The Australian Regime Governing Insurance Disputes
The resolution of insurance disputes in Australia is a two-step process, first there is an internal appeal complaints process with the insurer, and then, should that be unsuccessful, an external process.
The internal appeal process allows an insured to seek a review of a decision made by their insurer regarding their claim for indemnity under their insurance contract. The insurer has 45 calendar days to come to a decision with respect to any complaint.
Should the internal appeal process be unsuccessful, the insured may have the option to make a complaint to the Australian Financial Complaints Authority (AFCA) in respect of life insurance or general insurance (ie, car insurance, travel insurance, small business insurance). AFCA is the ombudsman established to resolve complaints by insureds about financial firms. AFCA can only consider complaints:
AFCA’s decisions are binding on the financial firm and can extend to awarding compensation for losses suffered because of a financial firm’s error or inappropriate conduct.
For all other complaints not covered by AFCA, the external recourse is the commencement of litigation in the Australian courts. This process is set out in the next section.
The Australian Court Process Governing Disputes
Australia has both state (Local, District and Supreme) and federal (Federal Circuit Court, Federal Court, Court of Appeal and High Court) courts that adjudicate over civil claims. The Australian state courts have monetary jurisdictional limits that govern which matters it can hear; for example, the Supreme Court can hear civil claims of AUD750,000 or more.
Cross-vesting legislation allows the state and federal courts to hear both state and federal civil matters.
Commercial insurance disputes concerning insurance contracts are usually heard by the relevant state Supreme Court or the Federal Court of Australia (which has a specific expedited insurance list). Insureds may commence proceedings against insurers seeking indemnification, or insurers and insureds can seek declarative relief from the courts regarding their respective rights and obligations under the policy. Declarative relief can be utilised by insurers as a circuit breaker for heavily disputed coverage positions.
In summary, the procedural process is as follows:
For most causes of action, including a breach of contract claim and misleading and deceptive conduct allegations, proceedings must be brought within six years from the date a cause of action arises. When a cause of action arises, and when a limitation period commences, can often be an area of dispute.
ADR is prevalent in Australia.
Each Australian insurer, pursuant to the Australian Securities and Investments Commission’s regulatory guide RG 271 Internal Dispute Resolution, is required from 5 October 2021 to have an internal dispute resolution system consisting of an internal dispute resolution procedure and membership with AFCA (which are discussed above).
External ADR is an option to resolve disputes once they become litigated in the Australian court system. The court’s overriding purpose is to facilitate the just, quick and cheap resolution of a dispute. To align with this purpose, the court has wide discretion to order the parties to engage in different forms of ADR if it considers the circumstances are appropriate.
The different types of ADR include mediation, arbitration, conciliation and informal settlement conferences, with mediation being the most popular for insurance disputes.
Parties have a duty to participate in ADR in good faith. If a party is found not to have acted in good faith, for an applicant the proceedings may be stayed or dismissed, and for a respondent its defence could be struck out. Additionally, adverse costs orders can be made, or a party held in contempt of court.
Australian Court Jurisdiction
The Federal Court of Australia, pursuant to Section 39B(1A)(c) of the Judiciary Act 1903 (Cth), has the jurisdiction to hear matters commenced based on federal laws. This jurisdiction extends to matters in which federal issues are properly raised as part of a claim or a defence, and to matters where the subject matter in dispute owes its existence to federal law. This would include matters concerning issues dealing with the Insurance Contracts Act 1984 (Cth) (ICA).
The Australian state courts also have the jurisdiction as they are invested with this federal jurisdiction in accordance with Section 4 of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth).
In addition to the Australian court’s jurisdiction, Section 8 of the ICA operates to exclude provisions of insurance policies that purport to contract out of Australian law being the proper law governing the contract.
This does not include some expressly excluded types of insurance contracts, such as reinsurance.
Foreign judgments can be enforced in Australia if the court that handed down the judgment is listed within the Schedule in the Foreign Judgments Regulations 1992 (Cth), such as the Supreme Court of the United Kingdom.
