In brief - Insurers follow an established procedure in assessing claims
While every claim made will require its own specific considerations, some basic steps will be on every insurer's checklist in assessing the legitimacy of claims received. The list below provides an insight into the procedure followed by insurers in assessing the validity of the claims and provides guidance when making an assessment of the likelihood of any pending claim getting the seal of approval.
Step 1: Who is the claimant?
On receipt of any insurance claim, the first step on an insurer's checklist will be to identify the claimant clearly in order to determine whether or not the person or entity claiming on the insurance policy is actually an insured party.
Historically, it was possible to prevent third parties who were not a party to an insurance contract from benefiting under the cover provided. (See Vandepitte v Preferred Accident Insurance Corporation of New York  AC 70.)
However, the introduction of section 48 of the Insurance Contracts Act 1984 (as amended) (the Act) changed this position. (All references to the Insurance Contracts Act 1984 will be made in accordance with the changes contained in the Insurance Contracts Amendment Bill 2013 which was passed by the Australian Senate on 20 June 2013.) The section was designed so as to negate such third party disentitlement.
Pursuant to that section, a third party beneficiary under a contract of general insurance has a right to recover from an insurer (in accordance with the contract in place) the amount of any loss suffered by that third party beneficiary, even where he or she is not a party to the contract.
The section also extends obligations owed by an insured under the contract to the third party beneficiary. (See section 48(2), Insurance Contracts Act 1984, as amended.) Furthermore, the same defences to an action under the section are available to the insurer that would be available in any action by the insured.
The amendment bill has introduced the addition of defences including (but not limited to) the conduct of the insured, regardless of whether such conduct occurred before or after the contract was entered into. (See Section 48(3), Insurance Contracts Act 1984, as amended.)
Step 2: Is the insurance policy current?
Reference to the relevant schedule or certificate of insurance will provide guidance as to the period of insurance applicable to your claim. First it will be necessary to determine whether you are dealing with a "claims made and notified" or "event based" policy. The occurrence which gives rise to the indemnity will be a key indicator in establishing which type you are dealing with.
Under a claims made and notified policy, an insured must notify his or her insurer during the period of insurance of circumstances which may give rise to a claim. Subject to section 40 of the Act, provided sufficient notice is given by the insured, the question will then be whether the policy was in fact current at the time the insurer was notified of the circumstances giving rise to the claim.
Where the answer is yes and where appropriate notice is given, coverage will apply. Professional indemnity policies provide a good example of a claims made policy.
Event based policies provide coverage for a particular event or occurrence which takes place during the period of insurance. The occurrence of a loss or damage (or an incident which triggers a loss or damage) are examples of events that might trigger the policy.
An example of an event based policy would be a property damage policy. For claims made under an event based policy, the question to ask is whether the policy was current at the time the event occurred.
Step 3: Is this an insured event?
In determining whether an "insured event" has occurred, close scrutiny of the insurance contract, or policy terms and conditions, will be required. The onus of demonstrating that the claim does fall within the coverage provided lies with the insured, while the responsibility of determining whether any claim constitutes an insured event rests with the insurer.
Although it may feel like a tedious task, the only thing to do is to scrutinise the policy terms and conditions closely and apply them to the facts at hand.
Step 4: Do any policy exclusions apply?
While exclusion clauses can be an extremely useful tool to the insurer, such clauses are limited by section 54 of the Act and are strictly construed by the courts.
The language used in their drafting must be clear, plain and unambiguous. Where a clause can be said to meet each of these requirements, it will be for the insurer to demonstrate that the exclusion clause applies and has in fact been triggered.
Again, a close check of the policy terms and conditions should provide guidance as to whether an exclusion clause has been triggered.
Step 5: Other considerations which may disallow the claim
Where an exclusion clause fails to trigger or where none exists, an insured may still be disentitled from claiming under his or her policy.
Some questions considered by insurers are set down by legislation and it is useful to bear these in mind when assessing the efficacy of any insurance claim. These include:
- Has there been a breach of the duty of good faith? Section 13 of the Act implies into every insurance contract the "duty of good faith". Each party must act towards the other party with the utmost good faith. Pursuant to the additions made to the section by the 2013 amendment bill, a breach of duty of good faith will now constitute a breach of the requirements of the Act.
- Have you made full and proper disclosure? Pursuant to section 21 of the Act, an insured has a duty to disclose to the insurer (before entering into the contract) every matter that is known to the insured, which a reasonable person could be expected to know to be a matter relevant to the insurer in deciding whether to accept the risk. The amendment bill has introduced factors to be considered in assessing such disclosure, namely the nature and extent of the insurance cover and the class of person ordinarily expected to apply for such insurance. (The amendment will only apply to contracts entered into after the commencement of the new legislation. Further change to the section will commence 30 months after the date of Royal Assent, when section 21A will allow the insurer to ask the insured to answer specific questions relevant to its decision. Section 21B extends disclosure requirements to insurance contract renewals.)
- Is the claim genuine? According to section 56, where a claim is made under a contract of insurance by a person who is not the insured under that contract and that claim is made fraudulently, the insurer (although unable to avoid the contract) may refuse payment of the claim.
Non-legislative considerations include:
- Do you hold "other insurance"? Whether or not an insured holds other insurance (i.e. an entitlement to indemnity from two or more insurance providers in respect of the same subject matter) will be investigated by an insurer. Often, an insurance contract will include a clause aimed at limiting an insurer's responsibility where such dual policy coverage arises. However, the provisions of section 45 of the Act are relevant - pursuant to subsection (1), such clauses may be void. (Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract.) Where legitimate dual coverage arises, section 76 of the Act allows an insured to claim against whichever insurer he or she elects and to recover from that insurer the amount of his or her loss (subject to the maximum sum insured).
- Has the insured event contributed to the loss? Where the insured event could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, an insurer may refuse to pay all or part of the claim.
- Has the insured event been tainted by illegality? Many insurance contracts will contain a clause that provides that an insurer may refuse to pay a claim where an insured event is tainted by illegality.
- Does a right of subrogation exist? An insurer will usually investigate whether a recovery action exists whereby the insurer can step into the shoes of an insured and proceed with a claim against the party responsible for the loss. In this instance, the claim will usually be paid on the proviso that the insured will assist the insurer in recovering from the third party.
The efficacy of the claim (or lack thereof) has been determined - what next?
Where a claim has been granted indemnity/cover, it will be necessary to measure the loss. Depending on the type of claim at hand, various different factors will need to be determined by the insurer in conducting calculations. Notwithstanding this, the following points will usually be considered in most cases:
- Does an excess or deductible apply?
- Are dual policies in place?
- Has the insured sum been correctly calculated or over or under insured?
- What is the limit of liability under the policy? Will the claim fit within it or has the limit been eroded by other claims?
- Are there any applicable sub-limits?
- Does a policy reinstatement apply?
Where indemnity cannot be resolved, seeking legal advice at an early stage can help to keep costs to a minimum, by obtaining a clear view on the complexity of the matter and an accurate assessment on the likelihood of succeeding with an insurance claim. An insurance lawyer will be able to assist in ascertaining whether a strong claim on the part of the insured (or conversely, a reliable insurer defence) exists and can assist with communication between the parties, or where appropriate, settlement negotiations.
Further information regarding the questions considered by insurers in assessing the claims they receive can be found in the Insurance Council of Australia General Code of Practice, which sets out the way in which consumers can expect their insurer to behave and the recourse that policyholders have in disputes. The Code includes timeframes for the notification of decisions made on claims received (10 days where no investigation is required) and standards applicable where claims investigations apply.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2022.