 The IAIS ICPs provide benchmarks on the key elements that should be addressed in the national supervisory regimes to ensure both financially sound insurance industries and adequate levels of consumer protection for policyholders. Each of the 26 ICPs include further guidance on the recommended measures to implement the relevant principles.

ICP 19 ‘Conduct of Business’ envisages that ‘The supervisor requires that insurers and intermediaries, in their conduct of insurance business, treat customers fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied.’. ICP 19.0.2 elaborates on this general statement by explaining that ‘fair treatment of customers’ encompasses achieving outcomes such as: (inter alia) ‘dealing with customer claims, complaints and disputes in a fair and timely manner’.

ICP 19.10 addresses claims handling and envisages that supervisors in each jurisdiction will require insurers to handle claims in a timely, fair and transparent manner, and to have dispute resolution policies and procedures in place. To achieve these benchmarks, the guidance to ICP 19.10 on effective claims handling recommends that insurers should maintain written documentation on their claims handling procedures; clearly inform claimants about procedures, formalities and common timeframes for claims settlement; ensure that claimants are given information about the status of their claim in a timely and fair manner; and clearly explain in comprehensible language claim-determinative factors (such as depreciations, discounting or negligence) that could result in claims being denied in whole or in part.Footnote 2

The guidance to ICP 19.10 on claims handling goes on to explain that a fair claims assessment process requires the avoidance of conflicts of interest as well as appropriate competence and ongoing training of the staff involved, with the competence requirements for claims handlers likely to differ depending on the types of insurance policies involved.Footnote 3

In relation to claims disputes, the guidance on ICP 19.10 emphasises that dispute resolution procedures should be fair, impartial and transparent with procedural complexities minimised as far as possible; and that staff handling claims disputes being appropriately qualified and experienced in claims handling.Footnote 4 Similar recommendations are included in the European Insurance and Occupational Pensions Authority’s Guidelines on Complaints Handling by Insurance Undertakings.Footnote 5

The guidance on ICP 19.10 also recommends that if claims handling processes are outsourced (either in part or in full), supervisors should require insurers to maintain close oversight and ultimate responsibility for fair and transparent claims handling and claims dispute resolution.Footnote 6 Similar recommendations on appropriate oversight are contained in ICP 19.11 which addresses situations where intermediaries are involved in claims handling processes.

Section 3 below shows how the legal framework for regulating the handling of insurance claims in the United Kingdom reflects the standards envisaged in ICP 19.10, and Sect. 4 explains how because of recent reforms Australian legislation governing the handling of insurance claims now also adheres to the principles set out in ICP 19.10.

3 The Regulation of Insurance Claims Handling in the United Kingdom

In the United Kingdom, since 1 December 2001,Footnote 7 the Financial Services and Markets Act 2000 (the FSMA) has governed the conduct of insurance businesses. Between 2001 and April 2013, the FSMA was administered by the Financial Services Authority. In the aftermath of the Global Financial Crisis, the regulatory functions of the Financial Services Authority were divided between two new agencies. The Prudential Conduct Authority assumed responsibility for the prudential regulation of the UK’s financial sector (including the insurance industry) and the Financial Conduct Authority (FCA), assumed responsibility for regulating the conduct of financial services firms.Footnote 8

The FSMA provides the FCAFootnote 9 with wide powers to make rules, issue codes, to give guidance and to develop rules, policy and guidance to regulate financial markets and services in the UK. The FSMA prevents a person from carrying on a ‘regulated activity’ unless the person is authorised by the FCA or an ‘exempt person’.Footnote 10

The FCA Handbook provides the primary re-statement of relevant rules, codes and general guidance in force at a given time, and consists of several ‘blocks’. These ‘blocks’ in turn contain a number of ‘source books’ on specific regulatory requirements, which contain both legally enforceable rules (denoted by an ‘R’ after the relevant rule) and regulatory guidance (denoted by an ‘R’ after the relevant principle).Footnote 11

The Insurance Conduct of Business Sourcebook (ICOBS) sets out the obligations of firms that carry on a business of insurance in the United Kingdom. ICOBS 8 sets out the obligations of insurers in relation to claims handling. ICOBS 8.1.1R requires insurers to (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress; (3) not unreasonably reject a claim (including by terminating or avoiding a policy); and (4) settle claims promptly once settlement terms are agreed.

For contracts agreed before the commencement of the Insurance Act 2015 (UK) on 1 August 2017, ICOBS 8.1.2R explains that the rejection of a consumer policyholder’s claim may be unreasonable unless there was evidence of fraud; non-disclosure or misrepresentation of a fact that was material to the risk to be transferred; or breach of a warranty or condition under the contract.

For contracts agreed after 1 August 2017, ICOBS 8.1.2AR explains that the rejection of a consumer policyholder’s claim may be unreasonable unless the consumer made a qualifying misrepresentation within the meaning of the Consumer Insurance (Disclosure and Representations) Act 2012 (UK); or for claims subject to the Insurance Act 2015 (UK), where the consumer breached a warranty or engaged in fraudulent conduct.

The FCA’s Dispute Resolution: Complaints sourcebook sets out the requirements for firms to have arrangements in place for the handling of complaints by consumers. DISP 1.3.1R requires firms to establish, implement and maintain effective and transparent procedures for the handling of complaints. DISP 1.4.1R elaborates on these obligations, by requiring firms to investigate and assess complaints fairly, consistently and promptly; to offer redress or remedial action where appropriate; and to clearly and fairly explain its assessment of the complaint to consumers in a manner that is not misleading. The DISP sourcebook includes further guidance for firms to meet these mandatory requirements.

At a broader level, the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) sourcebook places responsibility on the directors and senior managers of firms to take reasonable care to ensure compliance with applicable requirements and to implement appropriate risk management arrangements.

