Insurance claims services: Can you handle it? Claims handling set to become a new financial service

This article was written by Mandy Tsang, Chloe Walker and Sarah Yu.

Treasury has released draft legislation to make handling and settlement of insurance claims a new 'financial service'.  The exposure draft is open for consultation until 10 January 2020 and is set to come into effect just six months later on 1 July 2020.

Key Takeaways

• The reforms will make handling and settling an insurance claim a new 'financial service'.  As a result, insurers, loss assessors, insurance claims managers, insurance brokers and other persons who provide 'claims handling and settling services' ("CHS services") in respect of insurance products will be required to hold an Australian Financial Services ("AFS") Licence covering such services or otherwise become an Authorised Representative ("AR") of an AFS Licensee. 


• The new laws adjust the application of the general conduct and disclosure obligations that ordinarily apply to financial services for CHS services.  The draft laws remove the obligation to provide a Financial Services Guide where CHS services are the only financial service being provided.  However, there is a new obligation to provide a Statement of Claims Settlement where a cash settlement offer is made.  Recommendations or opinions that are reasonably necessary as part of handling and settling an insurance claim will not constitute financial product advice for the purposes of the Corporations Act 2001 (Corporations Act).  Despite this tailoring, the overarching obligation to provide the CHS service efficiently, fairly and honesty will apply.


• The new laws will apply to general insurance products, life risk insurance products, and investment life insurance products.  The changes will not apply to handling and settlement of claims under contracts of insurance that are not 'financial products'.


• The regulation of claims handling by superannuation trustees will be addressed by separate legislation that will be consulted on in early 2020.


• KWM has extensive experience in financial service regulation and applications for and variations of AFS Licences and appointment of ARs.

On 29 November 2019, Treasury released the Financial Sector Reform (Hayne Royal Commission Response-Protecting Consumers (2020 Measures)) Bill 2020 and Financial Sector Reform (Hayne Royal Commission Response-Protecting Consumers) (Claims Handling and Settling Services) Regulations 2020, which give effect to the Royal Commission's recommendation in February 2019 that the current exemption for handling and settlement of insurance claims from the definition of a 'financial service' under the Corporations Act should be removed.  The draft legislation follows on from Treasury's consultation paper from March 2019, which recognised that inappropriate claims handling practices can cause significant consumer detriment, and provides further clarity on how the Government intends to regulate claims handling.  

Claims handling a new financial service

As foreshadowed in the consultation paper, the draft legislation removes the existing exemption for CHS service and expands the definition of 'financial service' under the Corporations Act to include a new category of service, namely 'claims handling and settling service'.  

For the purposes of the Corporations Act, a person will be taken to provide a CHS service if they:

1. make a recommendation or state an opinion in response to an inquiry about a potential insurance claim that could reasonably be expected to influence a decision whether to make an insurance claim;
2. assist another person to make an insurance claim;
3. assess whether an insurer is liable under an insurance product;
4. make a decision to accept or reject all or part of an insurance claim;
5. quantify an insurer's liability under an insurance product;
6. offer to settle all or part of an insurance claim; or
7. satisfy a liability of an insurer under an insurance claim.

Importantly, this includes where the CHS service is provided to a third party beneficiary under an insurance contract, and not just the insured.

Contrary to what the Insurance Council of Australia recommended in its response to the consultation paper, this definition plainly goes beyond the decision making elements of the claims management chain.

There are some limitations to the definition in the draft Bill.

First, each of the services are tied to the definition of an 'insurance product'.  This means that services provided in respect of contracts of insurance that are not insurance products (e.g. health insurance, insurance provided by the Commonwealth, State and Territory, and reinsurance) will not be regulated as 'financial services'.  The Explanatory Memorandum states that the handling and settling of a claim in relation to self-insurance and other insurance like products are also outside the scope of these reforms.

Tying each of the services to the definition of 'insurance product' also means that:

• services provided in relation to life polices as defined in the Life Insurance Act 1995 (Cth) will be caught by this legislation; and
• claims handling in relation to superannuation products are not caught.

The regulation of claims handling by superannuation trustees will be addressed by separate legislation that will be consulted on in early 2020. Unless that legislation is the same, this raises the prospect of claims handling for cover inside of super being different from claims handling for cover outside of super. This would create undesirable complexity for insureds and operational complexity for life insurers.

The draft Bill also excludes from the definition of CHS services most (but arguably not all) services provided by a lawyer (e.g. providing advice, assessing liability under an insurance contract, negotiation the settlement of a claim or dealing in a financial product on behalf of the client).  It is unclear whether this exemption would capture a lawyer preparing or making an insurance claim on behalf of a client.

