Insurance

ASIC examines handling of life insurance claims

ASIC’s review of nearly 4,800 Individual Disability Insurance (IDII) applications received between January 1 and June 30, 2021 revealed that insurers still need to work to ensure consumers are protected from unfair practices in non-disclosure investigations and physical surveillance.

As a result of the ASIC review, some life insurers have made improvements to their practices. ASIC’s investigations are continuing with life insurers who had a higher proportion of potentially unwarranted investigations identified in the review.

ASIC has long been concerned about the potential harm to consumers from excessive use of intrusive complaints-handling practices such as non-disclosure investigations and physical surveillance. This review of IDII claims follows ASIC’s 2019 633 report Holes in the Safety Net: A Review of TPD Insurance Claims (REP 633) and follow-up 2021 Report 696 TPD insurance: Progress made but gaps remain (REP 696) which examined claims handling practices in the context of Total and Permanent Disability (TPD) insurance.

The Royal Commission on Financial Services reviewed several case studies of flagrant misconduct in which physical surveillance and non-disclosure investigations were misused. In response to one of the case studies, ASIC took action against TAL Life Limited (TAL). On March 9, 2021, the Federal Court found that TAL breached its duty of good faith in handling a claim (21-042MR).

ASIC Vice President Karen Chester said: “Our previous reviews and the Royal Commission have identified concerns about the misuse of investigative tools by insurers and the resulting harm to consumers. . Following the Royal Commission, we brought an action against TAL for breach of its duty of good faith in handling claims. Changes to the Corporations Act as of January 1, 2022 mean that insurers are now legally bound to act efficiently, honestly and fairly in handling claims.

“ASIC’s latest review aimed to test whether insurers are now entrenching good practice, particularly with insurers now subject to new claims handling obligations. We also sought to identify outliers and areas for improvement. As a result of the review, we remain concerned that some insurers still appear to be “fishing” for non-disclosures to avoid paying legitimate claims. We advise insurers that we will take action when we find harm to consumers due to poor claims handling practices,” Ms Chester added.

“We have also identified concerns about mental health claims and investigations. Non-disclosure investigations and physical surveillance are intrusive measures and insurers must ensure that they have reasonable grounds to undertake them. We expect physical surveillance to be used only as a last resort,” Ms Chester concluded.

ASIC has written to life insurers covered by the review outlining areas for improvement and communicating expectations regarding their use of investigative tools, including the requirement to handle claims efficiently, honestly and fairly. .

The following life insurers participated in the review:

  • AIA Australia Limited (AIAA), comprising AIAA and The Colonial Mutual Life Assurance Society Limited (CMLA);
  • TAL Life Limited (TAL), comprising TAL and Asteron Life & Superannuation Limited (Asteron);
  • Zurich Australia Limited (Zurich), comprising Zurich and OnePath Life Limited (OnePath);
  • MLC Limited;
  • Resolution Life Australasia Limited (formerly AMP Life Limited); and
  • Westpac Life Insurance Services Limited (Westpac) (now TAL Life Insurance Services Limited from 1 August 2022).

Review results

ASIC’s review of nearly 4,800 Individual Disability Insurance (IDII) claims found that:

  • non-disclosure investigations were conducted in approximately 5% of claims (252 claims) and physical monitoring was conducted in approximately 1% of claims (57 claims);
  • five insurers appeared to have initiated non-disclosure investigations only on the grounds that the claim was filed within three years of policy inception or renewal, increasing the risk of “fishing”;
  • 40% of non-disclosure investigations related to non-disclosure of mental health;
  • physical surveillance was used in 10 mental health claims and ASIC considers that surveillance may have been unwarranted in half of these cases; and
  • the use of monitoring may have been unwarranted in 17.5% of claims (10 out of 57) where monitoring was used, because the insurer had not demonstrated that other methods of investigation had been exhausted.

Background

Individual Disability Insurance (IDII) coverage is obtained through direct or advised channels where each insured is underwritten individually. IDII coverage provides income for a period of time if a person cannot work due to illness or injury.

Insurers use non-disclosure investigations to confirm that claimants provided the required information about their medical history when they purchased their policy. In limited circumstances, physical checks are used to check for potential inconsistencies in claim information.

Since March 2019, Article 13(2)(A) of the Insurance Contracts Act 1984 imposes a civil penalty on an insurer who does not act towards an insured with the utmost good faith. The penalty did not apply at the time of the conduct that was the subject of ASIC’s action in Federal Court against TAL (21-042MR). However, ASIC believes that the requested statements set an important legal precedent and will act as a deterrent against similar conduct.

As part of the legislative reforms following the recommendations of the Royal Commission, the existing disclosure obligation in sections 21A and 21B of the Insurance Contracts Act 1984 has been replaced by an obligation for the insured to take reasonable precautions not to make false declarations when purchasing insurance. The new law applies to retail contracts issued, renewed or amended on or after October 5, 2021.

On January 1, 2022, the processing and settlement of insurance claims became regulated as a financial service under the Companies Act 2001. This includes the obligation to deal with complaints efficiently, honestly and fairly. Insurers can fail to handle claims effectively, honestly and fairly if they lack a reasonable basis to test for non-disclosure or misrepresentation. Without a reasonable basis, the insurer can engage in “fishing” and default on its obligations.