Over the recent years, the FCA has undertaken several reviews of British insurers’ claims handling practices. In May 2014, the FCA published the report of its thematic review of insurers’ management of claims in the household and retail travel sector. This review was based on both consumer research and the FCA’s engagement with the claims handling staff of insurers. Whilst consumer research for this revealed that consumers levels of satisfaction with their claims experiences were overall reasonably high, the review highlighted some issues for future improvement by insurers. These included working to ensure that policy documentation was clear and understandable to consumers (particularly around policy exclusions), and keeping consumers informed during the claims process (particularly where third party providers such as builders and loss adjusters were involved).Footnote 12 This thematic review also involved a survey of members of the Chartered Insurance Institute about the members’ perceptions of insurers’ practices for handling household and travel insurance claims. Whilst responding members indicated that insurers were adequately informing customers about how to make claims and providing relatively straightforward claims notification processes, the survey highlighted several areas for insurers to improve their claims handling practices. These included keeping claimants informed throughout the claims process; clearly informing claimants about the coverage of their policies; proactive management of third-party suppliers (such as tradespersons); and clearly informing claimants about the evidence needed to support their claims.Footnote 13

A year later in May 2015, the FCA published the findings of its thematic review of the handling of claims lodged by policyholders in the Small and Medium-sized Enterprise (SME) sector. Whilst noting that claims by SMEs were more complex than those examined it its earlier review of household and travel claims, the FCA identified several areas for insurers to improve their claims handling practices. These included many SME claimants reporting a lack of clarity about who was responsible for managing their claims (particularly where external providers such as loss adjusters were involved), and poor communication about the progress of their claims.Footnote 14

The FCA has a wide range of enforcement powers to respond to breaches of its rules, which are set out in its Enforcement Guide. One of the FCA’s enforcement options is its power under s 206(1) of the FSMA to impose financial penalties where it determines that an authorised person has contravened a requirement under the FMSA. The FCA’s approach to exercising its powers to impose financial penalties is set out in Chapter 7 of its Enforcement Guide, and its policy on the determining the appropriate quantum of financial penalties is set out in Chapter 6 of its Decision Procedure and Penalties Manual (DEPP).

The application of these sanctions was illustrated on 29 October 2018 when the FCA imposed a financial penalty of £5,280,800 on Liberty Mutual Insurance Europe SE (Liberty) following its investigation into Liberty’s failure to exercise appropriate oversight of claims on mobile phone insurance policies which it had underwritten between 2010 and 2015.

By way of background, in 2010 Liberty entered into an arrangement to underwrite mobile phone insurance, with a third partyFootnote 15 providing this insurance to retail customers in the UK. Under this arrangement, the third party managed the administrative functions associated with the mobile phone insurance on Liberty’s behalf, including the handling of claims and complaints. However, as the authorised insurer, Liberty retained primary responsibility for ensuring that these outsourced claims and complaints handling arrangements complied with regulatory requirements.

Following numerous complaints by customers to the UK’s Financial Ombudsman Service, an investigation by the FCA determined that Liberty had failed to exercise appropriate oversight of the third party’s handling of claims on the mobile phone insurance policies. The FCA’s investigation found that around 6000 customers had been unfairly denied cover for claims for loss or theft if they had failed to comply with a requirement to download and install a Mobile Rescue App; that in many of the 3171 claims declined on suspicion of fraud there had been insufficient evidence to support such suspicions due to an overreliance on voice analytics software; and that approximately 1707 customers had been unfairly denied cover through the inappropriate use of a policy exclusion for unattended loss. Based on these findings, the FCA investigation determined that Liberty had failed to comply with its obligations under ICOBS 8.1.1R to handle claims promptly and fairly, and to not unreasonably reject claims.

The FCA also found that Liberty had failed to ensure that the third party had adequate complaint handling processes in place, noting with concern that the great majority of the 1627 customers who complained about denials of cover for late notification of their claim or for failure to install the Mobile Rescue App had the original decision overturned. These failings meant that Liberty had failed to adhere to its obligations DISP 1.3.1R and 1.4.1R discussed above, as well as its obligations under SYSC 3.1.1R, which requires firms to establish and maintain appropriate systems and controls.Footnote 16

More recently, on 19 March 2020, the FCA outlined set out its expectation of firms when handling insurance claims in the context of the COVID-19 pandemic. Emphasising the importance of treating customers fairly, the FCA made clear that it expected firms to clearly communicate policy exclusions, and to take a more flexible approach to motor and home property claims given the increased number of consumers working from home.Footnote 17

In summary, this part has shown how in the FCA is empowered to regulate the handling of insurance claims in the United Kingdom in accordance with the standards envisaged in ICP 19.10. The following part of the chapter and discusses how significant reforms in Australia now provide for the effective regulation of all parties involved in the handling of insurance claims in accordance with the ICP 19.10 standards.

4 The Evolution of the Australian Legal Framework Relating to Insurance Claims Handling

4.1 Australian Insurance Contract Law Relating to Claims Handling

Since 1 January 1986, most classes of insurance contracts in Australia have been governed by the Insurance Contracts Act 1984 (Cth) (the ICA).Footnote 18 The ICA regulates the relationship between insurers and insuredsFootnote 19 throughout the life cycle of a contract of insurance. It includes provisions governing pre-contractual disclosure, the ability of insurers to refuse (or limit their liability) when determining claims, and the circumstances under which insurers may cancel contracts.

Section 13 of the ICA imposes duties of utmost good faith on both parties to insurance contracts. Whilst the meaning of the generalised duty of utmost good faith is challenging to conclusively define—and will depend on the circumstances of each case—it has been noted to encompass notions of fairness, reasonableness and community standards of decency and fair dealing, and require both parties to an insurance contract to have due regard to the interests of the other party.Footnote 20

A leading Australian insurance lawyer has helpfully described the duty of utmost good faith under the ICA as consisting of four quadrants.Footnote 21 The first of these quadrants concerns the insured’s pre-contractual obligations, which under Part IV of the ICA require the insured to discloseFootnote 22 (and not misrepresentFootnote 23) information that is relevant to the risk to be transferred. The ICA includes specific Part IV of the ICA also provides remedies for insurers in cases where the insured has failed to comply with the duty of disclosure.Footnote 24 The second quadrant is the insurer’s pre-contractual obligations, with Part IV of the ICA requiring the insurer to clearly inform the insured in writing of the duty of disclosure before the insured enters into an insurance contract.Footnote 25

The third quadrant of utmost good faith focuses on the insured’s post-contractual obligations after an insurance policy comes into effect. Section 54 of the ICA provides remedies to insurers that have been prejudiced by the insured’s failure to comply with terms of an insurance contracts—which may involve the insurer reducing its liability in respect of the insured’s claim or avoiding the claim in its entirety. Section 56 of the ICA also provides remedies to the insurer in the event of fraudulent claims. The fourth quadrant of utmost good faith relates to the insurer’s post-contractual conduct—which in most cases concerns the insurer’s conduct in handling claims (the focus of the present chapter).

