Would you like insurance with that? ASIC dishes up advice on add-on insurance
The Australian Securities and Investments Committee (ASIC)’s latest report (Report 492) on add-on insurance makes for sobering reading. Following a review of add-on general insurance products sold through car dealers, ASIC identifies a number of concerns. This follows earlier reports focused on consumer experiences (Report 470) and the sale of life insurance through car dealers (Report 471). The most recent report focuses on the design of insurance policies and sales processes.
What is add-on insurance?
Add-on insurance generally refers to insurance products that are ‘added-on’ to the sale of a non-insurance product. For the purposes of the report, ASIC reviewed the following five add-on insurance products:
- Consumer Credit Insurance (CCI);
- Guaranteed Asset Protection Insurance (GAP);
- Loan Termination Insurance;
- Tyre and Rim Insurance; and
- Mechanical Breakdown Insurance.
What were ASIC’s key findings?
Overall, ASIC was not impressed with the quality of insurance policies sold through car dealers, sales processes and pricing. They identified six main concerns:
Low claim pay-outs
Over a three year period, add-on insurance products delivered an overall claims ratio of 9 per cent. ASIC is concerned that these insurance policies are not providing value for consumers and has announced it will consult with each insurer to seek information on their claims ratio targets. ASIC is also considering making claims ratios available to the public if outcomes do not improve.
Significant upfront commissions to car dealers
In their report, ASIC found that upfront commissions paid by insurers to car dealers accounted for up to 79 per cent of the premium paid. Over the past three years, the value of commissions paid to car dealers was approximately four times the amount of claims. Given ASIC’s consumer protection mandate, it is concerned that consumers may be subjected to pressure-selling tactics due to the significant financial incentive to car dealers to make policy sales.
Lack of price competition
Dual and discretionary pricing arrangements were picked up by ASIC during the review. ASIC is concerned about the potential for unfair outcomes to consumers due to the significant variation in prices based on factors unrelated to risk. They have foreshadowed further regulatory action if this practice continues.
Poorly designed policies
During the review, ASIC identified policies that were of low value, overly restrictive, overlapping or unnecessary. In particular, the review identified a range of products that were of ‘negative value’. This meant that the cost of the policy was higher than the maximum amount payable in the event of a claim. ASIC has clarified that it expects insurers to have internal controls to ensure ‘negative value’ policies cannot be sold and for insurers to provide refunds to consumers where such policies have been issued. ASIC has also indicated it intends to continue surveillance in this area to review the extent of the problem.
Single premium policies
As part of the review, ASIC analysed the way that policies are priced and purchased. It found that most add-on insurance is sold as a single premium policy and added to the consumer’s car loan. ASIC is concerned that insurers do not have adequate procedures or controls to ensure premiums are refunded upon early termination of CCI or GAP policies due to specified events. ASIC intends to follow-up and work with insurers to improve outcomes for consumers.
ASIC found that sales processes often led to misinformed consumer decision-making due to risks of information overload, decision fatigue and pressure tactics. It found cases of add-on insurance being issued to consumers who were never eligible to claim and instances where the cost of the policy was not clearly disclosed. ASIC has requested insurers to improve their supervision of car dealers at the point of sale and to implement incentives for car dealers to be compliant. ASIC has made clear its position that insurers are accountable for unfair tactics engaged in by their authorised representatives.
ASIC has advised the industry that it intends to conduct further surveillance to review the extent of problems and to detect improvements. It is also considering further regulatory action if consumer outcomes do not improve.
ASIC’s latest missive reveals its desire to seek greater powers especially around product suitability and intervention capabilities, as recommended in the Murray Financial System Inquiry (FSI). Until such powers are realised, ASIC’s toolkit to address its concerns is quite limited.
However, as emphasised by the Insurance Council of Australia (ICA), add-on insurance plays an important role in ensuring that consumers are adequately protected by insurance for large purchases at a time when they may overlook the need for insurance. In response to the report, the ICA has proposed measures such as a transition to a 20 per cent commission cap, which already applies to CCI under the National Credit Code. Any such proposal is subject to approval by the Australian Competition and Consumer Commission (ACCC).
Nonetheless, the release of the report is a timely reminder for insurers to revisit their policies, practices and internal systems to address ASIC’s concerns and to ensure they remain compliant.
It is clear that ASIC expects organisations to constantly monitor and review their products to ensure that positive consumer outcomes are achieved. ASIC’s focus is not only on sales practices, but also on the manner in which products are designed, claims are managed and that data collected from claims and complaints is used to identify and rectify areas of concern. Meeting ASIC’s expectations will require a new approach to products, and will ultimately require the implementation of a product governance framework that provides senior oversight of design, distribution and after-sale processes.
For further information please contact Timothy Chan and Ray Giblett in our Sydney office and Matt Ellis in our Melbourne office.
An insured by any other name doesn’t smell as sweet
Lambert Leasing Inc. v QBE Insurance (Australia) Ltd  NSWCA 254
A recent NSW court of appeal decision has confirmed that section 45 of the Insurance Contracts Act 1984 (Cth) (ICA) will only render an “other insurance” clause void where the insured is a contracting party to both policies.
