In March 2016, the insurance arm of the Commonwealth Bank (CBA), CommInsure, received heavy criticism after denying insurance claims to its policyholders. The Senate Financial Advice Inquiry is now in the middle of investigating the case, to which CBA has just recently made its submission.
We examine the importance of the implied duty of good faith in insurance contracts, the responsibilities of the insurer and the policyholder, and how policyholders can protect themselves.
James Kessel suffered a heart attack in 2014. However, when he lodged his claim for insurance from CommInsure, the bank only gave him $25,000 rather than $1 million as promised. The amount was only for the insertion of stents into his heart.
When deciding to reject the claim, CommInsure relied on a technical definition contained in their insurance policy – specifically referencing a precise measurement of troponin (a protein released when heart tissue is damaged) before classifying a heart attack.
Medical science has since progressed and now shows that this was an inaccurate method of determining heart attacks. Four Corners further investigated the matter and showed that doctors had in the past been pressured to rewrite medical opinions so the company could avoid insurance payouts.
Implied Duty of Good Faith
Under section 13 of the Insurance Contracts Act 1984 (Cth) (the ICA), the duty of good faith is implied in every insurance contract in respect of ‘any matter arising under or in relation to’ the contract. Acting in the ‘utmost good faith’ is a duty of both the insurer and the insured. A party’s failure to comply with this duty is a breach of the ICA and would give rise to a claim for damages.
According to the statute, it’s possible that CommInsure breached their duty to act in utmost good faith by unreasonably denying a legitimate claim made by James Kessel. Since however the statutory section covers all matters from the contract including pre-contractual and post-contractual stages, arguably including an allegedly outdated definition when medical science had progressed further was itself a breach of CommInsure’s duty.
What Does Acting in Good Faith Actually Involve?
To the insurer, acting in good faith may include:
- Not misrepresenting information about the policy and disclosing key terms to the policyholder;
- Drafting policies in understandable and clear terms;
- Making a full and efficient investigation into the claim before giving a decision, which must not be based on unreasonable grounds.
To the insured, acting in good faith may include:
- Not taking advantage of the policy to make a false claim;
- Making a full disclosure of relevant information and not leaving out important details or give misleading information when entering into the policy, such as health issues.
What Can a Policyholder Do?
Various stories and investigations have revealed unethical practices carried out by life insurance companies to avoid claims, from gruelling interviews with the policyholder to video surveillance of the policymakers’ home. If an insurer has acted unethically and breached their duty of good faith, there are several actions that the policymaker can take.
A policymaker can:
- Seek an internal review – this is usually the first step involved and most insurance companies will have a protocol or mechanism in place for consumers to do so;
- File a complaint with the Superannuation Complaints Tribunal, which deals with complaints relating to conduct of insurers and life policy funds;
- File a complaint with ASIC, which is the authority responsible for the general administration of the ICA and can exercise its powers under the statute to vary, suspend or cancel a financial services licence;
- Lodge a dispute with the Financial Ombudsman Service Australia, which handles disputes between financial services and consumers.
For consumers who are about to purchase life insurance, it is recommended that you carefully review the insurance policy to avoid falling foul of technical loopholes. For insurers, breaching your duty to act in good faith may have far-reaching ramifications and subject the company to a government investigation.
Questions? Get in touch with our litigation and disputes lawyers on 1300 544 755.