Section 14 of the ICA prevents parties to a contract of insurance from relying on a provision of the contract except in the utmost good faith, and to date s 15 of the ICA has provided that relief under other legislation does not apply to contracts of insurance governed by the ICA. Whilst to date this has meant that the unfair contract terms regime under the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act)—which renders void unfair contractual terms that cause a significant imbalance in the contracting parties’ rights and obligations—has thus far not applied to insurance contracts, as Sect. 5.2 below discusses the recommendations by the 2019 FSRC for extending the unfair contract terms regime to apply to insurance contracts subject to the ICA.

Over the recent years, there have been an increasing number of cases in which aggrieved policyholders have challenged the decision-making processes of insurers in refusing their claims. In several cases aggrieved policyholders have questioned the insurers’ adherence to the duty of utmost good faith under s 13 of the ICA—particularly in cases where the insurers were not open and frank in their dealings with the insureds. The decisions of Australian courts on such challenges have progressively clarified the standards expected of insurers when determining claims.

The leading Australian decision on s 13 of the ICA is CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36. During 1999 two representatives of the financial services company AMP had acted outside the terms of their respective authorities, resulting in losses for their clients. AMP then faced pressure from the corporate regulator ASICFootnote 26 to devise a protocol for settling claims by the affected clients in a timely manner. However, AMP’s professional indemnity policy with CGU prevented it from admitting liability or settling claims without obtaining the CGU’s written consent, and also required AMP’s liabilities to clients (and hence its right to indemnity under the policy) to be conclusively established by advice from a senior counsel. Whilst CGU indicated through its lawyers that it ‘agreed in principle’ to the protocol for compensating the affected clients, it also advised that it reserved its decision on its liability to indemnify AMP and advised AMP to act as a ‘prudent uninsured’. After almost two years of delays and changes of lawyers, CGU refused AMP’s claim. Following a succession of legal proceedings, the majority of the High Court of Australia upheld CGU’s refusal of AMP’s claim due to its failure to comply with the policy’s requirement to obtain CGU’s consent before settling the clients’ claims. However, in his dissenting judgement Kirby J was highly critical of CGU’s failure ‘to act with clarity, candour and decisiveness’,Footnote 27 as well as what he characterised as the ‘dilatory, prevaricating, confused, uncertain, inattentive and misleading way in which, over two years, CGU, with its four successive firms of solicitors, delayed and postponed its decision to deny indemnity’.Footnote 28 Whilst the High Court found by a 4:1 majority that CGU had not breached its duty of utmost good faith in its refusal of AMP’s claim, in other cases Australian insurers have been found to have breached this duty in their determination of claims.

In the field of Total and Permanent Disability (TPD) insurance there have been several cases where insurers have been found to be in breach of their duty of utmost good faith in determining claims. In Australia TPD insurance policies are commonly arranged on a ‘group insurance’ basis by trustees of superannuation funds to provide benefits for incapacitated members of the fund. Whilst such claimants are not parties to the insurance contract arranged between the superannuation fund trustee and the insurer, Australian courts have recognised that insurers’ duties of utmost good faith also extend to third party claimants.Footnote 29 This position was confirmed through amendments to the ICA in 2013,Footnote 30 which extended insurers’ duties of utmost good faith to third party beneficiaries.Footnote 31

Whilst TPD definitions vary between insurers, one typical example of the criteria that must be satisfied for TPD benefits to be payable is that ‘the Insured Person is unable to follow their usual occupation by reason of an accident or illness for six consecutive months and in our opinion, after consideration of medical evidence satisfactory to us, is unlikely ever to be able to engage in any Regular Remuneration Work for which the Insured Person is reasonably fitted by Education, Training or Experience’.Footnote 32

Determining claims for TPD benefits can be a complex process for insurers, requiring the evaluation of sometimes conflicting evidence from medical specialists, allied health professionals, investigative surveillance and labour market analyses to decide whether a claimant has satisfied the applicable TPD definition. If an insurer’s decision-making process is found to be unreasonable, the court may determine the TPD claim on the available evidence.Footnote 33 Examples of claims handling processes that have been found to breach of the duty of utmost good faith have included failing to inform an assessing doctor of the criteria that a claimant would need to satisfy to qualify for TPD benefits, and refusing a request by the claimant (an accountant who had suffered a stroke) for access to the documentation relied upon to declining his claim;Footnote 34 failing to inform a manual worker claiming TPD benefits for a back injury of adverse reports from an assessing doctor and private surveillance agents that were relied upon to refuse his claim;Footnote 35 failing to inform a manual worker with limited English about the information that would be required to substantiate his claim, and failing to give appropriate consideration to a specialist medical report that was favourable to the claimant;Footnote 36 and providing a claimant (a police officer claiming for psychological injuries) with only 14 days to respond to a ‘procedural fairness’ letter enclosing the full volume of information relating to her claim that had been collected in the three years since she had lodged her claim, after having failed to respond to three requests by her solicitors and the trustee of her superannuation fund to release medical reports relating to her claim.Footnote 37

Whilst these decisions finding insurers to be in breach of the duty of utmost good faith through their deficient claims handling practices have resulted from civil challenges by policyholders to the refusal of claims by insurers, the following sections outline how in in more recent years the regulators of the Australian insurance industry have become increasingly active in their monitoring of insurers’ claims handling practices.

