Time to end disclosure duty?

Geoff Masel lecture tour

Why, when an insurer knows so much more about a risk than the insured, do we still have the doctrine of disclosure?

That was one of many questions posed by Ian Enright, General Counsel, RGA Reinsurance Company Australia Ltd, when he presented the annual Geoff Masel Memorial lecture tour around the AILA branches.

He said the Insurance Contracts Act contained a duty of utmost good faith and a duty of disclosure. “Each of those duties applies before and during the contract, arguably, and the insured has [their] duties and the insurer has its duties. There are eight different scenarios.”

Mr Enright said the insured’s obligation to disclosure before the contract was clear and worked well. “It’s been fine tuned in the most recent amendments but nothing too radical. Yet the insurer is left with a pre-contractual obligation of utmost good faith and a pre-contractual obligation of disclosure. Why should that be?

“Let me give you two objections to it. If ‘utmost good faith’ really means what we think it means in the widest context, due regard for the interest of the other party and community standards, is an insurer being asked to say to the insured ‘this product you’re buying, we’re in fact planning in three years’ time to pull that off the market and have another product’ or ‘we think this product is actually not the best in the market because that’s the way we’ve priced it’ or ‘we think you can get something better from that insurer over there’, he said.

“Are we really saying that’s what an insurer should do? That’s utterly absurd, yet the law leaves us with that possibility.”

Mr Enright’s other objection related to product disclosure statements (PDS). “Under the corporations legislation, an insurer has to publish a PDS with an excruciating and unreadable amount of detail in it – 140 pages for a home contents policy. Are we seriously saying the law allows us the possibly there is a super added duty on top of that to give yet more information in fulfilment of this duty?

“Isn’t it time to think about abolishing disclosure? Isn’t it time to think about reshaping utmost good faith?”

Mr Enright said the expression ‘my word is my bond’ was demonstrated by Cuthbert Heath, who insured most of the houses in San Francisco in 1906 when they were destroyed by earthquake or fire.

“Some policies excluded recovery on the basis of fire; some excluded recovery on the basis of earthquake. Heath’s agent in America sent a telegram saying ‘what shall we do?’ Heath’s maximum liability was £40 million, an enormous sum of money.

“He cabled back immediately saying ‘pay all my policyholders irrespective of terms’. That’s contract certainty for you. It might be he was a fool but, for a century, America would insure nowhere else but with Heath, so he made and remade that money time and time again.”
Mr Enright said policy wordings “aren’t in great shape” and “never have been”.

In 1791, Mr Justice Buller held that a policy of insurance was considered in a court of law an absurd and incoherent instrument. An insurance commentator in 1914 wrote: If such a contract were drawn up for the first time today it would be put down as the work of a lunatic endowed with a private sense of humour.

Mr Enright suggested contract certainty, in the sense of clarity for customers, could be achieved by a model contract.

“We can do it for real estate. We can do it for shares on the stock exchange. The insurance industry is just as smart as those. Why couldn’t we have a model contract for home building insurance? If the insurer wants to add, you put that in the schedule. If the insurer wants to exclude, you put that in the schedule. It’s completely clear – you get the wording agreed by the industry, brokers, agents, lawyers, FOS and so on,” he said.
“Wouldn’t that reduce the number of disputes and lead to greater community assurance that we are trying to do the right thing? Is that so impossible for us? And wouldn’t that open up a sensible way of having disclosure, because the 140-page PDS for the home buildings contract has got a lot to do with explaining the work of lunacy that masquerades as our policy. If you remove that, you can say some sensible things about how the policy would work for you.

“We might even get ASIC’s approval to put in some calculators so people can get some pragmatic disclosure. And wouldn’t that open up a safe harbour between general advice and personal advice? Look at the things that really trouble the community about [buying] an insurance policy. Wouldn’t that be to our advantage and wouldn’t it be to the insurer’s advantage?”