The Foreign Judgments Act 1991 (Cth) (FJA) allows a foreign party to seek to register their foreign judgment under the FJA to enable the judgment to be enforced by an Australian court.
To be enforceable, the FJA requires the judgment to be final and conclusive, given by a recognised foreign court, and that it concerns a monetary judgment. Once registered, the foreign judgment has the same force and effect as if it were a judgment from an Australian court.
If a foreign judgment falls outside the FJA, a party may have the opportunity to enforce it through a treaty to which Australia is a party, or under the common law.
Insurance law in Australia has been codified under the ICA. The provisions of the ICA are quite unique to Australia in terms of the obligations it places upon insurers. Some provisions of note include:
Other Matters Relevant to Insurance Disputes in Australia
AFCA is an external ADR process in Australia whereby insurance disputes are resolved outside the Australian court system.
The unsuccessful party in litigation is often subject to party-party (usually 65–70%) costs orders within most Australian jurisdictions. However, parties to litigation should be aware of various procedural rules that allow for offers of compromise and Calderbank offers (a common law type of offer) and can significantly increase costs orders to successful parties (usually to indemnity costs of approximately 85%). Compromises are often used as persuasive tools to convince parties with weak or spurious claims to settle early.
Special insurance list
The Federal Court of Australia has a special insurance list that specifically deals with short insurance claims, particularly concerning policy interpretation and concerning the operation of insurance legislation. The aim of the special list is to provide prompt and efficient resolution of legal issues to enable the parties to resolve disputes without the need for a lengthy hearing. This special insurance list also oversees the transfer of life and general insurance schemes to ensure the insured’s benefits are preserved through the sale of business.
The ICA expressly voids any provision in an insurance contract that requires or authorises the parties to arbitrate a dispute. However, parties to an insurance contract may still mutually agree to arbitration after the dispute has occurred.
The ICA does not apply to certain contracts of insurance, such as contracts of reinsurance. Accordingly, these limitations are not, in principle, void in such contracts.
Enforceability of Foreign Arbitral Awards in Australia
Australia has been subject to the New York Convention since 26 March 1975. The objective of the New York Convention is to provide common legislative standards for the recognition of arbitration agreements and court recognition and enforcement of foreign and non-domestic arbitral awards.
It obliges contracting states, such as Australia, to ensure such awards are recognised and generally capable of enforcement in their jurisdiction.
The New York Convention has been enacted into Australian domestic law in the International Arbitration Act 1974 (Cth) (the "IA Act"). Section 8 of the IA Act provides that foreign awards by virtue of the IA Act are, for all purposes, binding on the parties to the award and may be enforced in any state court as if the award were a judgment or order of that court.
While parties can mutually agree to arbitrate an insurance dispute, in the authors' experience it is not commonly used by insureds and insurers in Australia, despite arbitration clauses being written into many policies. If used, the method is more frequently used in high-value insurance claims, with cross-border elements. Also, it is sometimes deployed in those areas of insurance that are very specialised; for example, complex property liability, construction, and warranty and indemnity claims.
Where a policy is subject to the ICA, various terms are implied to protect the rights of insureds, such as notification of circumstances (Section 40(3)) and disclosure to insurers (Section 21). Whilst insurers may include provisions in policies that address these issues, the ICA will generally apply as a base entitlement for insureds.
Importantly, Section 13 of the ICA requires each party to the contract of insurance to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith. The concept of utmost good faith generally means fair dealing in which one party puts the interests of the other at least at the same level of protection as its own. In contrast is acting in bad faith, which is addressed below.
Should an insurer contravene this duty, there is a civil penalty of 5,000 penalty units that applies. As at the date of this article, this is calculated to be AUD1,110,000 (based upon AUD222 per penalty unit, which is updated each year on July 1st).
Insured’s Duty to Disclose before the Commencement of an Insurance Contract
Under Section 21 of the ICA, the insured has a duty to disclose to the insurer at the time of entering into the insurance contract every matter known to the insured that:
The insurer’s rights under this provision in the ICA are significantly curtailed in circumstances where if the insured failed to answer, or gave an obviously incomplete or irrelevant answer to a question asked by the insurer, the insurer is deemed to have waived compliance with the duty of disclosure in relation to the matter.