4.2 The Powers of the Australian Insurance Industry Regulators

There are two key regulators of the Australian insurance industry, which have existed in their present form since 1998.Footnote 38 The first of these is the Australian Securities and Investments Commission (ASIC), which has responsibility for the general administration of the ICA.Footnote 39 ASIC’s wide range of responsibilities include the regulation of Australian companies, financial markets and financial services.Footnote 40 The focus of ASIC’s regulation of the Australian financial services industry (which as explained below, encompasses most forms of insurance) is on consumer protection, ensuring accurate disclosure for consumers and investors, and licensing providers of financial services. As also explained below, ASIC has a wide range of powers to investigate and take enforcement action in response to suspected non-compliance with the various laws that it administers, and it also publishes extensive regulatory guidance for the sectors that it oversees.Footnote 41

The other regulator of the Australian insurance industry is the Australian Prudential Regulation Authority (APRA). In comparison to ASIC’s focus on consumer protection, APRA focuses on the prudential regulation of Australian financial institutions (including general and life insurers) to ensure they remain financially viable and able to satisfy their obligation to policyholders. As part of this prudential regulatory role, the Financial Sector (Collection of Data) Act 2001 (Cth) enables APRA to collect and analyse data from the financial institutions it supervises on an ongoing basis. As explained below in Sect. 4.3 in recent years ASIC has worked collaboratively with APRA by drawing on its data collection and analysis capabilities in its reviews of the Australian insurance industry.

Chapter 7 of the Corporations Act 2001 (Cth) (the Corporations Act) sets out an over-arching consumer protection regime for the Australian financial services industry. Many of the key provisions of Chapter 7 are expressed broadly, with numerous ‘carve-outs’ as exceptions in both the Corporations Act and the Corporations Regulations 2001 (Cth).Footnote 42 A foundational term in Chapter 7 is the concept of a ‘financial product’, defined in s 763A as ‘a facility through which, or through the acquisition of which a person makes a financial investment; manages a financial risk, or makes a non-cash payment’. Section 763C includes ‘taking out insurance’ as an example of ‘managing a financial risk’, and s 764C includes ‘contracts of insurance’ as ‘financial products’. Section 765A provides exceptions to these general definitions by specifying the forms of insurance that are not classified as ‘financial products’ under Chapter 7.Footnote 43

Proceeding from these definitions of ‘financial product’, s 766A explains that a person ‘provides a financial service’ if they (inter alia) provide financial product advice,Footnote 44 or deal in a financial product. As this definition captures the busines activities of most forms of insurance in Australia, under s 911A general and life insurers must hold an Australian Financial Services (AFS) Licence issued by ASIC.Footnote 45

Section 911A imposes wide-ranging obligations on AFS licensees, which include ensuring that financial services are provided efficiently, honestly and fairly; complying with financial services laws; and ensuring that representatives are adequately trained and are competent to provide the relevant financial services.Footnote 46

When financial services are provided to consumers (who are classified as ‘retail clients’ under the Corporations ActFootnote 47), s 912A(1)(g) requires AFS licensees to have in place systems for resolving disputes. These must include internal dispute resolution (IDR) arrangements that comply with the standards made by ASIC,Footnote 48 and in cases where a firm’s IDR processes do not result in the resolution of the consumer’s dispute, external dispute resolution (EDR) arrangements. The Australian Financial Complaints Authority (AFCA) scheme is the sole EDR body for resolving consumer disputes in the financial services industry. The AFCA commenced operations on 1 July 2018 after a review of Australia’s financial services dispute resolution framework had recommended the replacement of the three previous EDR bodiesFootnote 49 (which were overlapping and inconsistent) with a single unified body for resolving consumer disputes.Footnote 50 The AFCA dispute resolution process (which is funded by the compulsory levies on AFS licenseesFootnote 51) is free to consumersFootnote 52 and seeks to resolve disputes firstly through informal methods such as negotiation, or through a conciliation conference.Footnote 53 If these methods fail to resolve the complaint, AFCA may then proceed to make a final determination in relation to the complaint, which is binding on the AFCA member.Footnote 54 Under Part 7.10A of the Corporations Act, AFCA is subject to oversight by ASIC and must report matters including serious contraventions of the law and systemic issues.Footnote 55

A significant focus of ASIC’s consumer protection efforts is on ensuring complete and accurate disclosure about financial products when these are sold retail clients. In most cases, a Product Disclosure Statement which clearly sets out the key terms and conditions of the insurance contract, including the policy wording.Footnote 56 must be provided to the retail client either by the insurer,Footnote 57 or by their insurance broker or financial adviser.Footnote 58 ASIC utilises a risk-based approach to monitor the adequacy of Product Disclosure Statements in informing consumers about the terms and conditions of financial products.Footnote 59

Chapter 7 of the Corporations Act includes provisions that prohibit dishonest conductFootnote 60 and misleading or deceptive conductFootnote 61 in relation to financial products or financial services. These provisions are paralleled in the ASIC Act, which also includes prohibitions on misleading or deceptive conductFootnote 62 and false or misleading representationsFootnote 63 in relation to financial services.

ASIC utilises a range of measures to regulate the financial services industry, including engagement with the industry and other stakeholders, consumer education, the development of regulatory guidance, targeted surveillance to assess compliance, and formal enforcement action. ASIC has extensive powers to monitor and enforce compliance with the legislation it administers. These include the powers to conduct examinations of individuals;Footnote 64 obtain records relating to financial productsFootnote 65 and financial services;Footnote 66 and apply for warrants to enter premises to obtain records.Footnote 67 ASIC may also direct AFS licensees to provide written statements about the financial services they provide.Footnote 68

Depending on its assessment of the seriousness of breaches that come to its attention, there are a range of regulatory enforcement tools that ASIC may utilise.Footnote 69 ASIC’s enforcement strategies encapsulate the principles of ‘responsive regulation’, which combines both compliance and deterrence through an ‘enforcement pyramid’ of progressively more punitive measures in response to breaches of the law.Footnote 70 Whilst to date the bulk of ASIC’s enforcement actions have tended to be at the lower levels of the enforcement pyramid, as Sect. 5.2 explains the recommendations from the 2019 FSRC have urged ASIC to firstly ask the question ‘why not litigate?’ when taking enforcement strategies in response to future instances of misconduct in the financial services industry.

