ASIC’s review of nearly 4800 individual disability income insurance (IDII) claims received between 1 January and 30 June 2021 has found more work is needed by insurers to ensure that consumers are protected from unfair practices in non-disclosure investigations and physical surveillances.
As a result of ASIC’s review, some life insurers have made improvements to their practices. ASIC’s inquiries are continuing with those life insurers that had a higher proportion of potentially unwarranted investigations identified in the review.
ASIC has longstanding concerns about the potential consumer harm resulting from over-use of intrusive claims handling practices like non-disclosure investigations and physical surveillances. This review of IDII claims follows ASIC’s 2019 Report 633 Holes in the safety net: a review of TPD insurance claims (REP 633) and follow up 2021 Report 696 TPD insurance: Progress made but gaps remain (REP 696), which examined claims handling practices in the context of total and permanent disability (TPD) insurance.
The Financial Services Royal Commission examined several case studies of egregious conduct in which physical surveillance and non-disclosure investigations were improperly used. In response to one of the case studies, ASIC took action against TAL Life Limited (TAL). On 9 March 2021, the Federal Court found that TAL breached its duty of utmost good faith in handling a claim (21-042MR).
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ASIC Deputy Chair Karen Chester said, ‘Our previous reviews and the Royal Commission identified concerns around the misuse of investigative tools by insurers and resulting consumer harms. Following the Royal Commission, we took action against TAL for breaches of its duty of utmost good faith in handling claims. Changes to the Corporations Act on 1 January 2022 mean that insurers are now legally obliged to act efficiently, honestly and fairly when handling claims.
‘ASIC’s latest review sought to test whether insurers were now entrenching good practices, especially with insurers now being subject to new claims handling obligations. We also sought to identify any outliers and areas for improvement. Following the review, we remain concerned that some insurers still appear to be ‘fishing’ for non-disclosures to avoid paying out legitimate claims. We are putting insurers on notice that we will take action where we see consumer harm from poor claims handling practices,’ added Ms Chester.
‘We also identified concerns around mental health claims and investigations. Non-disclosure investigations and physical surveillance are intrusive measures and insurers must ensure they have reasonable grounds to undertake them. We expect physical surveillances to be used as a last resort only,’ concluded Ms Chester.
ASIC has written to the life insurers covered by the review to outline areas for improvement and communicate expectations for their use of investigative tools, including the obligation to handle claims efficiently, honestly and fairly.
These life insurers participated in the review:
- AIA Australia Limited (AIAA), comprising AIAA and The Colonial Mutual Life Assurance Society Limited (CMLA);
- TAL Life Limited (TAL), comprising TAL and Asteron Life & Superannuation Limited (Asteron);
- Zurich Australia Limited (Zurich), comprising Zurich and OnePath Life Limited (OnePath);
- MLC Limited;
- Resolution Life Australasia Limited (formerly AMP Life Limited); and
- Westpac Life Insurance Services Limited (Westpac) (now TAL Life Insurance Services Limited as of 1 August 2022).
ASIC’s review of nearly 4800 individual disability income insurance (IDII) claims found that:
- non-disclosure investigations were conducted in around 5% of claims (252 claims) and physical surveillance was conducted in around 1% of claims (57 claims);
- five insurers appeared to commence non-disclosure investigations only on the basis that the claim was lodged within three years of policy inception or renewal, heightening the risk of ‘fishing’;
- 40% of non-disclosure investigations related to mental health non-disclosure;
- physical surveillance was used in 10 mental health claims and ASIC considers that surveillance may have been unwarranted in half of these cases; and
- use of surveillance may have been unwarranted in 17.5% of claims (10 of 57) where surveillance was used, because the insurer had not shown that other investigative methods had been exhausted.
Individual disability income insurance (IDII) cover is obtained through direct or advised channels where each life insured is individually underwritten. IDII cover provides an income for a period of time if an individual cannot work because of an illness or injury.
Insurers use non-disclosure investigations to confirm claimants provided the required information about their medical history when they applied for their policy. In limited circumstances, physical surveillances are used to check potential inconsistencies in claim information.
Since March 2019, section 13(2)(A) of the Insurance Contracts Act 1984 imposes a civil penalty on an insurer that fails to act towards an insured with utmost good faith. The penalty did not apply at the time of the conduct that was the subject of ASIC’s Federal Court action against TAL (21-042MR). However, ASIC considers that the declarations sought set an important legal precedent and will act as a deterrent against similar conduct.
As part of the law reforms following the recommendations of the Royal Commission, the existing duty of disclosure in s21A and s21B of the Insurance Contracts Act 1984 was replaced with a duty on the insured to take reasonable care not to make a misrepresentation when buying insurance. The new duty applies to retail contracts issued, renewed or varied from 5 October 2021.
On 1 January 2022, insurance claims handling and settling became regulated as a financial service under the Corporations Act 2001. This includes the obligation to handle claims efficiently, honestly and fairly. Insurers may be in breach of the obligation to handle claims efficiently, honestly and fairly if they do not have a reasonable basis to test for non-disclosure or misrepresentation. Without a reasonable basis, the insurer may be engaging in ‘fishing’ and may be in breach of the obligations.