Insurers will find it tougher to dodge paying out claims if the Royal Commission's recommendation to amend insurance law is enacted.
At the round six hearings of the Royal Commission, it was revealed that CommInsure used outdated medical definitions in denying a customer's heart attack claim and did not co-operate with the Financial Services Ombudsman to whom the customer made a complaint.
It also denied 88% of the claims made on accidental death policies over the previous five years, while reaping $121 million in premiums.
Hayne today recommended the government amend the Insurance Contracts Act to rid such instances.
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"Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms," Hayne said in the report.
The government has agreed to the recommendation in its response.
"...while appropriate disclosure is important to ensure that insurers are able to appropriately price the risks being underwritten, it is essential that appropriate safeguards are in place to avoid consumers having their claims declined where they may have failed to disclose a matter that would not have had any real bearing on the likelihood of them being offered insurance or the price of the insurance," it said.
The final report makes 15 recommendations on Australia's insurance industry - all of which the government has agreed to implement.
Commissioner Kenneth Hayne has asked that the process of handling and settling insurance claims should not be excluded from the definition of 'financial service' after the hearings laid bare questionable claims handling practices, including at TAL which hired a private investigator to follow a claimant.
He has also asked for the BEAR regime to be extended to all APRA-regulated insurers to ensure better accountability of life insurance executives.
Hayne wants hawking of insurance products to be prohibited, just like for superannuation products. In September, ClearView admitted it's direct life insurance business had breached the anti-hawking law more than 300,000 times, at the RC public hearings.
Stronger codes of practices
Another key recommendation is that Financial Services Council should amend the Life Insurance Code of Practice to allow the code's governance committee to impose sanctions on members that breach it.
The report also asks for industry codes to be amended for enforceable provisions.
In handing down these two recommendations, Hayne has chosen to ignore FSC chief executive Sally Loane's call. Appearing before the financial services Royal Commission on the final day of its round six hearings into insurance, Loane said the FSC would like the second iteration of its life insurance code to be given a chance to have an effect before statutory obligations are enforced.
"In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as 'enforceable code provisions'," the report said today.
"No more special treatment for life insurers"
UNSW Business School's commercial law and regulation professor Pamela Hanrahan said the final report's life insurance recommendations were significant.
"Since, 2001 the life insurance industry has special arrangements, so things like not treating claims handling as a financial service and funeral insurance not being subject to financial policies," Hanrahan said.
"But with this report Commissioner Hayne is almost saying there is no more special treatment for insurance, and is pushing back the insurance law towards community expectations."
She said that in recommending Life Insurance Code of Practice have the power to sanction, Hayne had actually gone a step further than ASIC enforcement taskforce's previous recommendations.
The proposed amendment to the Section 29(3) of the Insurance Contracts Act could stop people from missing out on technicalities.
"I think there is quite a lot in there," she said.
"Other parts of the [RC] report have made less extensive recommendations."