Life Insurance Act 1945 (Cth)

5.1 Section 84 of the Life Insurance Act 1945 (Cth), which governs life insurance contracts throughout Australia to the exclusion of State law provides as follows:

A policy shall not be avoided by reason only of any incorrect statement (other than a statement as to the age of the life insured) made in any proposal or other document on the faith of which the policy was issued or reinstated by the company unless the statement

(a) was fraudulently untrue; or

(b) being a statement material in relation to the risk of the company under the policy, was made within the period of three years immediately preceding the date on which the policy is sought to be avoided or the date of the death of the life insured, whichever is the earlier.

5.2 Section 83(1) of the same Act provides:

A policy is not avoided by reason only of a misstatement of the age of the life insured.

Under section 83(2) the insurer is entitled to the benefit of a principle of proportionality in place of the remedy of avoidance.

Instruments Act 1958 (Vic)

5.3 The Instruments Act 1958 (Vic.) contains provisions to similar effect as those of section 84 of the Commonwealth Act. Section 25 of the Victorian Act provides:

No contract of insurance (other than a contract of life insurance) shall be avoided by reason only of any incorrect statement made by the proponent in any proposal or other document on the faith of which such contract was entered into revived or renewed by the insurer unless the statement so made was fraudulently untrue or material in relation to the risk of the insurer under the contract.

5.4 These provisions are clearly intended to modify the common law. Two significant limitations upon their effect should be noted:

• each relates to “incorrect statements” and does not extend to nondisclosure;
• they have effect only in relation to statements in documents and do not deal with oral statements. This may be particularly important in the case of temporary insurance, for example, by way of cover note, which is often arranged orally.

Accepting these limitations, it remains plain that the provisions have the capacity to nullify basis of contract clauses. Section 25 of the Instruments Act, 1958 could have the effect in an appropriate case of preventing the insurer from avoiding the policy and, in addition, not giving the insurer consequential relief either by way of additional premium or reduction in the extent of its liability.

New Zealand

5.5 The Insurance Law Reform Act 1977 contains a number of relevant provisions:

• section 5(1) provides as follows.

A contract of insurance shall not be avoided by reason only of any statement made in any proposal or other document on the faith of which the contract was entered into, reinstated, or renewed by the insurer unless the statement

(a) Was substantially incorrect; and

(b) Was material.

• section 6 defines the terms “substantially incorrect” and “material”:

(1) [A] statement is substantially incorrect only if the difference between what is stated and what is actually correct would have been considered material by a prudent insurer.

(2) [A] statement is material only if that statement would have influenced the judgment of a prudent insurer in fixing the premium or in determining whether he would have taken or continued the risk upon substantially the same terms.

• section 11 forbids exclusions in terms similar to those employed in section 138 of the Consumer Credit Act 1981 (N.S.W.). Section 11 provides.

Where -

(a) By the provisions of a contract of insurance the circumstances in which the insurer is bound to indemnify the insured against loss are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of certain events or on the existence of certain circumstances; and

(b) In the view of the Court or arbitrator determining the claim of the insured the liability of the insurer has been so defined because the happening of such events or the existence of such circumstances was in the view of the insurer likely to increase the risk of such loss occurring -

the insured shall not be disentitled to be indemnified by the insurer by reason only of such provisions of the contract of insurance if the insured proves on the balance of probability that the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of such events or the existence of such circumstances.

These provisions were enacted following the Report of the Contracts and Commercial Law Reform Committee on Aspects of Insurance Law (1975).

5.6 Broadly speaking, section 5 of the New Zealand Act is subject to the same criticisms as section 25 of the Instruments Act 1958 (Vic.) and section 84 of the Life Insurance Act 1945 (Cth). Section 11 of the New Zealand Act is comparable to section 138 of the Consumer Credit Act 1981 (see paragraph 4.6, above) and provides a source of relief to insured persons where the description in an insurance policy of the ambit of the risk or the operation of a provision in that policy would operate to deprive the insured of indemnity for reasons that in essence have nothing to do with the risk actually run or the true cause of the loss suffered.

Conclusion

5.7 It can be seen that legislative steps have been taken outside New South Wales to soften the impact on insured persons of the rigid rules of common law. An accommodation has been sought to be achieved between the competing interests. On the one hand, the object has been to retain the essential concept of materiality and to protect insurers from deliberate or fraudulent misconduct on the part of proponents for insurance. The other purpose has been to protect insured persons from the consequences of material misstatements or innocent non-disclosures, where it is reasonable to do so. They have also been protected from contractual provisions which might allow the insurer to limit or exclude liability on the basis of events or circumstances having no relevance to the loss for which indemnity is sought. We think that this general approach is justified and should be followed in New South Wales.