At the lowest level of the enforcement pyramid, ASIC may issue informal warnings or recommendations for changing business practices.Footnote 71 In situations where ASIC is satisfied that a regulated entity is willing and capable of implementing appropriate measures to ensure compliance with the law and/or to compensate adversely impacted persons, ASIC may consider entering into an enforceable undertaking as an alternative to formal administrative or civil action.Footnote 72

The next level up on the ‘enforcement pyramid’ are administrative actions against regulated entities and individuals.Footnote 73 Examples of administrative actions include the powers to suspend or cancel AFS Licences;Footnote 74 the power to ban individuals from providing financial services;Footnote 75 and issuing infringement notices under the ASIC Act 2001.Footnote 76 In contrast to civil litigation and criminal prosecutions, decisions to impose administrative sanctions are made within ASIC by authorised delegates, after providing the regulated entity or individual with the opportunity for a hearing.Footnote 77

The higher levels of the enforcement pyramid involve ASIC pursuing action through the courts, which can include civil litigation such as seeking injunctionsFootnote 78 and/or the pursuit of recovery actions.Footnote 79 For more serious breaches of the law which adversely impact on consumers and/or investors, ASIC may pursue proceedings for the imposition of civil penalties. Section 1317E designates a number of provisions of the Corporations Act as ‘civil penalty provisions’, and when a court declares a contravention of a civil penalty provision it may impose a range of penalties. These include pecuniary penalty orders,Footnote 80 compensation ordersFootnote 81 and/or orders disqualifying a person from specified roles such as managing a company or providing financial services for the period that it considers appropriate.Footnote 82 Civil penalties were introduced into Australian corporate legislation in the 1990s to expand the enforcement powers of regulatory authorities such as ASIC and its predecessors by providing an alternative to pursing criminal prosecutions (which involve the very high standard of proof beyond reasonable doubt. By contrast the civil standard of proof of the balance of probabilities applies to civil penalty proceedings. Civil penalties are intended to have both a deterrent effect both specifically (through punishing the offending individual or entity through the imposition of fines and/or disqualification orders) and generally (through providing high profile examples of punishment for wrongful conduct to the relevant regulated sectors).Footnote 83

Reforms to the ICA which took effect from 12 March 2019 have enabled ASIC to pursue civil penalty proceedings for contraventions of designated provisions of the ICA, including the duty of utmost good faith under s 13. As discussed in Sect. 5, recent reforms resulting from the recommendations of the 2019 FSRC report which took effect from 1 January 2021 have introduced civil penalties for a range of other legislative provisions relating to insurance claims handling.

In the most serious cases, ASIC may refer matters to the Commonwealth Director of Public Prosecutions, which may prosecute under both commonwealth and state and territory legislation.Footnote 84

The following Sect. 4.3 explains how ASIC has become increasingly active in its monitoring of the practices of the Australian insurance industry over the recent years. Although since 2013 s 14A of the ICA has empowered ASIC to suspend, cancel or impose conditions on AFS licenses in cases where an insurer has failed to comply with the duty of utmost good faith in the handling or settlement of claims, to date it has been limited in its ability to seek the imposition of civil penalties in cases where an insurer has engaged in unfair conduct in the determination of a claim. In comparison to the selling of insurance (which has been designated as a financial serviceFootnote 85 since the inception of the Corporations Act in 2001), s 766A(2) of the Corporations Act has to date exempted ‘handling insurance claims’ from the ambit of ‘financial services’. Until 1 January 2021, Regulation 7.1.33 of the Corporations Regulations 2001 (Cth) explained this exemption as encompassing the handling and/or settling of actual and potential claims, and provided non-exhaustive list of examples of such services as negotiations of settlement amounts; interpretation of relevant policy provisions; estimates of loss or damage; estimates of value or appropriate repair; recommendations on mitigation of loss; recommendations on changing cover limits; and claims strategy such as the making of claims under alternate policies.Footnote 86 However, as Sect. 5.2 explains, the FSRC has made recommendations to remove this exception.

In addition to the legal requirements set out in the ICA and the Corporations Act, codes of practice have progressively developed as an important source of self-regulation for the Australian insurance industry. Since 1994 there have been various iterations of the General Insurance Code of Practice, with the most recent iteration coming into effect on 1 January 2020.Footnote 87 The General Insurance Code of Practice is subscribed to by the majority of Australia’s general insurers and sets out standards of business practice for insurers to adhere to when selling insurance; when issuing policies (and explaining the basis for rejecting applications for policies); determining claims (including timeframes and special arrangements in response to catastrophes); and when dealing with complaints and disputes. Codes of practice for the Australian life insurance industry have been developed over more recent years, covering similar issues to the General Insurance Code of Practice. These include the Life Insurance Code of Practice developed by the Financial Services Council which came into operation on 1 July 2017,Footnote 88 and the Association of Superannuation Funds of Australia’s Insurance in Superannuation Voluntary Code of Practice, which commenced on 1 July 2018.Footnote 89 Whilst to date breaches of the provisions of these industry codes of practice have only been enforceable by the respective code governance committees (which are empowered to impose such sanctions as they see fit), as Sect. 5.2 explains reforms that took effect from 1 January 2021 to implement the recommendations of the 2019 FSRC now enable ASIC to pursue a variety of enforcement measures in the event of breaches of the provisions of financial services industry codes of practice.

4.3 Reviews of Insurance Claims Handling Practices by Australian Regulators

Over the recent years, ASIC and APRA have increased their scrutiny of the claims handling practices of Australian insurers. In response to media reports about the practices of life insurer CommInsure (including reliance on outdated medical definitions to deny claims; assessing doctors being pressured to change their reports; and the delaying of claimsFootnote 90) in 2016 ASIC reviewed the claims handling practices of Australian life insurers. Whilst ASIC’s Report 498 on this review did not identify evidence of industry-wide misconduct, it noted with concern that declined claims were higher for policies that were sold directly to consumers in comparison to those that were sold through adviser channels. Report 498 also identified the need for more detailed, consistent and transparent data about life insurance claims to better enable consumers to compare performance indicators between insurers. As an example of good practice Report 498 pointed to the Association of British Insurers’ practice of publishing claims payout rates each year, which ASIC noted as having prompted standardisation of policy definitions and improved transparency for consumers.Footnote 91 Over the next two years, ASIC and APRA worked collaboratively to improve the consistency in the data about life insurance claims,Footnote 92 and in March 2019 the regulators published their first joint report on life insurance claims and dispute statistics.Footnote 93