General Insurance Code of Practice
On and from 1 January 2021, a new voluntary General Insurance Code of Practice (the "Code") took effect, incorporating penalties for significant breaches of the Code of up to AUD100,000. The types of insurance covered under the Code include motor vehicle, home building and contents, sickness and accident, travel insurance, personal and domestic property. The Code does not cover reinsurance.
One of the key objectives of the Code is to provide fair and effective mechanisms for resolving complaints made by insureds.
The Code Governance Committee is an independent body that monitors and enforces an insurer’s compliance with the Code. The Code Governance Committee’s "Annual Industry Data and Compliance Report for 2019–20" reported that:
In the past 12 months, AFCA has reported that there continues to be a large number of complaints in respect of declinatures issued under general insurance policies.
Additionally, AFCA notes that it has experienced an influx of claims in respect of a delay in claim handling, an indemnified claim amount, a denial of claim based on an exclusion or condition, and service quality.
As outlined below, COVID has also had a significant impact on insurance claims and coverage disputes, with a large number of business interruption claims pursued as a result of the pandemic and lockdowns.
There have, and continue to be, a number of test cases before the courts to provide guidance and authority in respect of the policy response to COVID-related claims.
The findings of such test cases are also likely to spur business interruption class actions against insurers for losses sustained during COVID, where business interruption claims have been denied.
Disputes between insureds and insurers in Australia are resolved in a number of ways. For retail insureds, the most common forum in the first instance is AFCA. For more complex and commercial insurance disputes, they are dealt with through the court process and often resolved through ADR.
AFCA does not hear complaints regarding reinsurance contracts. Generally, any disputes concerning reinsurance are resolved by arbitration or the court process.
In circumstances where a dispute arises between an insurer and a consumer insured party, the dispute will be dealt with by AFCA if it cannot be resolved internally.
There are a number of circumstances in which a third party can enforce an insurance contract or sue an insurer in connection with the contract pursuant to provisions in the ICA, the Corporations Act 2001 (Cth) (the "Corporations Act") and the Bankruptcy Act 1966 (Cth) (the "Bankruptcy Act").
Under Section 51 of the ICA, a third party can enforce an insurance contract or sue an insurer in connection with an insurance contract if:
The Corporations Act identifies the following circumstances in which third parties have rights under an insurance contract.
Under Section 117 of the Bankruptcy Act, where a bankrupt company that is, or was, insured under an insurance contract against liabilities to third parties and an insured liability occurs, any amount received by the trustee of the bankrupt company with respect to that liability is payable to the third party.
In Australia, there are no laws explicitly relating to bad faith in an insurance context. However, the ICA provides a requirement that both parties to an insurance contract act with the utmost good faith.
As previously discussed, Section 13 of the ICA requires both parties to an insurance policy to act towards one another in respect of any matter arising under, or in relation to, the insurance contract with the utmost good faith. At its core, the duty of utmost good faith imposes a standard for both insureds and insurers to uphold in their dealings with each other.
The duty of utmost good faith applies to all aspects of the relationship between an insurance company and the insured person. It also applies to any third-party beneficiary to the contract. The duty arises when negotiations for the insurance policy commence and does not end until the settlement of any claim. Breach of the duty is a breach of contract, as well as a breach of the legislation. Section 13(2A) of the ICA, which was introduced in March 2019, exposes insurers to civil penalties for a failure to comply with this duty.
While Section 13 of the ICA imposes the obligation of utmost good faith on all parties to an insurance contract, the weight of jurisprudence in this area overwhelmingly relates to insurers breaching this duty. In this regard, the courts have interpreted the duty of utmost good faith to include:
There is no scheme that applies strict liability penalties to insurers for the late payment of claims. Each claim must be assessed and determined upon its unique facts and circumstances.
However, the duty of utmost good faith at Section 13 of the ICA has been interpreted by the courts to require insurers to make a timely decision to either accept or reject a claim by an insured for indemnity under a policy.
