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 commences and does not end until the settlement of any claim.

Part II of the Insurance Contracts Act 1984 (Cth) implies the duty into every insurance contract to which the legislation applies. Breach of the duty is a breach of contract, as well as a breach of the legislation. Civil penalties apply to a breach of the legislation. The duty exists at common law as well as in the legislation.

There is no definition of the duty in the legislation. The High Court of Australia in CGU v AMP [2007] HCA 36 has described the duty of the insurance company towards the insured as the requirement to “act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured."

The scope of the duty is very broad and may include the following:

Claims Handling

Delays by the insurance company in dealing with claims can be very detrimental to the insured person. Damaged to property such as a home or car means that property cannot be used by the insured person. Additional costs are incurred providing alternative accommodation or transport whilst repairs are done. An insurance company must be frank about the progress of claims and inform the insured person about any delays.

From January 2022, all services that provide claims handling and settling must have an Australian Financial Services licence (AFSL). This means that claims handling services (which are often separate from insurance companies and therefore not required to comply with the same laws) are subject to clear regulation under the Corporations Act 2001 (Cth), including providing their services efficiently, honestly and fairly. Australian Securities and Investments Commission oversees and regulates all AFSL holders.

Responding to complaints

The Insurance Code of Practice 2020 sets out timeframes for insurance companies to respond to complaints. Despite this, some insurance companies are slow at responding to complaints. An insured person can complain about delays in response times as well as the substance of the complaint.

More information about the Insurance Code of Practice can be found on the General Insurance Code of Practice website [link opens in a new window].

Insurance Investigations

Insurance companies have the right to investigate claims where there is a suspicion of exaggeration or fraud. This is part of the insurance company’s risk management. An insured person has a duty to co-operate with an investigation. This includes providing relevant information if requested by the insurance company and participating in an interview. For example, an investigator might ask for bank statements or medical reports

Having an insurance claim investigated can be very stressful for an insured person and can delay payment of a genuine claim. An insured person is entitled to get legal advice to understand their rights, as well as make a complaint if the investigation is not conducted fairly.

Under the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) a court can declare unfair terms within standard form contracts for consumer goods and services and financial products or services void. For more information about unfair contract terms in consumer contracts, see Unfair Contract Terms.

From 5 April 2021, general and life insurance contracts are subject to the unfair contract terms provisions of the ASIC Act. This is under certain amendments to Section 15(2) of the Insurance Contracts Act 1984 (Cth). Health insurance, compulsory third party and workers compensation policies are not included.

An unfair contract term is one that:

A court may declare a contract term void, and the contract will continue to bind the parties as long is it capable of operating without the term. The provisions apply to standard form contracts where the consumer does not have the ability to negotiate the terms. An insurance policy is a typical example of a standard form contract.

The provisions do not cover all types of insurance contracts. For example, the provisions do not cover private health insurance, compulsory third party schemes and workers compensation. Contracts entered into before 5 April 2021 are also excluded.

Some terms are exempt, including the subject matter of the contract and the price paid. In an insurance contract, the subject matter is limited to a description of what is being insured.

Both insured persons and third party beneficiaries can challenge an unfair term. A third party beneficiary is the person named in a life insurance contract.

At present there is no penalty for including an unfair contract term in a standard form contract.

What can a consumer do if they think a contract term is unfair?

A consumer can complain to the insurance company.  The insurance company must deal with the complaint under its dispute resolution process.

If a complaint is not resolved, the consumer can lodge a dispute the Australian Financial Complaints Authority (AFCA). More detail about complaining to AFCA can be found under Complaints. Another option is to take the matter to court to ask for a declaration that the term is unfair. Going to court is expensive, and it is best to get legal advice first.

The Australian Securities and Investments Commission (ASIC) regulates the conduct of insurance companies. An individual can complain about misconduct to ASIC by using the form on the website. However, ASIC cannot assist individuals to resolve the dispute and does not have the power to declare a contract term to be unfair.

Examples of potentially unfair contract terms in insurance contracts:

Under the duty of disclosure, a consumer applying for insurance (the insured) must disclose relevant information to the insurer. The duty of disclosure is extremely important to the insurance company’s decision to agree to the contract of insurance.

