The Insurance Contracts Act 1984 (“ICA”) contains important consumer protections designed to prevent insurers from relying on pre-existing defect or imperfection exclusion clauses to decline claims when the insured was not reasonably aware of those defects or imperfections at the time they took out the policy. This blog addresses a series of court decisions that have washed away those consumer protections and which insurers have exploited to side-step the operation of the ICA.
Berrill & Watson has acted for consumers in numerous general insurance claims, including home and contents, motor vehicle and other claims. In recent years, insurers have increasingly relied on exclusions and other clauses in the fine print of their policies to deny claims based on defects, imperfections or alleged lack of maintenance of the property – be it a home, a car or something else insured under the policy.
This has become a growing concern, particularly in home and contents claims following catastrophic flood events in Victoria, NSW, South Australia and Queensland in 2022 and 2023.
Section 46 of the Insurance Contracts Act 1984: pre-existing defects or imperfections
Section 46 of the ICA is designed to prohibit an insurer from relying on a clause in a contract that would otherwise allow the insurer to deny or limit its liability for a claim because of a pre-existing defect or imperfection in a thing that is insured under the contract (e.g. a home insured under a home and contents policy).
The wording adopted by the ICA is set out in full below.
46 Pre‑existing defect or imperfection
- This section applies where a claim under a contract of insurance (other than a contract of insurance that is included in a class of contracts declared by the regulations to be a class of contracts in relation to which this section does not apply) is made in respect of a loss that occurred as a result, in whole or in part, of a defect or imperfection in a thing.
- Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to the condition, at a time before the contract was entered into, of the thing.
However, the protection provided to consumers by s 46 of the ICA has been substantially eroded by the courts’ interpretation of the phrase “by reference to the condition, at a time before the contract was entered into”.
Insurance related court decisions that have washed away consumer protections
Asteron Life Limited v Zeiderman [2004] NSWCA 47
Asteron Life Limited v Zeiderman [2004] NSWCA 47 was a decision of the NSW Court of Appeal concerning the application of an exclusion clause in a trauma insurance policy.
This case considered the application of s 47(2) of the ICA concerning pre-existing sickness or disability in life insurance contracts. Section 47(2) is drafted in identical terms to s 46(2) of the ICA, but the terms “defect or imperfection” are substituted for “sickness or disability”.
In that case, the Court unanimously agreed that both s 46 and s 47 did not apply to an exclusion clause in a policy of insurance “when the time of entry into the contract of insurance is irrelevant to the exclusion” as drafted in the policy. It stated at [16]:
An insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusionary provision of that character does not fall within the statutory preclusion in either s 46 or s 47 of the Act because it could not be said that a limitation or exclusion was made “by reference to” a condition of a thing or a sickness or disability at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, the sections do not apply.
Nelson v The Hollard Insurance Company Pty Ltd [2010] NSWSC 199
In a subsequent decision of the NSW Supreme Court in Nelson v The Hollard Insurance Company Pty Ltd [2010] NSWSC 199, the Court followed the Zeiderman decision in the context of a general insurance policy covering the insured’s yacht. The policy contained an exclusion from liability “for any loss of damage caused by or resulting from, or the costs incurred from or of: inherent defects, structural faults, faulty workmanship or faulty design.”
In that case, the Court held at [34]-[38] that:
Section 46(2) requires an examination of the relevant policy terms and not the particular facts of the case: this is accepted by all members of the Court of Appeal in Asteron.
Despite the Court’s acceptance that the condition of the insured yacht, in that case, was pre-existing to the entry into the policy, it concluded that the absence of any temporal element within the wording adopted by the insurer in the exclusion clause specifically referencing the condition of the yacht pre-contract meant that s 46 provided no relief to the insured. The insurer had drafted its exclusion in a way that meant the defects in the yacht could conceivably occur after the contract had been taken out.
In this regard, the clause did not operate “by reference to the condition, at a time before the contract was entered into, of the thing”.
Zhang v Popovic [2016] NSWSC 407
A similar result occurred in a further decision of the NSW Supreme Court in Zhang v Popovic [2016] NSWSC 407 in the context of a commercial motor vehicle policy. In that case, the Court held at [239] that:
The exclusion in cl 2(b)(8) does not operate by reference to whether there was a defect at the time the contract was entered into since it purports to exclude liability which arises out of or in connection with a defect in the motor vehicle whenever the defect arose. In the present case, the timing at which the vehicle was, or became, defective was irrelevant.
Section 46 in practice
The impact of the interpretation of “by reference to the condition, at a time before the contract was entered into” in s 46(2) has allowed insurers to completely bypass the consumer protections intended by s 46 by simply removing any reference to the words “pre-existing” or any other temporal wording referring to a time before the contract was entered into.
This means that even though the “effect” of the contractual provision is to allow an insurer to decline a claim for a pre-existing defect or imperfection, an insurer can still refuse a claim (even when an insured was not aware of the defect or imperfection when they took out the policy) simply because the clause could also conceivably apply to defects or imperfections which arose after the contract was entered into.
The fact that the defect or imperfection was existing pre-contract, in a person’s individual circumstances, would ultimately have no relevance in those circumstances, and s 46 does not apply.
For example, for a flood claim where the insured has pre-existing defective stumps on their home, which they had no knowledge of prior to taking out the policy, the effect of the case law is that the mere fact that the clause is drafted such that it could also apply to stumps which deteriorated after the policy commenced, means s 46 has no operation to the insured’s claim and offers no protection for the insured.
Amending s 46 to strengthen consumer protections
Section 46 of the ICA could likely be amended to avoid this outcome by removing the phrase “by reference to” in s 46(2) and replacing it with “because of”, such that the section would read something akin to:
- Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract because of the condition, existing at a time before the contract was entered into, of the thing.
The same could also be said with respect to s 47(2) in the context of life insurance contracts.
Get help from an insurance lawyer
If you have a general insurance claim against your insurer and your insurer has relied on a defect, imperfection or lack of maintenance clause in your policy to deny or reduce their liability under the claim, contact us for some advice about your situation.
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