In relation to the issue of delay, recent jurisprudence has identified that the failure to make a timely decision to accept or reject a claim by an insured for indemnity under a policy can amount to a failure to act towards the insured with the utmost good faith, even if the failure results not from an attempt to achieve an ulterior purpose but results merely from a failure to proceed reasonably promptly when all relevant material is at hand, sufficient to enable a decision on the claim to be made and communicated to the insured.
It is worth noting that breach of the duty of utmost good faith is considered a breach of contract as well as a breach of the legislation. Civil penalties apply to a breach of the legislation. This is because the duty exists both at common law and in the legislation.
Furthermore, whilst not strictly being a penalty, Section 57 of the ICA provides that an insurer is liable to pay interest on late payments commencing on the day as from which it was unreasonable for the insurer to have withheld payment.
Given the complexity that surrounds insurance practice and special arrangements, there is no strict rule as to when an insured will be bound by representations made by their broker. The facts and circumstances of the relationship between the insured and the broker must be considered.
Typically, a broker acts as an agent for the insured and the insured is bound by representations made by their broker. However, some courts have recognised two exceptions where an insurer may be responsible for the conduct of a broker. In these cases, the insured is not bound by representations made by their broker. The first is where the insurer has granted the broker authority to grant interim cover. The second is where a broker is acting under a binder in arranging a final contract of insurance.
Depending on the facts, there may be other scenarios in which it is appropriate to regard a broker as acting as an agent for the insurer rather than the insured; however, it is worth noting that the High Court of Australia has indicated that it will only depart from this expectation in rare circumstances.
Delegated authority is when an insurer permits another party to act on its behalf, either in an underwriting or claims handling capacity.
Delegated underwriting allows a managing agent to delegate authority to another company or partnership (they are known as coverholders) to enter contracts of insurance on behalf of the underwriter.
Claims handling authority arrangements are quite common in Australia. Delegated underwriting authority is also common within the Australian insurance market, with a range of coverholders acting on behalf of large underwriting services.
Claims handling services are now subject to the financial service provisions of the Corporations Act and insurance claims managers (defined as those who carry on a business of handling and settling claims for one or more insurers) are required to obtain a financial services licence, and there is a general obligation to provide services efficiently, honestly and fairly.
While it is not uncommon for disputes to arise around whether the coverholder has kept within the scope of the agreement, in the authors' experience, these disputes are rarely litigated in Australia, and are generally resolved on a commercial basis.
Australia has an active and diverse litigation landscape, as you would expect in a mature economy. This includes a very active regulatory environment and class action industry. Costs funded by insurers include not only defence costs, but also costs of inquiries and participation in other regulatory and disciplinary processes.
In the authors' experience, the main areas where insurers are funding the defence costs of the insured ordinarily arise out of the following types of policies:
Defence costs cover for third-party claims is generally written on the following two bases: the insurer has the duty to defend or the insured has the duty to defend. In the former case (common with professional indemnity and similar policies), the insurer takes over conduct of the defence on behalf of the insured. In the latter case (common with D&O policies), the insured retains the duty and right to defend, but the insurer funds that defence on certain terms.
Claims activity in Australia is expected to continue to remain active over the next few years, including in already prominent areas such as D&O liability, professional indemnity, employment and construction liability. In the authors' view, the following areas are likely to drive claims activity.
It is expected that the impacts of the pandemic will continue to give rise to a broad range of claims activity. In the short term, this will include claims around business interruption, public liability, occupational health and safety, and life insurance claims. In the longer term, and depending on the impact of the lockdowns during the second half of 2021, an increase in claims activity around insolvency and corporate resilience is expected. It is also possible that professional indemnity claims may increase due to the additional risks around remote working.
Class actions will continue to dominate the Australian landscape. While the continuous disclosure reforms may have some impact on securities class actions, the authors do not expect any dramatic short-term reduction in the number of filings. Also, the class action industry and litigation funders have diversified their portfolios substantially over recent years and class action activity has been seen across a broad range of subject matters and legal issues.