Common Law Position

At common law, an insurance company (the insurer) is entitled to avoid a contract if the insured has:

Based on the information volunteered by the insured, an insurer may decide not to accept the contract, may impose conditions and may adjust the premium. But the onus is on the insured to disclose every fact that is material to the insurer’s decision.

The failure to disclose a material fact may be innocent, but at common law the insurer is entitled to avoid the contract which may have drastic consequences when a claim is made.

Legislation

Part IV of the Insurance Contracts Act 1984 (Cth) creates a statutory code replacing the common law. Recent reforms to the legislation simplify the consumer’s duty of disclosure recognising that there is a gap in the information known to the insurer and that known by the consumer.

Section 20B states that a consumer must take reasonable care not to make a misrepresentation to the insurer when entering into a contract of insurance, including renewal, extension, variation or reinstatement of a consumer insurance contract. Under the legislation, a consumer insurance contract is one for personal, domestic or household purposes and includes general and life insurance contracts.

Whether or not a consumer has complied with the duty depends on the relevant circumstances of each case. Factors that may be considered include:

In addition, the characteristics of the individual consumer can be considered when determining if the consumer has taken reasonable care not to make a misrepresentation.

Section 20B (4) provides that a consumer is not taken to have made a misrepresentation if they did not answer a question or gave an obviously incomplete or irrelevant answer.

Division 3 of Part IV sets out the remedies for an insurance company if a consumer breaches the duty not to make a misrepresentation. Depending on the circumstances of the breach, the insurance company can reject a claim, reduce a payout on a claim, increase premiums or cancel the contract. The insurance company must prove that the consumer made a misrepresentation to the insurer.

An insurance contract can also be cancelled under section 60 in a range of circumstances, including breaches of the duty not to make a misrepresentation.

There is a General Insurance Code of Practice, which deals with service standards for general insurance products. The Code does not relate to life or health insurance, reinsurance, workers compensation, marine insurance, medical indemnity insurance, or compulsory third party insurance.

The 2020 General Insurance Code of Practice includes increased protections for insured consumers. Part 6 outlines standards in relation to buying insurance, including the requirement that insurers will not engage in pressure selling of insurance. If an insurance company refuses to provide a person with a policy, it must say why. Part 9 states that an insurer must take extra care with vulnerable consumers and must have a family violence policy. Part 10 includes a range of measures to ensure that people who are suffering financial hardship are assisted, including assessing that hardship for the purposes of the waiver or deferral of a debt.

The Code also includes penalties of up to $100,000 for a significant breach of the code by an insurance company. Anyone can report breaches of the Code to the Code Governance Committee, who is responsible for monitoring and enforcing it.

Recent reforms related to financial products sold to consumers include:

Add-on Insurance Reforms

Add-on insurance products are sold to a consumer with another type of product. Examples include consumer credit insurance offered with a home loan, or tyre and rim insurance with the sale of a car.

The reforms introduce a four-day deferral period for the offer or sale of add-on insurance associated with the sale of products.  Consumers will have time to consider if the insurance is suitable for their needs without pressure.

There are some exemptions to the regime. Examples are the sale of CTP insurance and comprehensive insurance with cars and home building and house and contents insurance.

Breaches of the legislation may result in fines for sellers. Affected consumers can cancel the policy and ask for a refund.

Anti-Hawking of Financial Products Reforms

The anti-hawking provisions aim to prevent consumers from buying inappropriate insurance and other financial products because of unsolicited contact from a seller. This also aims to prevent financial harm by allowing consumers to make their own choices about suitable financial products.

There are some exemptions to the anti-hawking regime, including basic banking products and offers made to existing customers of the seller.

Breaches of the legislation may result in fines for sellers.

The ASIC website (link opens new window) includes more detailed information in the regulatory guides for each reform.

Australia has two health insurance regimes: Medicare, and private health insurance.

Medicare is a taxpayer-funded health cover scheme that gives all permanent residents a basic level of health insurance. It provides:

Bulk-billing

If a doctor bulk-bills the government, there is no charge to the patient. If the doctor does not bulk-bill, the patient is responsible for the shortfall between what the doctor charges and what Medicare pays (this is often referred to as ‘the gap’).