In October 2019, ASIC published Report 633 which set out the findings from its review of over 35,000 TPD claims lodged in 2016 and 2017 with seven of Australia’s largest life insurers.Footnote 94 ASIC noted with concern the widespread use of restrictive definitions in policies which only provided benefits to claimants that were unable to undertake the activities of daily living, which was a factor in nearly a third of declined TPD claims.Footnote 95 ASIC and APRA published a further report on life insurance claims data in June 2019 which summarised the percentage of claims accepted, the length of time taken to pay claims, the number of disputes and policy cancellation rates for life insurance claims lodged in 2018. Similarly to its findings in Report 498 this review found declined claims were higher in policies that were sold directly to consumers than in the case of policies arranged by financial advisors.Footnote 96

In July 2019, ASIC published the findings of its review of industry practices for investigating motor vehicle claims lodged between September 2016 and September 2017.Footnote 97 For this review, ASIC examined the records of five insurers accounting for 62% of written premiums in the general insurance market, and also interviewed policyholders whose claims had been investigated. The concerning practices identified by ASIC including delays in the resolution of claims; the failure to inform claimants about the investigation process and their rights to make complaints; the practice of requesting onerous amounts of information from claimantsFootnote 98 and several examples of unfair practices by claims investigators.Footnote 99 ASIC’s report concluded with several recommendations to improve claims handling practices, including a four-month timeframe for finalising claims. ASIC also warned that in future cases where it identified poor claims handling practices it would consider using its various enforcement powers, including the power to pursue civil penalty proceedings for breaches of the s 13 duty of utmost good faith.Footnote 100

In addition to the reviews of claims handling practices discussed above, ASIC has conducted a number of reviews of industry practices in the selling of insurance.Footnote 101 ASIC also conducted a more broadly-focused review of corporate governance practices of seven of Australia’s largest financial institutions in 2018, which included four banks, one general insurer and two large diversified financial institutions (one of which issued life insurance), and released its findings from this review in Report 631 in October 2019.Footnote 102 ASIC’s review focused on the oversight by directors and officers of non-financial risk—which ASIC’s review defined as encompassing operational risk,Footnote 103 compliance riskFootnote 104 and conduct risk.Footnote 105 In its report ASIC emphasised the importance of directors formulating clear ‘risk appetite statements’ with both leading and lagging indicators, and holding management to account against the metrics in such risk appetite statements.Footnote 106 Report 631 also highlighted the important role of board risk committees in ensuring the timely flow of material information to boards about non-financial risk matters.Footnote 107

It is also relevant to note that under s 180 of the Corporations Act, directors and officers of Australian corporationsFootnote 108 have generalised obligations to discharge their duties with the degree of care and diligence that a reasonable person would exercise if they had the same responsibilities in a corporation in similar circumstances. Contraventions of s 180 may be attract civil liability (for example, claims for damages by members, creditors and/or other affected persons) and also be subject to civil penalty proceedings by ASIC.Footnote 109 All decisions thus far by Australian courts on alleged breaches of s 180 have related to financial liabilities incurred by the relevant companies—particularly the failure by listed companies to disclose market-sensitive information to financial markets such as the Australian Securities Exchange in a timely manner. However, in light of both the enhanced focus by ASIC on the oversight of non-financial risk by directors and officers of financial institutions, and as Sect. 5.2 discusses, ASIC’s ‘why not litigate?’ mantra following the recommendations of the 2019 FSRC, it is quite possible that the coming years may see decisions by Australian courts on the duties of directors and officers in relation to the oversight of non-financial risk.

5 The 2019 FSRC: Key Findings and Reform Recommendations

On 1 December 2017, in response to widespread reports of misconduct within the Australian financial services industry, the federal government announced the appointment of former High Court of Australia judge the Honourable Kenneth Hayne AC QC to chair a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Following seven rounds of hearings throughout 2018 involving the examination of over 130 witnesses and the review of over 10,000 public submissions, Commissioner Hayne presented his final report to the Federal Treasurer on 1 February 2019, which was made public on 4 February 2019. Whilst the final report of the FSRC identified numerous instances of misconduct within Australian banks and superannuation funds (including the charging of fees on the accounts of deceased customers, delays in reporting breaches to regulators and pressure selling), the discussion below focuses on the findings of misconduct within Australian insurers.

5.1 FSRC Findings in Relation to Insurance Claims Handling and ASIC’s Enforcement Practices

In its sixth round of hearings, the FSRC examined the practices of Australian general and life insurers across all stages of the insurance process from design and sale of insurance products to the handling of insurance claims. In relation to the design of insurance products, the FSRC identified several examples of policies with outdated definitions and/or overly restrictive exclusions, which lessened the circumstances under which consumers might be entitled to successfully claim on such policies. The FSRC also identified several instances of problematic selling of insurance products, including misrepresentations or omissions about policy premiums and/or payment arrangements, and pressure selling whereby sales agents did not provide consumers with sufficient opportunities to review policy documents before committing to purchase insurance products.

The final report of the FSRC included three case studies of unsatisfactory claims handling practices. The first of these case studies concerned the practices of TAL Life Ltd in handling claims under income protection policies. These included the excessive use of private surveillance; bullying tactics and offensive communications with claimants; and misuse of daily activities diaries by claimants. The FSRC also found that TAL had failed to provide several claimants with an adequate opportunity to respond to the proposed declinature of their claims; that its IDR processes lacked independence from its claims management functions; and that it had failed to engage with the former Financial Ombudsman ServiceFootnote 110 in an open and cooperative manner.Footnote 111

The FSRC’s final report included two case studies of misconduct in the handling of general insurance claims. The first of these case studies concerned the insurer Youi Pty Ltd which had failed to exercise appropriate oversight of a builder that it had engaged to repair a policyholder’s house in the NSW mining town of Broken Hill following a hailstorm. The delays in repairing the hail-damaged property (which totalled almost two years) had left the pregnant homeowner exposed to lead dust. In another claim following a tropical cyclone, Youi had failed to ensure the completion of repairs to the damaged house of a policyholder’s house, and had also failed to arrange emergency accommodation for the policyholders in a timely manner. These omissions lead Commissioner Hayne to conclude that Youi had breached several provisions of the General Insurance Code of Practice in force at the time.Footnote 112