The tragic crash and unfortunate loss of fifteen lives following the sale of a plane from Lambert Leasing (a subsidiary of SAAB AB) to Lessbrook Pty Ltd led to a game of pointed fingers regarding the insurance arrangements.
Global Aerospace insured SAAB AB and its subsidiaries, QBE Insurance insured Lambert. When relatives of the deceased crew and passengers brought proceedings in the United States, Lambert claimed under the Global Aerospace policy.
The Global policy contained an “other insurance” clause which, as such clauses aim to do, was intended to reduce Global’s liability if another insurance policy covered the same risk. When it was discovered that under the QBE policy Lambert and others were “additional insureds”, Lambert tried to claim losses from the US proceedings on the QBE policy.
QBE sought to limit its liability by relying on an “other insurance” clause in its own policy, as well as requiring the cooperation of Lambert in order to satisfy the terms and conditions of the policy. On appeal, the Court of Appeal examined five points which had been raised in the first instance proceedings.
Did section 45 of the ICA render the QBE "other insurance" clause void?
Subject to some exceptions (if the other insurance is specified), section 45 of the ICA renders an “other insurance” clause void where an “insured” has “entered into” such other insurance. Since the decision of the High Court in Zurich, it has been clear that being a third party beneficiary of a policy (such as an additional insured) does not constitute entering into that policy. Accordingly, the “other insurance” clause in the Global policy was valid as Lambert had not entered into the QBE policy.
What Lambert argued (which has remained a point of debate since Zurich), is that despite being a third party beneficiary of the QBE policy it had entered into the Global Policy and therefore the “other insurance” clause in the QBE policy was void. This would effectively render the policy where Lambert was a mere beneficiary primary to the policy Lambert had actually entered into. To succeed, Lambert needed to establish that the reference to an “insured” in section 45 could include a third party beneficiary or be “plausibly extended” to include one. Support for this proposition could be found in the Queensland decision of Nicholas.
However, the Court agreed with the first instance judge that section 45 required that the insured must be a contracting party to both the insurance policies, and considered itself bound by the decision of the High Court in Zurich, which held that ‘entered into’ did not include a non-party who was merely entitled to a benefit under the policy, otherwise known as a third party beneficiary.
It is interesting that the court considered itself bound by the decision in Zurich. Although the narrow approach as to who constitutes an “insured” is consistent with recent authority in the context of other provisions of the ICA (e.g. ABN Amro) and arguably consistent with some comments of the High Court in Zurich, as noted above the decisive issue in Zurich was whether the insured had “entered into” the second policy, not the characterisation of the “insured”. Accordingly, any observations of the High Court were potentially obiter.
The Court ultimately concluded that for the other insurance clause to be relevant the party must have ‘entered into’ both contracts, rather than entering into one policy and merely being a beneficiary of the second policy (regardless of which way around).
In any event, as Lambert wasn’t involved in negotiating the Global policy, nor had it paid any premium, the Court didn’t think that Lambert could be said to have done anything warranting a finding that it had ‘entered into’ the Global policy either.
If not, did the two "other insurance" clauses cancel each other out?
Whilst the Court concluded that since section 45 had no application both “other insurance” clauses were valid, they also determined that the “other insurance” clauses would cancel each other out, such that whichever insurer ultimately paid would be able to seek contribution from the other insurer.
Did payments made under the Global Aerospace policy preclude a claim for indemnity under the QBE policy?
Yes. The Court confirmed that an insured is unable to claim indemnity from both insurers, instead they must claim indemnity from whichever insurer they prefer and then leave it to the insurers to allocate contribution. The Court specifically noted that the attempt by Global to have the Deed characterised as a ‘limited recourse loan’ did not alter this position.
Were the appellant aircraft lessors entitled to indemnity from the aircraft owners arising out of their "use or operation" of the aircraft?
An indemnity term of the contract of sale, subject to the law of Virginia, required the ‘use’ of the aircraft as a precondition to liability. The word ‘use’ did not have any special meaning under Virginian law. The Court determined that ‘use’ did not include the leasing or paying for the maintenance of an aircraft as it did not demonstrate sufficient control.
Rein J at first instance had also ruled that the proceedings had been commenced prematurely. On appeal, the Court determined that as QBE was entitled to require the production of documents and that as the appellants were afraid that disclosure of these reports to QBE would affect their position in the United Sates proceedings, the court was correct to say that the proceedings had been commenced prematurely.
For the briefest of moments the Court looked at section 13 of the ICA as to the duty of good faith and considered whether QBE had been ‘fence sitting’, but the Court ultimately eschewed any mental gymnastics on the topic to state that QBE was entitled to await appropriate documentation to consider the claim.
The takeaway point from all this is confirmation of the limited application of section 45; a provision of the ICA many assumed effectively did away with “other insurance” clauses. With “other insurance” provisions rising from the wreckage so to speak, the Court had now clarified the rule:
An “other insurance” clause in your policy remains effective unless you are a contracting party to both policies. If both policies have “other insurance” clauses they cancel each other out and you can take your pick under which policy you claim.
Simple, right? Or at least, that’s where it will stay until the High Court decides to look more closely at the issue (which may be soon if Lambert is granted special leave).
For further information please contact David Frew and Ray Giblett in our Sydney office.