When a person is admitted to a public hospital, the hospital should ask the person whether they wish to be treated as a public or private patient and explain the difference.

The right to choose

Everyone has the right to choose to be treated as a public or a private patient whether they have private health insurance or not.

Admission as a public patient

A person who chooses to be a public patient does not have to pay fees, but will be treated by a doctor who is on duty at the hospital at the time.

Uninsured private patients in hospitals

Someone who chooses to be treated as a private patient will be billed for accommodation by the hospital and for medical services by the doctor, even if they do not have private health insurance.

Admission as a private patient

A person who wants to be treated by a doctor of their choice may choose to be a private patient. The hospital then charges a daily fee.

Privately insured patients in public hospitals

In a public hospital, accommodation fees are fully covered by private health insurance if the patient has this cover.

Privately insured patients in private hospitals

Private hospitals can be very expensive, and there may be additional fees such as theatre fees. Even the highest level of private health insurance may not cover the whole cost, and patients may face expenses above those covered by their insurance. It is important to check before going into a private hospital what the fees will be and what is covered by your private health insurance.

As well as hospital fees, private patients in both public and private hospitals are charged fees by the treating doctor (and there may be more than one doctor for treatment such as surgery). Medical fees are covered up to the government recommended schedule fee, with Medicare covering 75% of the schedule fee and private health insurance covering 25%.

Gap payments

Many doctors charge above the schedule fee, and the patient must pay the extra (this additional payment is called the gap). Patients should check with their doctors what fees will be charged.

In some cases, private health insurers, private hospitals and doctors have established agreements that mean there are no gap payments, or gap payments that are known in advance, for patients being treated in some private hospitals. Patients should check whether their private insurer has any such agreement, and whether there will be additional expenses in the hospital where they are planning to be treated.

Gap cover schemes

Many private health insurers offer gap cover schemes. They may be included as a standard in hospital cover, but patients should check whether their insurance includes a gap cover scheme.

Details of gap cover schemes are available at the PrivateHealth.gov.au site.

Private health insurance can be purchased for a single person, a couple, a single parent family or a couple with children (family membership).

Advantages of private cover

The main benefits of having private health insurance are:

Privately insured patients in public hospitals

Having private health insurance does not (and is not intended to, or designed to) give a person priority of treatment over public patients in public hospitals. The Australian Health Care Agreements (agreements between state and territory governments and the federal government in relation to the provision of funding for health care) for 1998 made it legally possible for a public hospital to treat private patients differently from public patients.

In general, state and territory Health Departments still require public hospitals to treat patients on the basis of need, regardless of their status as public or private patients. However, there have been reports in the media of public hospitals encouraging privately insured people to choose to be private patients by offering to pay any excess and waiving any gap between the cost of treatment and what their insurance covers.

Types of cover

There are seven main types of private health insurance.

One hundred per cent cover

Many funds have entered agreements with hospitals and doctors to provide products that cover all hospital and medical costs. These agreements do not apply to all hospitals and doctors, and it is important to check which are covered.

One hundred per cent hospital cover with partial medical cover

This form of insurance covers all hospital costs from hospitals that have an agreement with the member’s health fund. The patient still has to make a gap payment for doctors’ fees that exceed the schedule fee.

Public hospital cover

This covers a person for treatment as a private patient in a public hospital. The person must pay large additional costs if they are treated in a private hospital.

Exclusionary cover

This form of insurance excludes cover for certain treatments or conditions, and in return the member pays a lower premium. For example, a fund could offer a package that does not cover obstetrics, or hip and knee replacement surgery, or major eye surgery.

Front end deductable or excess cover

In return for lower premiums the member agrees to pay a certain amount up front if they use their private health insurance. For example, a member with a $400 front end deductable will have to pay the first $400 if they use their insurance.

Co-payment policies

With these policies, the member contributes an agreed amount per day for their care while in hospital. For example, a patient might agree to pay the first $100 for each day in hospital.

Ancillary cover

Ancillary policies provide cover for a number of non-hospital services such as physiotherapy, dental treatment, and optical treatment. Ancillary cover is available separately, or in addition to any form of hospital cover.

