- From 1 July 2017, life insurers that are members of the Financial Services Council must comply with the new Life Insurance Code of Practice.
- The Life Code requires insurers to provide new customers with documents that clearly explain key information in plain language.
- The importance of legal documents being written so that they can be understood by everyday citizens and consumers cannot be overstated. This is especially so in life insurance, as most people will only first read their policies when they are in an emotionally vulnerable state.
From 1 July 2017, life insurers that are members of the Financial Services Council (‘FSC’) must comply with the new FSC Life Insurance Code of Practice (‘Life Code’).
First life insurance consumer code
The Life Code covers various interactions between life insurers and their clients. It requires life insurers to respond to claims, complaints and information requests within set timeframes, limit the use of surveillance, and review medical definitions regularly.
Importantly, the Code also contains prescriptive obligations regarding plain language in customer documents.
Plain language under the Life Code
The Code requires insurers to provide customers with documents that clearly explain key information in plain language, including the amount insured, the type of cover purchased, exclusions, cooling-off periods, medical definitions and cost. Life insurers are also required to consumer-test their plain language.
When designing and introducing new life insurance policies, the Code requires insurers to incorporate plain language into sales and policy information. Where policies are sold directly to individuals without a financial adviser, policy information must be clear and informative – to the standard required for a consumer to be able to reasonably assess whether the policy suits them.
The Code also imposes prescriptive plain language obligations in relation to pre-existing condition exclusions, funeral insurance policies, consumer credit insurance and the advertising and marketing of life insurance policies.
The Code is more prescriptive in describing the information, documents and circumstances requiring plain language than, for example, the General Insurance Code, which requires insurers to ‘take reasonable steps’ to ensure customer communications are in plain language.
The Code is also significantly more prescriptive than the Corporations Act 2001, which requires that product disclosure statements (‘PDS’s) be ‘clear, concise and effective (s 1013C(3)), without further legislative guidance as to what this might require.
Ineffective disclosure claims Consumer rights groups have long and often criticised the life insurance industry for policies and communications that are difficult for customers to understand.
In 2015, the Insurance Council of Australia (‘ICA’) Effective Disclosure Taskforce investigated the issue and found in its ‘Too Long; Didn’t Read – Enhancing General Insurance Disclosure’ report, that customers ignored general insurance PDSs because they were too long, too complex and used technical jargon. The ICA further found that consumers filed away their PDS documents until they needed to claim.
Accordingly, the ICA considered that PDSs were not meeting their primary purpose of helping consumers buy insurance that met their needs. These findings were upheld in further research, summarised in the ICA’s ‘Consumer Research on General Insurance Product Disclosures – Research findings report February 2017’.
The Australian Securities and Investments Commission (‘ASIC’) report ‘Life insurance claims: An industry review – October 2016’ found that most life insurance disputes occurred at claim time. ASIC did not find this surprising as this was the time a policyholder was likely to become aware of limitations with their policy, including a misalignment between what they understood the policy to cover and its actual cover.