Who?

Not everyone who provides a CHS service is required to obtain an AFS Licence or become an AR of an AFS Licensee. 

Under the new laws only the following people handling and settling an insurance claim will be required to have an AFS Licence with the requisite authorisation or become an AR:

1. the insurer who issued the insurance product;
2. a loss assessor or loss adjustor acting on behalf of an insurer (defined to include those who investigate the validity of a claim as well as those who assess the insurer's liability for such a claim);
3. an insurance fulfilment provider who has authority to reject all or part of a claim (defined to include those who carry on the business of providing goods or services to insureds in satisfaction of the insurer's liability e.g. smash repairers or builders);
4. an insurance claims manager (broadly defined as those who carry on a business of handling and settling claims for one or more insurers);
5. an insurance broker who handles an insurance claim on behalf of the insurer; and
6. a person who provides financial advice to an insured and also handles and settles an insurance claim on behalf of the insurer.

The draft legislation provides an exemption from this licensing requirement under section 911A(2) for the following people:

• product issuers who provide CHS services to retail customers under an arrangement with an AFS Licensee who has the appropriate authorisations to provide the CHS service to retail customers; and
• product issuers who provide CHS services to wholesale customers under an arrangement between the issuer and an AFS Licensee.

Such persons will therefore not need to hold an AFS Licence.

Commentary

It is clear that a broad group of people will be affected by these reforms.  For example, an insurance fulfilment provider with delegated authority to reject a claim within a certain amount will fall within the group of people required to hold a licence or become an AR.  The Explanatory Memorandum states that such fulfilment providers will not require a licence if insurers delegated authority to accept a claim only following natural disasters. 

The definition of loss assessor is even broader.  Unlike fulfilment providers, there is no requirement that they have authority to reject a claim.  This potentially captures anyone who assess a claim and quantifies the insurer's liability (e.g. doctors, who assess whether an injury which could be a potential insurance claim).  Query also whether expert loss assessors giving evidence as to the validity of a claim and the insurer's liability, would also be captured by this definition.  Application of the financial services regime to such service providers would be impractical and could lead these service providers to withdraw their services to avoid having to obtain an AFS Licence or become AR of an AFS Licensee, which could result in reduced competition in the insurance market.

The inclusion of these people is inconsistent with Insurance Council of Australia's recommendation that loss assessors be carved out of the regime, especially given many of these people are small businesses.  It is also arguably contrary to Treasury's recognition in the consultation paper that imposing heavy compliance burden on such third parties would make existing claims handling processes more costly, without any anticipated benefits for consumers.

What?

Generally a person who holds an AFS Licence (and their representatives) is required to comply with a vast range of general disclosure and conduct obligations including the core obligation to provide the CHS services efficiently, honestly and fairly.  The Explanatory Memorandum suggests that at a minimum this would entail licence holders providing CHS services:

1. in a timely way, without undue delay;
2. in the least onerous and intrusive way possible (e.g. only requesting information if it is strictly relevant to the claim);
3. fairly and transparently, and giving reasons for decisions; and
4. in a manner that ensures adequate support is provided for insureds, in particular for vulnerable consumers.

Commentary

While in principle these suggestions are commendable, in practice such obligations may be difficult to monitor.  They become particularly onerous for AFS Licensees who are responsible for multiple ARs.

We are concerned that the enforcement of the efficiently, honestly and fairly AFS licensee duty may require insurers to go further than their duty of utmost good faith (that is framed by the terms of the policy) and subjugate the insurer's contractual rights to the policy owner's interest if the insurer's enforcement of their contractual rights is found to not be 'efficient, honest and fair'. This issue becomes particularly acute as the Courts are moving away from interpreting this phrase as being a compendious phrase and towards treating each of these elements as being separate duties.

There are various other obligations which will also need to be met, for example:

• training and competence requirements;
• processes and policies to manage conflicts of interest;
• complaints handling and internal and external dispute resolution systems; and
• breach reporting processes.

An AFS Licensee will be required to ensure that all of its representatives who handle and settle insurance claims on its behalf have all relevant qualifications and are adequately trained to comply with these obligations.

All licensed CHS service providers will also be required to pay a minimum industry levy of $500 to ASIC.  Each entity will be required to pay an additional graduated component depending on its share of the total number of claims under insurance products in relation to which the entity provided CHS services in the financial year.

The draft legislation makes three adjustments to the ordinary financial services obligations.