The second of the FSRC’s general insurance claims handling case studies examined the practices of insurer AAI Ltd (AAI) in handling of a claim for storm damage. The FSRC found that AAI had breached several provisions of the General Insurance Code of Practice that required it to handle claims in an honest, fair, transparent and timely manner; and other Code provisions requiring it to keep the policyholders updated about the progress of their claim. Commissioner Hayne also condemned AAI for its failures to properly inform the policyholders about its internal dispute resolution processes—noting that whilst AAI had initially offered to settle the policyholders’ claim for $30,000, the former Financial Ombudsman Service later awarded the policyholders $744,000 for the cost of repairing their house.Footnote 113

The final report of the FSRC was also highly critical of ASIC’s tendency to respond to instances of misconduct in the Australian financial services industry by resorting to enforcement measures at lower levels of the enforcement pyramid such as enforceable undertakings and infringement notices. As Commissioner Hayne put it:

It is wholly consistent with the analyses that are expressed by the metaphor of the regulatory pyramid, that serious breaches of law by large entities call for the highest level of regulatory response. And that is what has been missing … Too often serious breaches of law by large entities have yielded nothing more than a few infringement notices, an enforceable undertaking not to offend again (with or without an immaterial “public benefit payment”) or some agreed form of media release.Footnote 114

Commissioner Hayne therefore recommended that when determining the enforcement action(s) to take in response to future instances of misconduct in the financial services industry, ASIC’s first question should be: ‘Why not litigate?’.Footnote 115 ASIC accepted Commissioner Hayne’s recommendations by revising its enforcement strategy to involve greater use of court-based sanctions.Footnote 116

Commissioner Hayne referred a total of 17 instances of misconduct to ASIC for further investigation, which included the misconduct by Youi in its handling of general insurance claims, and by TAL in its handling of life insurance claims discussed above. ASIC subsequently commenced proceedings against both insurers in the Federal Court of Australia (the Federal Court).

On 27 November 2020, Chief Justice Allsop declared that Youi had breached its duty of utmost good faith under s 13 of the ICA through its failure to exercise appropriate oversight of the contracted builder in its handling of the Broken Hill hail damage claim that had been reviewed by the FSRC. As Youi’s misconduct had occurred before 13 March 2019 (when as noted in Sect. 4.1 reforms were made to the ICA enabling ASIC to seek pecuniary penalties for breaches of the duty of utmost good faith came into effect) ASIC was only able to seek declarations that Youi had breached the s 13 duty.Footnote 117

ASIC also commenced proceedings in the Federal Court against TAL in respect of its handling of life insurance claims. ASIC alleged that through its misconduct TAL had breached its duty of utmost good faith under s 13 of the ICA, and that it had engaged in false or misleading conduct in breach of ss 12DA and 12DB of the ASIC Act, and s 1041H of the Corporations Act. In his judgement on 9 March 2021, Allsop CJ found that whilst ASIC’s claims of false or misleading conduct had not been made out. Nevertheless, his Honour found that through its failure to inform the policyholder that it was examining her medical history; its failure to provide her with the opportunity to address the material that TAL was relying upon to decline her claim; and its failure to make inquiries of her treating medical professionals, TAL had breached its duty of utmost good faith under s 13 of the ICA.Footnote 118

5.2 FSRC Reform Recommendations

In his final report, Commissioner Hayne made a total of 76 recommendations for law and/or policy reform, with the Australian government accepting all these reform recommendations.Footnote 119 Following a consultation process during which exposure drafts of the new legislative provisions were released for feedback from stakeholders, these reforms were enacted to take effect at various times during 2021. The discussion below focuses on the reforms that relate most closely to insurance claims handling.

5.2.1 Making Insurance Claims Handling a Financial Service

A significant recommendation of the 2019 FSRC was the removal of the exemption of insurance claims handling from the definition of ‘financial services’ under the Corporations Act.Footnote 120 Commissioner Hayne accepted ASIC’s submission that ‘for consumers, the intrinsic value of an insurance product lies in the ability to make a successful claim when an insured event occurs’,Footnote 121 and from this basis reasoned that:

There can be no basis in principle or in practice to say that obliging an insurer to handle claims efficiently, honestly and fairly is to impose on the individual insurer, or the industry more generally, a burden it should not bear. If it were to be said that it would place an extra burden of cost on one or more insurers or on the industry generally, the argument would itself be the most powerful demonstration of the need to impose the obligation.Footnote 122

Reforms to implement Commissioner Hayne’s recommendation for removing the exemption of claims handling from the ambit of ‘financial services’ under the Corporations Act were introduced through the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), with the new measures taking effect from 1 January 2021.Footnote 123 The explanatory memorandum to the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Cth) to implement these reforms explained that a person will provide a ‘claims handling service’ if the person makes a recommendation or states an opinion that could influence a decision whether to make an insurance claim; assists another person to make an insurance claim; assesses whether an insurer is liable under an insurance product; makes a decision to accept or reject all or part of an insurance claim; quantifies an insurer’s liability under an insurance product; offers to settle all or part of an insurance claim; or satisfies a liability of an insurer under an insurance claim.Footnote 124

The explanatory memorandum went on to explain that the persons required to either hold an AFS Licence covering claims handling (or become an authorised representative of such an AFS Licensee), will include an insurer; a loss assessor or loss adjustor acting on behalf of an insurer; an ‘insurance fulfilment provider’ (a new category of persons including smash repairers, builders and any other tradespeople contracted by an insurer) with authority to reject all or part of a claim; an insurance claims manager; an insurance broker who handles an insurance claim on behalf of the insurer; or a financial adviser who provides claims handling services on behalf of the insurer.Footnote 125

The new measures will require such authorised persons to handle and settle insurance claims in a timely way, without undue delay, balancing the negative effects of delay on consumers with the insurer’s reasonable requirements for handling an insurance claim; in the least onerous and intrusive way possible, including requesting information, medical examinations, surveillance and undertaking other assessment methods if it is strictly relevant to the claim; fairly and transparently, with information about the handling process, the reason for information requests, and reasons for decisions provided to consumers; and in a manner that ensures adequate support is provided for consumer, particularly for vulnerable consumers (for example those experiencing financial hardship).Footnote 126

