Most of us have an instalment contract of general insurance. An instalment contract is one under which the insured pays the premium in seven (7) or more instalments per year. Comprehensive car insurance or home and contents insurance policies are examples of such products.
But what happens if you miss a premium and an ‘event’ occurs under the policy? Your policy will contain a clause about this.
The Policy wording
By way of example, the current Youi Insurance Ltd home and contents Product Disclosure Statement provides as follows:
‘Make your premium payments/s.
You must ensure that your first and any subsequent instalment premium payments are made by the due dates in order to be covered, if any payment remains unpaid for a period of 14 calendar days or more, we may refuse to pay your claim. If any payment remains unpaid for a period of one calendar month or more, we may cancel your policy as permitted by law’
The Insurance Contracts Act 1984 (Cth)
The Insurance Contracts Act 1984 (Cth) requires insurers to state the circumstances in which they will limit their liability, or refuse to pay a claim in the event of non-payment of a premium. Section 39 of the ICA states:
‘Where a provision included in an instalment contract of general insurance has the effect of limiting the liability of the insurer by reference to non-payment of an instalment of the premium, the insurer may not refuse to pay a claim, in whole or in part, by reason only of the operation of that provision unless:
(a) at least one instalment of the premium has remained unpaid for a period of at least 14 days; and
(b) before the contract was entered into, the insurer clearly informed the insured, in writing, of the effect of the provision.’
Claim denials by insurers
If an insured fails to pay a premium by the due date, many insurers send a reminder letter shortly afterwards saying something like:
‘We tried to debit your Home insurance premium of $400.00 on 10/12/2018 and we’ve been notified by your credit card provider that we were unsuccessful.
For your continued protection we’ll try again on 21/12/2018.’
If a premium has remained unpaid for at least 14 days and an ‘event’ occurs under the policy, some insurers deny the claim at first instance, purporting to rely upon a clause just like Youi’s above.
A decision to reject a claim on the basis of an insured’s non-payment of a premium, before a policy is cancelled should be challenged through a process like those described in our previous article, 7 Tips for dealing with insurance claims. In some circumstances, a decision to reject a claim for an event occurring after cancellation may be contestable too, if the cancellation itself was invalid.
What many insureds do not realise is that a communication like this reminder notice can operate to extend the due date for the premium. This is important because if the due date for the premium is reset, an insurer cannot refuse to pay a claim for an event which occurs within 14 days of the ‘new’ due date for the premium.
Decisions of the Financial Ombudsman Service (now ACFA)
There are a number of decisions by the Financial Ombudsman Service (FOS) on this issue in favour of insureds and these include:
In this case, the Financial Services Provider (FSP) was unable to direct debit an account on the due date for the first instalment of the premium. The FSP subsequently cancelled the policy and an event occurred after the cancellation of the policy. In arriving at its decision in favour of the applicant, the FOS noted as follows:
’28. However, in considering the evidence submitted by the FSP, the Panel notes the FSP’s letter of 23 June 2010 which states ‘A cancellation letter was sent on 4 May 2010 advising if payment is not received by 14 May 2010 then policy (sic) will be cancelled’. This letter extends the period for payment to 14 May, indicating that cover will continue subject to payment, but that if a payment was not made by 14 May it would cancel the policy.’
It follows then, that a reminder letter such as the one above ‘extends the period for payment’. Once the due date for the premium is extended, the 14-day period under section 39 of the ICA cannot begin to run until the ‘new’ date for payment of the premium and cover must be extended for a claim arising prior to the expiration of 14-days.
In this case, the FSP was unable to direct debit an account on the due date for the premium. The applicant submitted a claim one (1) month later for an event and the FSP denied cover on the basis that the policy had been cancelled and that it was entitled to decline cover as the payment remained unpaid for 14 days. In arriving at its decision in favour of the applicant, the FOS determined:
’36. A critical matter is that I disagree with the FSP’s argument that the Overdue Notice did not change the due date for the monthly instalment. Consistent with earlier Determinations of this Service, my view is that when the FSP advised in the Overdue Notice that it ‘will try again to deduct the payment on 1 January 2011’ the FSP has effectively extended the due date to pay the monthly instalment premium to 1 January 2011.
37. This conclusion is fundamental to the decisions which must be made as to the various points advanced by the FSP.
38. In my opinion, in order for the FSP to successfully deny a claim on the ground of non-payment of an instalment premium, the accident or event giving rise to the claim must have occurred after the 14th day from the date the premium was due. Otherwise stated, the accident or event must have occurred on the 15th day.
39. Once the conclusion is reached that the due date for payment of the instalment premium was 1 January 2011, 14 days thereafter is 15 January 2011. As the collision occurred on 15 January 2011, the FSP was not entitled to refuse to meet the claim arising from this collision on the ground of non-payment of the premium. The 14 days does not expire until midnight on the 14th day.’
It should be beyond doubt, that the position of the FOS (now ACFA) is that a reminder notice, extends the due date for payment of premium and that denial of non-payment of premium cannot be effective until after midnight on the 14th day following the ‘new’ due date for a premium.
(a) offer instalment contracts of general insurance; and
(b) deny claims on the basis of non-payment of a premium,
may find themselves squarely in the gun. On one view, this conduct could be described as a breach of the duty of utmost good faith or, misleading and deceptive. A want of intention to mislead or deceive does not matter.
Insurers who adopt this sharp practice on mass across claims have impacted an indeterminate number of insureds.
Insureds are not to know the laws that protect them. Many insureds who experience claim denial in these circumstances simply accept the insurer’s determination as valid and take their claim no further. They cannot even contemplate the idea that there insurer would deny their claim unless they had good reason to. Perhaps some insurers bet on this.
Insurers providing these products should know, or do know, better. They are expected to make the right decision.
Denning Insurance Law is interested in hearing from insureds across Australia with respect to decisions like this. To enquire about challenging a decision to deny a claim for non-payment of a premium, email email@example.com.