First, under the draft Bill recommendations or opinions that are reasonably necessary as part of handling and settling an insurance claim are not considered financial product advice.  The extensive disclosure obligations which usually apply when personal or general advice  is provided will not apply to such recommendations. 

The Explanatory Memorandum provides limited guidance on what is considered reasonably necessary, suggesting that recommendations as to the administrative matters (e.g. on the most effective manner of submitting a claim) could reasonably be regarded as a necessary part of a CHS service and therefore will not be considered 'financial product advice'.

The draft Regulations prescribe that the following types of advice will not be considered a necessary part of a CHS service and will therefore be considered 'financial product advice':

1. how an amount is to be paid to a person in settlement of a claim under an insurance product is to be structured;
2. the management or use of an amount paid, or to be paid, to a person in settlement of a claim under an insurance product; and
3. advice that is given in response to a claim, or potential claim, made under an insurance product and which relates to other insurance products or financial products.

It is unclear whether financial advice provided by accountants and financial planners in relation to insurance claims will constitute financial product advice and therefore require appropriate authorisation.

The second adjustment made to the obligations in respect of CHS services is that the draft legislation removes the requirement for a person to provide a Financial Services Guide (FSG) to retail customers if the 'financial service' provided consists only of handling and settling an insurance claim.  Importantly, an entity may still need to include details relating to CHS services in an FSG if it provides other financial services alongside a CHS service.

Finally, for general insurance, the reforms establish a new disclosure obligation specific to CHS services.  Where an offer is made to settle all or part of a general insurance claim through cash settlement instead of repairing or replacing the insured product a 'Statement of Claims Settlement' must be given to retail customers.  This document is required to contain certain details including the options for settling a claim.  The statement is also required to contain a statement that the customer should obtain independent financial advice, which may include advice that is not considered to be a necessary part of a CHS service.  If so, the independent advice will require requisite authorisation for insurance claims handling advice.

When?

If enacted, the draft legislation is proposed to commence on 1 July 2020 and will apply to claims or a potential insurance claims that occur after 1 July 2020 under an existing insurance product.  However, entities will be given a grace period allowing them to perform the services without an AFS Licence while they make the necessary arrangements up until 31 December 2020 (though this can be extended to no later than 30 June 2021 where a licence application has been lodged by 31 December 2020).

Commentary

Given the length of time required to amend or seek a new AFS Licence and the number of applicants, the proposed grace period does appear short.

Impact on insurance industry

Some of those who will be required to be licensed under the reforms (e.g. insurers and brokers) will already be acquainted with the AFS Licence regime and only require a variation of their existing authorisations.  However, others (e.g. loss assessors and insurance fulfilment providers) will be faced with navigating the compliance minefield of ASIC regulation for the very first time.

Applying to obtain a new AFS Licence or vary an existing AFS Licence involves substantial work and can be time consuming.  ASIC has not yet released any guidance on how it intends to deal with applications arising from the reforms.  Applicants will need to demonstrate to ASIC that they have the organisational competence to carry out CHS services to the required standard and provide other proof documentation as well as documented compliance procedures. 

It is foreseeable though that many claims service providers will seek to become ARs of insurers or other AFS Licensees with the appropriate authorisation rather than going through the lengthy process of obtaining their own AFS Licence.  Such providers will need to agree terms on which the authorisation is provided, address cross-authorisation requirements and notify ASIC of the appointment as representative.  

The cross liability and cross endorsement regime will apply where such ARs provide claims services by or on behalf of multiple insurers.  Under the draft Regulations, the provision of CHS services is separated into three separate classes: general insurance, investment life insurance and life risk insurance.  As the Explanatory Statement explains, this amendment ensures that where a person handles and settles insurance claims as an AR of multiple AFS Licensees, the licensees will only be jointly and severally liable if the conduct is within the authority and class of each of those licences.

Insurers will also need to consider the additional compliance obligations this entails, including to train and supervise the conduct of such ARs.  Of significance will be the requirement to monitor and ensure that each AR provides their services efficient, honestly and fairly.

With the Product Design and Distribution Obligations commencing in April 2021 and extension of unfair contract terms legislation to insurance on the horizon, 2020 is set to be a busy year for the insurance industry. 

How to have your say

Treasury is taking submissions on the exposure draft until 10 January 2020.  Given the holiday period, it is important you get your submissions in sooner rather than later.

To review the Bill and associated documents click here.  For further information regarding the Royal Commission, please refer to our Royal Commission Hub by clicking here.

KWM has extensive experience in financial service regulation and applications for and variations of AFS Licences and appointment of ARs.