Combinations

Combinations of these types of cover can be purchased. For example, a policy with hospital cover with a front end deductable and excess could be purchased, along with ancillary cover.

Comparing costs

The main difference between most private health insurance products is in terms of the trade-off between premiums and excesses. That is, the choice is largely between:

Choosing between packages

There are many different health insurance packages available, tailored to the needs of different consumers. This range can make it difficult to understand what is covered, and to compare different funds and packages.

Before taking out insurance, it is important to be clear about what is covered by the package being considered, and to check whether there are limits on the benefits paid, whether an excess applies, what the waiting periods are, and so on.

Limits on benefits for ancillary services

Most health insurance funds limit the maximum annual benefit payable for ancillary services such as dental care and physiotherapy.

Waiting periods

All funds have waiting periods before benefits will be paid for some services. For pre-existing ailments and conditions, and obstetric care, the period is 12 months. People planning a family and intending to join a health fund should do so as early as possible to ensure they are covered if the baby is born prematurely.

For other services the waiting period varies, depending on the fund and the type of service.

The waiting period for pre-existing ailments and conditions is rarely waived, even in special promotions that waive other waiting periods.

Financial incentives

The thirty per cent rebate

Since January 1999, the federal government has offered a 30% rebate on premiums paid for private health insurance. The rebate covers all private health insurance cover (hospital, extras and combined cover), and means that the cost of private health insurance is reduced by 30%. For example, a family paying a premium of $4000 per year would receive a rebate of $1200.

The rebate can be claimed:

All Australians who are eligible for Medicare and who are members of a registered health fund are eligible for the rebate.

The Medicare levy surcharge

High income earners are further encouraged to take out private health insurance through a surcharge of 1% that must be paid on top of the normal 1.5% Medicare levy if they do not take out private hospital insurance.

The surcharge is paid by:

who have not taken out appropriate health insurance cover.

The family income threshold increases by $1500 for each dependent child after the first.

Lifetime health cover

Lifetime health cover, introduced by the federal government on 1 July 2000, allows health funds to charge different premiums according to a person’s age when they first took out hospital cover. Members who join early in life pay a lower premium than those who join later in life.

The certified age of entry

A person’s certified age of entry is the age they are considered to be when they take out hospital cover. A person’s certified age of entry is:

People born on or before 1 July 1934 are not affected by lifetime health cover. They can take out private health insurance at any time and receive a certified age of entry of 30.

Effect on premiums

There is a 2% loading on the base rate premium for every year that a person’s age at entry exceeds 30, up to a maximum of 70%.

Breaks in cover

A person can drop their hospital cover for up to 24 months (cumulative) without affecting their certified age of entry. After 24 months their certified age of entry increases by one year for every year they do not have cover.

Effect on ancillary products

Ancillary products are not affected by lifetime health cover.

Weighing up the cost

While lifetime health cover provides an incentive to take out private health insurance at the age of 30 or as soon as possible thereafter in order to avoid paying the additional loading later on, it is important to weigh up the cost of paying premiums from the age of 30 onwards against the cost of joining later and paying the loading.

Bonuses

Loyalty bonuses

Another recent legislative change allows funds to offer loyalty bonuses to members based on length of membership. Such bonuses can take the form of either:

No claim bonuses

Offering no claim bonuses is still prohibited.

Effect on higher income earners

The combined effect of the Medicare levy surcharge, the 30% rebate and lifetime health cover means that some high income earners may find it cheaper to take out private health insurance cover even if they never intend to be treated as a private patient.

Self-insuring

Some people choose to self-insure. Given that private health insurance can cost a family thousands each year, setting the equivalent amount aside each year in a term deposit account may be cheaper. It is, of course, more risky, because people have little control over the timing of major medical expenses. The person must also be sure not to spend the saved amount for other purposes.

The medical expenses rebate

From 1 July 2019, the medical expenses rebate is no longer available.

Disputes

People who have problems with private health insurance fees or claims for refunds should first try to resolve the matter with their health insurance fund.

If the matter is not resolved with the fund, the person should contact the Private Health Insurance Ombudsman. The Ombudsman has been established to deal with complaints about private health insurance arrangements, and is independent of the private health funds, public and private hospitals, and the government. See Complaints against private health insurers.