Insurance_contracts
Legal3/03/2021 12:00:00 AM

Insurance Contracts Act reform: Claims handling and settling and you

2021 will usher in a year of reform for the Australian insurance industry with the passing of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth).

By Nicholas Matkovich, Partner, and Diren Fernando, Partner at HWL Ebsworth.

Key points:

Providing “a claims handling and settling service” will now be treated as the provision of a financial service.

This may require certain providers to obtain an AFSL; to update their AFSLs to cover such a service; or to implement processes to comply with new statutory obligations.

General insurers will also need to begin providing Cash Settlement Fact Sheets, where offering to cash-settle certain claims.

2021 will usher in a year of reform for the Australian insurance industry with the passing of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) (FSRA).

The crucial changes include the following:

1. The FSRA introduces the definition of “claims handling and settling service” (CHSS) into the Corporations Act 2001 (Cth) (CA). A CHSS includes but is not limited to a natural or legal person:

• making a recommendation or stating an opinion in response to an inquiry about an existing or potential insurance claim, where it could be expected to influence a decision about the claim

assisting an insured person to make a claim, or representing an insured in pursuit of a claim

assessing (or assisting with the assessment of) whether an insurer has a liability under an insurance product

deciding whether to accept or reject all or part of a claim under a policy of insurance, and

offering to settle an insurance claim, or satisfying an insurer’s liability under a claim.

2. The FSRA specifies that providing a CHSS is taken to be providing a financial service, for the purposes of the CA.

3. By means of a “double negative”, the FSRA mandates that persons carrying on a financial services business by providing a CHSS must hold an Australian Financial Services Licence (AFSL) covering that service, if they fall within certain defined categories, including:

insurers

persons who satisfy insurers’ liabilities, and who have authority from the insurer to reject all or part of a claim

insurance claims managers

insurance brokers acting on an insurer’s behalf, and

financial advisers, who both provide advice to the insured as well as a CHSS on behalf of the insurer.

4. The requirement to hold an AFSL then imposes on those service providers the licence-holders’ obligations in s 912A of the CA;

5. The FSRA also effects new obligations, where an AFSL holder (or its representative) offers to cash-settle a claim by a retail client under a general insurance product. If a cash payment is not the only option available for settlement of the claim, then the client must be given a written and dated “Cash Settlement Fact Sheet”, which contains prescribed information, including an outline of the options available to the client under the insurance product, and a breakdown of the proposed cash payment.

6. The above amendments will, in effect, be operative from 30 June 2021. However, a transitional regime applies for those who, prior to 30 June 2021, apply for an AFSL or seek to vary one, to address the new statutory requirements. Those persons will be bound by the above amendments from 31 December 2021 (or a later date, if it is prescribed).

It is clear that the FSRA intends to extend the consumer protections available under the CA to claims handling, as well as provide for greater oversight of insurers, their employees, and their agents by ASIC.

It remains unclear how broad the obligations under FSRA/CA will be interpreted. For example, it is currently unclear whether experts who are retained by insurers are deemed to be persons “assessing” liability under a policy of insurance, and attract the above obligations.

At this stage, insurers should take care to ensure that systems and processes are in place to comply with these new obligations: eg identifying if and when representatives are not complying with the insurer’s obligations as an AFSL licensee.

Providers should also ensure that their AFSLs are updated to authorise the provision of a CHSS.

This article first appeared in HWL Ebsworth’s Market Insights on 8 February 2021.