The art of entering into

Col Fullagar looks at when an intending insured is able to cease and desist disclosing ‘all sorts of stuff'.

To use the legal, technical vernacular, under Section 21 of the Insurance Contracts Act (1984) an intending insured has a duty to disclose to an insurer "all sorts of stuff".

This article, however, is not so much concerned about the stuff to be disclosed; rather it will focus on when the intending insured can cease and desist disclosing.

On the surface, the position is clarified within subsection (1) of Section 21 i.e. the duty continues up until "…the relevant contract of insurance is entered into" and if that was all there was to it, there the article would end.

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Sadly, no such luck because the question must follow: "When is the contract (of insurance) entered into?".

Whilst various suggestions were made in the past, for example:

• When the application is completed and premium deposit paid;
• When the application and premium are received by the insurer; and
• When the application is accepted by the insurer's underwriter.

It was not until a judgement was handed down in the Supreme Court of South Australia that the position appeared to be resolved.

The abbreviated facts of the Summerton & Ors v SGIC Life Limited — SASC — 26 March 1999 case were:

• 25 March 1995 (day 1) — application completed and submitted to the insurer with an initial deposit cheque. Application contained a declaration "I understand that the insurance applied for shall not become effective until this application is accepted by SGIC [Insurance] in writing";
• 4 April (day 10) — application received by the insurer and cheque banked;
• 18 April (day 24) — application underwritten and additional medical information requested;
• 21 May, Sunday (day 57) — applicant notices symptoms that lead her to seek medical advice;
• 22 May, Monday (day 58) — applicant attends treating doctor who suggests additional testing;
• 23 May, Tuesday (day 59) — tests undertaken — treating doctor reviews and requests more tests;
• 24 May, Wednesday (day 60) — applicant returns to doctor with further test results. Adverse diagnosis made. On the same day the insurer received the medical information requested 18 April. Application was assessed and accepted;
• 30 May, Tuesday (day 66) — policy schedule produced and checked; and
• 2 June, Friday (day 69) — policy document sent to applicant.

A legal dispute ensued over liability in regards to the claim subsequently made. Ultimately, the judge found:

"The issue of a policy is not essential to the entry into a contract for insurance. Ordinarily, to decide when the contract comes into existence, one must look for an unqualified acceptance by one party of an offer made by the other" (paragraph 33).

"In my opinion, the natural meaning of the statement that appears in the proposal is that there would be no contract of insurance until SGIC advised the proposer in writing of the acceptance of the proposal. I take the reference to acceptance in writing to be a reference to an acceptance communicated to the proposer… However… I am prepared to assume that the statement refers to the dispatch of the acceptance to the insured, as distinct from its receipt... It follows that on my findings the earliest time at which a contract came into existence was 30th May, 1995, and the latest was about the 3rd or 4th June" (paragraph 34).

"… one would expect that SGIC would not want to be bound until the paperwork was complete and at least ready for dispatch. It is only by that stage that all of the final checks have been carried out to ensure that it is in fact appropriate to issue a policy" (paragraph 41).

Subsequent to the above judgement, insurers began making various representations and/or interpretations about when the contract has been entered into and thus, when the duty of disclosure will end.

Unfortunately, these representations were not necessarily either accurate or consistent as evidenced by the following which were made by the same insurer:

• "This duty continues to apply until the insurer notifies you that the risk has been accepted" (PDS, March 2014);
• "If we accept your application, your cover starts when you've paid the first premium, and we have sent you a schedule confirming cover" (PDS, June 2015); and
• "I have read and complied with my duty of disclosure… and understand that this duty continues to apply and the insurance applied for will not become effective until (insurer) advises that the risk has been accepted in writing" (application declaration).

Three subtly different representations:

• When the risk has been accepted;
• When a schedule has been sent; and
• When the risk has been accepted in writing.

Pity the poor adviser who is trying to navigate the confusion arising and even more so when a recent real life case study may add a fourth, or fifth representation even!

(i) Lengthy delays

In an early part of the judgement, reference is made to the fact that between the date of underwriting acceptance and dispatch of the policy "the paperwork took a little while".

One might interpret this to imply that, provided reasonable service standards apply, an insurer is permitted time to undertake the administrative functions necessary to the process of "entering into a policy".

