Non-disclosure and the duty to take reasonable care in life insurance

Since 5 October 2021, people applying for consumer insurance, including life, TPD, trauma and income protection, have a duty to take reasonable care not to make a misrepresentation to the insurer. It replaced the older duty of disclosure, which required you to tell the insurer anything you knew, or should have known, was relevant. Now you must answer the questions the insurer asks honestly and with reasonable care. If you breach the duty, what the insurer can do depends on whether the misrepresentation was fraudulent, whether the insurer would have offered cover on different terms, and whether the policy has been in force for more than three years.

This guide is part of the claims and complaints guide. It explains the general rules; your policy and facts matter, so get legal advice on a real dispute.

The duty in plain terms

The Insurance Contracts Act 1984, as amended by the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, says:

• You must take reasonable care not to make a misrepresentation when answering questions for a consumer insurance contract, including when applying, varying, extending or reinstating.
• Whether you took reasonable care depends on all the circumstances, including the type of policy, how the questions were asked, how clear they were, and your particular circumstances, such as language, health and literacy.
• Not answering a question, or giving an obviously incomplete answer, can be treated as a misrepresentation.
• The insurer is expected to ask clear, specific questions. If it does not ask, you are generally not required to volunteer.

What changed from the old duty

What the insurer can do if you breach the duty

For life insurance, the remedies are set out in the Act. In general terms:

1. Fraudulent misrepresentation. The insurer may be able to avoid the contract, treating it as if it never existed, at any time.
2. Non-fraudulent misrepresentation, within three years of the policy starting. If the insurer would not have issued the cover at all, it may avoid the contract. If it would have issued it on different terms, such as with an exclusion or a higher premium, it may vary the policy to put itself where it would have been, for example reducing the sum insured to what the premium would have bought.
3. Non-fraudulent misrepresentation, after three years. The insurer generally cannot avoid the contract, though it may be able to vary the sum insured in some cases. This is often called the three-year rule.

The details, and the formula for reducing the sum insured, are in the Act. Each case depends on the evidence.

Worked example

Illustrative: Matt applied for $500,000 of life and TPD cover in March 2024 and answered "no" to a question asking whether he had seen a doctor for back pain in the last five years. He had seen a physiotherapist and his GP twice in 2022. In 2026 he makes a TPD claim for a back injury.

• The policy has been in force for less than three years.
• The insurer shows that, had it known, it would have offered cover with a back exclusion on TPD.
• Matt's misrepresentation was not fraudulent; he says he thought physiotherapy did not count.
• Was he careless? That depends on how clearly the question was worded. If the question said "doctor" and was ambiguous about physiotherapists, a court or AFCA may find he took reasonable care for the physiotherapy, but probably not for the GP visits.
• If he breached the duty, the insurer may vary the policy to add the back exclusion from the start. His TPD claim for the back injury would then be declined, but his life cover would remain, and the TPD cover would still respond to other conditions.

If the claim had come in 2028, more than three years after the policy started, the insurer's options would be much narrower.

What insurers must do

• Ask clear questions. Vague catch-all questions are discouraged.
• Tell you about the duty before the contract is entered into, in writing.
• Investigate fairly. Under the Life Insurance Code of Practice, subscribing insurers commit to explaining non-disclosure decisions and giving you a chance to respond, and not to conduct broad reviews of your medical history merely because you claimed.
• Act in utmost good faith. Both parties must do so throughout.

How to protect yourself

1. Read every question slowly; answer what it actually asks.
2. When in doubt, include the information. A note like "physiotherapy for lower back strain in 2022, resolved" costs nothing.
3. Ask for a copy of your answers, especially for phone interviews.
4. If an adviser filled in the form, check every answer before signing.
5. If you realise you made a mistake after applying, tell the insurer in writing.

Frequently asked questions

Does the duty apply to cover in super?

Default cover in super is often issued without questions. When you apply for extra cover or reinstatement, the duty applies to the questions you answer.

Can the insurer look at my medical records when I claim?

Yes, with your authority, which is usually required for the claim. The Code limits fishing expeditions.

What if the insurer cancels my policy for non-disclosure?

Ask for reasons in writing and the evidence. You can complain to the insurer and then AFCA. See AFCA complaints.

Sources

• Federal Register of Legislation — Insurance Contracts Act 1984, including Part IV
• ASIC — guidance on the duty to take reasonable care
• AFCA — approach to non-disclosure complaints
• Moneysmart — applying for life insurance