The explanatory memorandum provided indicative examples of conduct that could be inconsistent with the new requirements for ensuring that claims are handled efficiently, honestly and fairly and therefore possibly result in ASIC enforcement action.Footnote 127

In cases where an insurer is offering to settle a claim through a cash settlement instead of repairing or replacing the insured property or product, the insurer will be required to provide a Cash Settlement Fact Sheet, which will be required to set out the basis for the proposed settlement amount and statements that the client should consider obtaining independent financial advice in respect of the proposed settlement.Footnote 128

The explanatory memorandum also explained that an insurer’s failure to provide a Cash Settlement Fact Sheet, or the provision of a defective Cash Settlement Fact Sheet, could trigger the general offence, civil penalty and civil liability provisions in Division 7 of Part 7.7 of the Corporations Act.Footnote 129

On 27 November 2020, ASIC released a draft information sheet setting out its approach to regulating insurance claims handling as a financial service, which sets out further details of ASIC’s expectations on the contents of ‘Cash Settlement Fact Sheets’ for general insurance claims.Footnote 130 It is likely that ASIC will release further regulatory guidance on these matters in the near future.

5.2.2 Making Industry Codes Legally Enforceable

Whilst the industry codes of practice overviewed in Sect. 4.2 have to date only been enforceable by the relevant code governance committees,Footnote 131 as Sect. 5.2.1 explained the 2019 FSRC Report identified several instances where the sales and claims handling practices of Australian insurers had breached the provisions of the General Insurance Code of Practice. Commissioner Hayne therefore recommended that the provisions of Australia’s financial services industry codes should be legally enforceable.Footnote 132

Reforms to implement this recommendation were introduced into the Corporations Act through the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, with these new measures taking effect from 1 January 2021. Under these new measures, ASIC now has the role of approving financial services industry codes of conduct, and may designate certain provisions of such codes as enforceable code provisions.Footnote 133 If a person (such as an insurer) holds out that they comply with an approved code of conduct, the Corporations Act now provides for the imposition of civil penalties in the event of a breach of an enforceable code provision.Footnote 134

5.2.3 Extension of the Unfair Contract Terms Regime to Insurance Contracts

As Sect. 4.1 explained, the unfair contract terms regime under the ASIC Act has until now not applied insurance contracts. Whilst the extension of the ASIC Act unfair contract terms regime to insurance contracts was previously considered at the time of the consultations leading to the 2013 amendments to the ICA,Footnote 135 prompting mixed reactions from industry commentators,Footnote 136 these proposed reforms were not implemented at that time. However, following the recommendations of a 2017 Senate Economics Committee inquiry into the Australian general insurance industry,Footnote 137 the Australian government announced that it would extent the unfair contract terms regime to insurance contracts.Footnote 138 In light of the misconduct identified during the 2019 FSRC, Commissioner Hayne also recommended that the ASIC Act unfair contract terms regime be extended to contracts of insurance governed by the ICA.Footnote 139

These recommendations were implemented through the Financial Sector Reform (Hayne Royal Commission Response - Protecting Consumers (2019 Measures)) Act 2020, which makes several amendments to both the ASIC Act and s 15 of the ICA to extend the ASIC Act unfair contracts regime to insurance contracts governed by the ICA with effect from 5 April 2021.

Under Division 2 of the ASIC Act, a term in a consumer financial services contract may be considered unfair if it meets the three criteria in s 12BG of the ASIC Act—which are that the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; that the term is not reasonably necessary to protect the legitimate interests of the party that would be advantaged by the term; and that the term would cause detriment to a party if it were to be applied or relied on.Footnote 140 If a term of a consumer contract is found to be unfair, the term may be declared void.Footnote 141

The explanatory memorandum to the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Bill 2019 which implemented these reforms provided several indicative examples of terms in insurance contracts that could be unfair. These include a term that allows the insurer to, instead of making a repair, elect to settle the claim with a cash payment calculated according to the cost of repair to the insurer, rather than how much it would cost the insured to make the repair; a term that is an unnecessary barrier to the insured lodging a legitimate claim (for example, requiring the payment of a large excess before the insurer considers a claim or requiring the insured to lodge the claim within an unreasonably short timeframe); a term in a disability insurance contract that uses an outdated, and therefore inaccurate and restrictive, medical definition to determine whether the consumer meets the criteria to be eligible to have a claim paid; or a term in a contract that significantly reduces the cover offered where compliance with the preconditions for being covered is unfeasible (for example, a term in a travel insurance policy that only covers loss of luggage when it has been personally attended by the insured at all times).Footnote 142

In preparation for the commencement of these reforms, on 20 October 2020 ASIC released updated regulatory guidance on the extended protections under the new unfair contract terms laws, and advised that it would engage with the industry in preparation for the commencement of these new measures.Footnote 143

In summary, the new measures introduced through the reforms enacted in response to the FRSC’s recommendations now enable ASIC to respond more effectively to instances of deficient claims handling practices such as those highlighted by the FSRC in the Youi and AAI case studies. These newly enacted reforms bring Australia’s regulatory framework in line with the standards envisioned by ICP 19.10.

6 Conclusion and Key Lessons for Other Jurisdictions Considering Similar Regulatory Reforms

In conclusion, whilst the handling of insurance claims can often be a lengthy and complex process involving factual investigations, consideration of the application of policy conditions, the engagement of external service providers and negotiated forms of settlements, it is imperative to bear in mind that for policyholders their perceptions of the value of their insurance arrangements will usually be determined by their claims experiences. These perceptions will in turn influence consumer confidence in specific insurance markets. This chapter has provided two examples of how the legal frameworks in the United Kingdom and in Australia now enable the respective supervisory agencies to effectively regulate the claims handling process in a manner that reflects the standards envisioned under the IAIS Insurance Core Principles. As it is probable that the FCA in the United Kingdom and ASIC in Australia will be increasingly active in utilising their enforcement powers in response to future instances of poor claims handling practices, it is suggested that the application of the laws relating to claims handling in these two jurisdictions will be of interest to governments, regulators, insurers and policyholders in other jurisdictions in the years to come.