The climate will continue to emerge as a significant risk for companies, which may transpire in litigation and investigations. In 2019, Australia had the second-highest number of total claims commenced globally (94 cases). This figure is in comparison to 55 cases commenced in the European Union and 53 cases in the United Kingdom. It is expected that future climate change litigation will target corporations for failing to disclose climate risks and for failing to incorporate the climate in their decision-making processes.
Cyber risk will continue to develop over the next few years, raising complex issues for companies and their boards. Substantial activity in this space is expected, not only in terms of breach response, but also in relation to claims against directors for failures around cyber risk management.
Expected legal reform around cyber obligations and breaches is likely to pose additional litigation and regulatory risk for organisations.
An increase in claims in the technology space is anticipated. This will be driven by a number of factors, including:
A continued increase in the number of claims in the construction sector is expected. This trend has been driven predominantly by a rise in natural catastrophe events and project failures. The authors also expect the impact of COVID-19 on the construction sector to further increase claims given that lockdowns and government restrictions have reduced the capacity and operation of construction sites, leading to project delays. Australia also still continues to grapple with issues around cladding, which continues to lead to disputes.
A more robust and well-funded regulatory environment following the Royal Commission into the Banking, Superannuation and Financial Services Industry will increase costs around regulatory investigations and actions.
The cost and complexity of litigation in Australia have steadily increased over the past few years and this trend is expected to continue. Despite what has been written above, there has been an increased focus by courts to push ADR. Most Australian courts now have statutory powers to refer cases to mediation and other forms of ADR. These efforts have had some impact to address trends, specifically in relation to class actions.
There have also been attempts to try to simplify the class action landscape in Australia, particularly where there are competing claims that deal with similar issues. For example, in 2018, the Federal Court of Australia ordered four competing class actions that raised similar issues to be transferred to one court.
In the authors' experience, there are two main ways that claimants protect themselves against costs risks in Australia: litigation funding agreements and adverse cost insurance policies.
Litigation Funding Agreements
Litigation funding is an arrangement whereby a litigation funder partly or wholly funds the costs of litigation for a return in the proceeds of the claim if the claim is successful. Typically, a litigation funding scheme is an arrangement between members of the class action, a law firm and a litigation funder. However, these arrangements may vary depending on the nature of the claim. In recent years, Australia has become an attractive and profitable market for litigation funding, which has seen an increase in litigation funding agreements.
Adverse Cost Insurance Policies
An adverse cost insurance policy, sometimes referred to as "after the event insurance", is a form of insurance that protects the insured against the risk of an adverse cost order. The policy is purchased once proceedings are contemplated or a dispute has arisen. Where an adverse cost order is made against the insured, the policy will typically cover the costs awarded against the insured and the insured’s own disbursements. Typically, the insured’s legal fees are not covered.
Most contracts of insurance will contain a contractual right for the insurer to step into the shoes of the insured and attempt to recover any loss caused by a third party – by way of subrogation.
The insurer's right of subrogation enables it to exercise the insured's rights against third parties in connection with the property or liability against whose loss or occurrence the insurance provides cover. In most cases, the insurer's right of subrogation is exercised in respect of rights of the insured against a third party whose conduct gave rise to the loss. The insurer's right of subrogation is not limited to rights that arise out of the loss itself. It extends to any right of action that the insured has against a third party with respect to the subject matter of the loss.
There are some obvious restrictions to the insurer's right to subrogation, including:
Subrogation is the substitution of one person for another, so that the rights and duties of the original person attach to another person – generally an insurer. While this concept arises at common law and equity, it is mostly expressly written into insurance policies in Australia. The doctrine of subrogation allows an insurer to:
The Ongoing Effects of the COVID-19 Pandemic on Insurance Litigation
The COVID-19 pandemic has affected both the type and amount of insurance-related litigation.
In the authors' experience, the main pandemic-related litigation has been in relation to claims for business interruption losses. The economic impact COVID-19 has had on the operation of businesses has left many with lost earnings. Those business that are covered by an interruption policy are looking to insurers to recoup their losses. However, many policies do not intend to cover a pandemic and include an outdated exclusion. This has raised extensive coverage issues as to whether the COVID-19 pandemic was intended to be covered. This issue is discussed in further detail below.
