BACK TO BASICS: INSURANCE CLAIMS HANDLING AND THE KEY CONDUCT OBLIGATIONS

Claims handling in insurance is currently a key focus of ASIC, with ASIC Deputy Chair Karen Chester recently calling for action from insurers to get the basics right and warning of the risks of enforcement action. ASIC has indicated it is closely monitoring claims handling processes and has already commenced several investigations across the insurance sector. Claims handling will also be scrutinised by the House of Representatives Standing Committee on Economics for the inquiry into insurers’ responses to 2022 major floods claims, which is due to be tabled by September 2024.

In this article, we consider two key conduct obligations – the duty to act with utmost good faith and requirement to provide financial services efficiently, honestly and fairly (EHF Obligation) – and what they require in the context of claims handling.

Due to reforms in March 2019, the duty of utmost good faith and EHF Obligation are civil penalty provisions. The courts now have the power to impose civil penalties on licensees if they breach these duties. And ASIC continues to use both duties as enforcement tools, which can be seen in a marked uptick in ASIC litigation on utmost good faith and the EHF Obligation in insurance.

While complying with the Life Insurance Code of Practice (LICOP) and General Insurance Code of Practice (GICOP) is likely to go some way towards complying with these duties, the EHF Obligation and the duty of utmost good faith are broad obligations and their content will vary with the circumstances.

This means that it is important that licensees look beyond the industry Codes of Practice and review their claims handling frameworks to ensure these duties are considered, and complied with, at each stage of the claims process. This means giving due consideration to how the duties can evolve in line with community and regulatory expectations, and be malleable, giving rise to differing practical requirements in different circumstances.

Industry Codes of Practice

The LICOP and GICOP set standards that insurers agree to uphold with the aim of protecting customers in respect of all aspects of the insurance process, including claims handling.

For example, the LICOP sets out requirements that include:

• being honest, fair, respectful, transparent and timely in communication with customers;
• additional support for vulnerable customers;
• treating customers with empathy, compassion and respect throughout the claims process;
• regular communication with respect to claims;
• attempting to resolve inconsistencies in information without using surveillance;
• ensuring claims assessors have appropriate skills and training; and
• meeting specified timeframes for handling claims.

The LICOP is said to ‘se[t] higher standards than the law’.[1] However, this does not mean that it is the only set of standards with which insurers and other providers of claims handling and settling services must comply.

Insurers are subject to a broad range of legal obligations, including the general conduct obligations in section 912A of the Corporations Act 2001 (Cth) (Corporations Act) and the duty of utmost good faith in section 13 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act).

The duty of utmost good faith and the EHF Obligation in particular are intentionally broad, principles-based obligations. While complying with LICOP or GICOP is likely to go some way towards satisfying these duties in some circumstances, it is not possible to set out in a prescriptive and exhaustive way what they each require in all circumstances. It is important that insurers, and others involved providing claims handling services, look beyond LICOP and GICOP and understand what these broad legal duties can require and consider how they will comply with them.

The duty of utmost good faith

Insurers are subject to a duty to act with the utmost good faith in respect of any matter arising under, or in relation to, the contract of insurance (section 13 of the Insurance Contracts Act). This extends to claims handling and settling services.[2]

The duty imports a broad duty on the insurer to ‘act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured’.[3] A lack of honesty is not a prerequisite for the conclusion that there has been a lack of utmost good faith[4] and the concept of ‘utmost good faith’ has been said to ‘involv[e] something more than mere good faith’.[5]

Further, in ASIC v TAL,[6] Allsop CJ emphasised that ‘[i]t is inappropriate to draw conclusions of principle or of rules from other articulated fact situations about a duty of this character’ – in other words, what the duty requires will depend on the circumstances of the particular case.

However, his Honour also noted that ‘[i]t is… helpful to recognise from articulated fact situations how the standard can be taken to be breached’.[7] For example, the courts have found the duty to have been breached in respect of:

• failure to make a prompt admission of liability to meet a sound claim, where the relevant information was available;
• failure to inform the insured that it was investigating whether she had made a misrepresentation and provide her with an opportunity to respond before avoiding her policy; and
• informing an insured in a letter that they had acted without good faith and threatening to recover amounts paid under the relevant policy.