Whilst in the Summerton matter it took the insurer 14 days to complete initial underwriting and request additional medical information, subsequent to that, turnaround time was not unreasonable. The major delay was provision by the treating doctor of the requested medical information.

However, in the case study, the actual service provided was arguably well outside that which could be represented as reasonable i.e. a delay of 31 days between when information was provided to the insurer and acknowledged as being received by it.

The delays did not end there — crucially, even though premium payment details were provided on day 48, four days later, on day 52 a policy had still not been issued. In fact, as this was an increase to an existing policy, the new policy schedule would not actually be issued for several weeks.

If the Summerton judgement was to be followed, the duty of disclosure might be construed as continuing throughout that period; a situation clearly prejudicial to the insured.

(ii) Chronology adjustment

An alternate way to view and assess the case study would be to adjust the actual chronology on the basis of reasonable service standards that should have applied.

When this is done, even if only in respect of the 31-day delay mentioned in (i), verbal confirmation of acceptance would have occurred on day 16 rather than 47; well before any changes to the insurability of the insured.

It would seem that, even if the insurer was unwilling to accept that the contract had been entered into in advance of the change, the extended delay of the insurer's own doing had prejudiced the position of the insured and a right of redress might follow.

(iii) All requirements provided

A crucial difference between Summerton and the case study is that, in the latter instance, all outstanding underwriting requirements had been provided to the insurer prior to the change in the intending insured's circumstances.

Further, the insurer had similarly completed the underwriting process and verbally advised the insured (via the insured's representative) of the underwriting decision prior to the change in circumstances.

The change occurred subsequent to verbal advice of acceptance albeit prior to dispatch of the policy schedule.

(iv) The need for disclosure

Material issues are sometimes not obvious and, in the matter of the case study, a subtle, but no less important issue is that of the need for disclosure.

Under Section 21, an intending insured is required to disclose matters that the insured knows to be relevant to the insurer's decision to accept or otherwise the insurance applied for.

Further questioning of the insured about the events of days 49 to 51 revealed the following:

• Day 49 — awoke feeling what was recognised as nerve pain in the arm. Described as mild; more of a niggle than pain. Not worried by it and put it down to possibly a "crick in the neck". Self-assessment was that it would resolve in a day or so. Went to work and worked a full day without restriction;
• Day 50 — pain in arm was "improved" such that original sense of it appeared justified; and
• Day 51 — pain on waking was similar to that on previous day, however, subsequent to driving to work, pain increased such that it was assessed as something more than a crick in the neck.

The insured believed it was not until around 9am on day 51 that disclosure was required. Therefore, if it could be shown that the policy was "entered into" prior to then, it may be that disclosure was in fact not required.

(v) When is a contract concluded

It is generally accepted that four elements are required to be present for a contract to be concluded:

Offer, by way of the completion and lodgement of an application form;

Acceptance, either on an as-submitted basis or subsequent to the requesting and provision of additional requirements;

Consideration, involving the payment of a premium or the provision of an authority if there was no impediment to the authority operating e.g. sufficient funds were in the account; and

Intent, e.g. if an underwriter declined a risk but acceptance was advised in error, intent would not exist and likely neither would a completed contract.

The Summerton judgement would imply that notification is also required; however, the crucial question becomes whether notification must be in writing and, if so, must it be by virtue of the sending of the policy schedule or would it suffice if an email was sent or phone call made confirming acceptance.

(vi) Simple solution?

All the above would be thought provoking academia except that it is certainly not uncommon that the question of when did the duty of disclosure end becomes the crux of the perfect storm of loss, liability and litigation.

A simple solution might be:

• Insurers publish their service standards such that an adviser has a baseline against which to assess actual performance and following on from this, to assess whether delays are reasonable and, if not, the extent of any unreasonable component; and
• Rather than an insurer simply advising of acceptance, sending a schedule, etc. the insurer goes the extra kilometre, i.e. additional advice be provided by way of a clear statement to the effect that "your client's duty of disclosure has now ended"?

It is arguably feasible that the linking of the above actions might remove, or at worst reduce, the risk exposure for the adviser and uncertainty for the client.

Col Fullagar is the principal at Integrity Resolutions.