By contrast, there have been some areas less active than expected. One such area is insolvent trading. This lack of activity is due to a package of temporary measures introduced by the Australian federal government to protect businesses from financial distress. These measures were introduced on 23 March 2020 as part of the Coronavirus Economic Response Package Omnibus Act (the "CERPO Act").
One of the measures was a moratorium on insolvent trading. The CERPO Act temporarily suspended a director’s duty to prevent insolvent trading along with any associated personal liability for directors, so long as the relevant debt was incurred in the ordinary course of business. This moratorium ended on 31 December 2020 and may result in future litigation, as discussed below.
It is difficult to predict what the next 12 months will look like following the roll-out of vaccinations in Australia. Whether lockdowns will continue will depend on the extent to which vaccinations assist in achieving herd immunity. If current lockdowns and government-mandated restrictions endure, we can expect the current trend of business interruption claims to continue, particularly once the Australian test cases to determine coverage issues have been decided.
However, given that the most recent lockdown in Australia is occurring at a time when the temporary moratorium on insolvent trading is no longer in place, it is possible that over the next 12 months we may see an increase in the number of insolvent trading claims.
It is also possible that we will see an increase in other areas connected to COVID-19 and the current restrictions. This may include claims in the medico-legal space arising from telehealth, as well as claims against companies in relation to their resilience and response to the pandemic.
The Impact of the COVID-19 Pandemic on Insurance Coverage
As discussed above, the COVID-19 pandemic has given rise to coverage issues in relation to whether pandemics are intended to be covered under business interruption policies. AFCA has brought two test cases to determine these coverage issues.
The first test case considered whether a reference to a quarantinable disease under the Quarantine Act 1908, which has since been repealed, could be taken as a reference to a human infectious disease under the Biosecurity Act 2015. In November 2020, the New South Wales Court of Appeal held that the outdated Quarantine Act could not be considered as a reference to the Biosecurity Act. This was a win for the insureds seeking coverage.
The second test case remains ongoing and involves claims for other covering provisions found in many business interruption policies not considered by the first test case. The trial was set for hearing in September 2021.
Certain areas have been affected by the pandemic sooner than others. For example, the litigation and potential substantial losses around business interruption are likely to impact those areas already, both in terms of capacity and scope of cover.
There have been instances of insurers that have sought to impose pandemic exclusions for certain risks, particularly travel and business interruption.
The impact on other areas, such as financial lines, is slower to crystallise. It may be too soon to ascertain the extent to which the already hardening market in Australia is due to the pandemic or other factors. Much will also depend on the impact the pandemic has on insurance capacity globally.
In Australia, climate change is starting to become a key factor in an insurer’s decisions in terms of which risks to underwrite and how to price those risks. For example, a number of insurers have withdrawn cover for coal projects. Insurers are also considering certain aspects of D&O policies given the expected increase in claims against companies for climate-related issues.
There has also been substantial litigation activity both as a direct and indirect result of climate change. Indirectly, there has been an increase in jurisprudence trying to establish that the government owes a duty of care to young people on climate change. Directly, there has been substantial litigation as a result of bushfires and floods, which has caused the class action industry to expand substantially beyond securities class actions.
The most significant recent legislative change is the introduction of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) (FSRA), which seeks to amend sections of the Corporations Act as well as the ICA. Amendments to the Corporations Act have led to the provision of claims handling services being treated as financial services. Anyone providing such services now requires an Australian financial services licence, and insurers are subject to general obligations to act fairly, efficiently and honestly, as well as providing appropriate disclosure to consumers.
The change in regulation also requires companies providing financial services to retail clients to have adequate internal dispute resolution processes in place, as well as being a member of AFCA. The changes mean that the Australian Securities Investment Commission (ASIC) now has greater oversight over insurers.
The FSRA's changes to the ICA have reverted Section 29(3) to its pre-2013 form, whereby insurers can only avoid policies for “innocent” misrepresentation or non-disclosure where they would not have entered into a life insurance contract on any terms. Misrepresentation alone will no longer allow for a remedy unless the new duty for insureds to take reasonable care not to make a misrepresentation has been breached.
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