The variable nature of the duty means insurers should implement governance and claims handling frameworks that include prompts and appropriate escalation triggers to enable consideration of the duty during quality assurance and at each stage of the claims process.

Efficiently, honestly and fairly

The EHF Obligation requires financial services licensees to do all things necessary to ensure that the financial services covered by their licence are provided efficiently, honestly and fairly (section 912A(1)(a) of the Corporations Act).

Providing a claims handling and settling service is now a designated financial service (section 766A(1)(eb) of the Corporations Act). Accordingly, the obligation to act efficiently, honestly and fairly extends to all aspects of ‘claims handling and settling’ as it is defined in section 766G of the Corporations Act.

The EHF Obligation is wide-reaching and, like the duty of utmost good faith, it imports commercial standards of decency and fairness, and its content can vary depending on the circumstances. While there continues to be developments regarding the scope of the EHF Obligation, fundamentally, it requires the licensee to provide financial services competently, reasonably and with due regard to principles of commercial fairness. We consider that this encompasses both procedural and substantive elements.

For example, ASIC has interpreted the obligation as requiring licensees to handle and settle claims:

• in a timely way;
• in the least onerous and intrusive way possible;
• fairly and transparently; and
• in a way that supports consumers, particularly ones who are experiencing vulnerability or financial hardship.

The requirements under LICOP and GICOP target many of these requirements in a prescriptive way; for example, through the imposition of specific claims timeframes.

Further, the circumstances which lead to a breach of the EHF Obligation may extend beyond the licensee’s own operations to ‘downstream’ representatives and service providers.[8] However, as a ‘forward-looking obligation’ it is primarily concerned with the ‘taking of steps to achieve compliance… before any specific instance of non-compliance has arisen’.[9]

Accordingly, licensees should consider whether they have compliance systems in place that ensure compliance with the EHF Obligation within their own claims handling operations but also involve appropriate supervision of and compliance by downstream entities, such as claims managers, fulfilment providers and other claims intermediaries.

Practical measures

Breaches of the duty of utmost good faith or the EHF Obligation (or both) could theoretically arise due to (among other things):

• inefficiencies that lead to poor communication or slow claims responses;
• inadequate resourcing and organisational prioritisation of claims handling processes;
• differential treatment between claimants where such differential treatment is not appropriate or justifiable;
• failure to provide claimants with procedural fairness, such as opportunities to put forward additional evidence in the context of declined claims, or failing to provide claimants with the precise basis for declining a claim;
• favouring a medical report of the insurer over the claimant’s medical report without providing an opportunity for the claimant to counter-respond or obtain/provide further medical evidence;
• failure to have specific measures in place for the protection of vulnerable customers, including those in financial hardship;
• failure to have appropriate escalation points and triggers for complex cases; or
• inadequate oversight and supervision arrangements for claims intermediaries.

It is important for insurers to periodically review their claims handling frameworks to ensure they remain fit for purpose and suitable in light of evolving expectations under the duty of utmost good faith and the EHF Obligation. ASIC enforcement, AFCA determinations and case law continue to develop and add colour to these duties in practical terms - meaning that claims handling frameworks should not be treated with a 'set and forget' mentality.

If you are interested in better understanding how to build these obligations into existing claims handling frameworks and processes, get in touch with one of our experts below.

[1] https://cali.org.au/life-code/

[2] ASIC v TAL Life Ltd (No 2) [2021] FCA 193 (ASIC v TAL) at [157].

[3] CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1 (CGU v AMP) at [15].

[4] CGU v AMP at [342]; ASIC v TAL at [172].

[5] AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2005) 146 FCR 447 at [87]; ASIC v TAL at [345].

[6] ASIC v TAL at [173].

[7] ASIC v TAL at [173].

[8] ASIC v Diversa Trustees Limited [2023] FCA 1267 (Diversa) at [147].

[9] Diversa at [149]; ASIC v Commonwealth Bank of Australia [2022] FCA 1422 at [156].