Australian Insurers Swindle Customers

When an industry doesn't have a code of conduct, is granted exemptions from laws banning unfair terms in contracts and has the power to discriminate, it is little wonder that consumers end up the poorer.

This is certainly the case in the $44 billion life insurance industry, which has all these exemptions, and last month was caught abusing this privileged position. The requirement to act in "utmost good faith" has proved to be of little use to consumers who end up arguing their life insurance cases before the courts.

Commonwealth Bank's life insurance arm CommInsure apologised to customers that it had treated poorly and agreed to accelerate changes to its heart attack and rheumatoid arthritis definitions, albeit only backdating to May 2014, to bring it into line with medical advances.

It followed shocking revelations that some legitimate claims were being knocked back using definitions that were years out of date – definitions that certain key executives had been made aware of but had not been updated.

       

But CommInsure isn't the only life insurer flogging products with out-dated definitions that are then used to decline claims.

 

Faulty Products
In most sectors this would be deemed a faulty product or service and the manufacturer or service provider would be called on to fix or recall the product and cop a fine.

Yet when it comes to life insurance, which is purchased by consumers to give them peace of mind in case something terrible happens in their life such as illness or death, there is an explicit "carve out" of unfair contract terms laws written into the insurance legislation.

When the laws governing insurance were drafted in the 1980s, it was thought that there were enough consumer protections in the act, such as insurers' requirement to act in "utmost good faith" to protect consumers.

Between the unfair terms protections in the Australian Consumer Law and the ASIC Act, every contract that a consumer is ever likely to enter is protected by unfair terms law – except insurance.

Put simply, insurance has been allowed to fall through the cracks. Not surprisingly, the insurers, especially the life insurers, have fought tooth and nail to protect it.

Change Resisted
The previous Labor federal government flagged plans to pass laws extending the ban on unfair contract terms to general insurers. But the life insurance industry was spared this attempted reform, which failed to clear Parliament before the 2013 election.

The reason is simple. During a review of the laws in 2010, the life insurance industry's lobby group, the Financial Services Council (then known as the Investment and Financial Services Association) went into lobbying overdrive to maintain the "status quo", effectively launching a scare campaign that any changes would increase costs, which would be passed on to consumers. It also warned of increased litigation.

It boldly wrote: "[Life] insurance policies are not commonly a source of contract terms that could be said to be harsh and/or unfair to consumers."

Six years later, Fairfax Media and Four Corners' investigation has exposed CommInsure's use of outdated and unobtainable medical definitions in life insurance contracts.

Hidden Nasties
These definitions have disadvantaged many sick and dying consumers. CommInsure has since apologised to paid out those victims but what about the others who have been knocked back or have been waiting years for a response to their claims?

John Berrill, one of the country's leading life insurance lawyers, says one of the key problems with life insurance is the "hidden nasties" in the fine print of lengthy product disclosure statements.

He says other industries such as general insurance have a standard cover, which assumes terms in insurance policies are consistent with what most people understand they would be covered for or not. The life insurance industry doesn't.

It means the requirement to act in "utmost good faith" has proved to be of little use to consumers who end up arguing their life insurance cases before the courts.

It's why, David Leermakers, senior policy officer at the Consumer Action Law Centre, believes the exemption from laws banning unfair contract terms should end. The former ACCC chairman Allan Fels strongly agrees.

Too Important For Flaws
Life insurers, unlike general insurers, don't have an industry code of conduct – further eroding the protections for consumers of their products.

The industry is currently working on a code, but only after ASIC released a damning report in 2014 that found 37 per cent of advice on life insurance was in breach of the law. The industry was told to fix itself up.

But it beggars belief why a mandatory code wasn't imposed and exemptions removed.

The industry has been dogged with problems for years. In 1992 the then Trade Practices Commission conducted an investigation that found that "the market continues to deliver poor value for money to a high proportion of consumers, particularly in the regular premium sector of the market.

"The root causes of this market failure are the serious information problems facing consumers in this market and the misleading conduct of some agents."

Still privileged position
Despite this, life insurers hold the privileged position of being legally exempt from anti-discrimination laws, as long as they can back any discrimination with statistical and actuarial data.

Beyondblue chairman Jeff Kennett doesn't believe they have the data, yet they continue to discriminate. In a recent interview, he said beyondblue had been trying since 2002 to get the statistical data to understand why claims are being refused.

"They're collecting premiums, they know some of those premiums are going to result in claims. They know that they're going to rely on a clause of mental health where they don't have to pay up. It's unacceptable. It's discriminatory. It's hurtful because the damage isn't just about the money. It's the psychological damage they do to individuals taking on these big organisations."

Kennett believes the data should be subpoenaed, analysed and a report handed own. "From that I think you'll find the use of the words 'mental illness' within an insurance policy, life, income protection, tourism, travel – anything else – will be substantially changed."

Cabrini Medical Centre rheumatologist, Associate Professor Stephen Hall, has been battling issues surrounding insurance companies and his rheumatoid arthritis patients for 30 years.


He told Fairfax Media in March how insurers used 50-year-old actuarial tables that failed to account for medical advances; the result was the denial of claims based on "antiquated" medical definitions.
It all adds up to an extraordinarily light consumer protection regime for an industry that holds so much sway over people's lives in their most vulnerable moments.

"Pretty much everybody but the insurance industry agrees that these consumer protections for insurance are not up to the task – they don't do what they need to do," Leermakers says.