Following consultation, AFCA has finally and definitely outlined its view on the cancellation of life policies for non-payment of premiums. That is, its position paper entitled ‘The AFCA Approach to cancellation of insurance policies for non-payment of premiums’ indicates that s210(5) of the Life Insurance Act 1995 provides the correct cancellation procedure for life policies as opposed to s59 of the Insurance Contract Act 1984.

The release of this paper effectively ends any glimmer of hope that AFCA remained open to sensible s59 arguments noting that some Determinations seem to indicate this was the case.

Background

The law governing the cancellation of life insurance policies for non-payment of premiums is unresolved, with both s210(5) of the Life Insurance Act and s59 of the Insurance Contract Act seemingly providing competing insurer cancellation procedures.

Briefly stated, the more complicated cancellation procedure under s210(5) requires written notice to be given setting out the premium amount outstanding, the due date for payment and that the policy will be cancelled 28 days after the notice is given (if the premium is not paid) or 28 days after the premium due date, whichever is later.

On the other hand, the cancellation procedure in s59 simply requires written notice to be given of the proposed cancellation with the cancellation to take effect on the relevant prescribed day (usually 20 business days later).

It is generally accepted that the superior legal argument is that s210(5) applies only to cancellation for non-payment of premiums of certain life insurance policies with a surrender value and that s59 governs the cancellation of all other life insurance policies (including risk only policies) for non-payment of premiums.

The AFCA Approach

AFCA acknowledges the competing legal arguments and the lack of definitive case law, but adopts s210(5) as the standard for cancellation of all life insurance policies for non-payment of premiums on the basis it is ‘fair in all the circumstances’:

• It says s210(5) is ‘better suited’ to life insurance which is usually ‘a medium to long term product’, noting it is harder for a person to obtain a new policy as they get older and their medical history is likely to become more extensive.
• It asserts s210(5) provides ‘greater flexibility for insurers to keep customers’ as it ‘provides the insured with a final opportunity to pay the premium’ before the policy is cancelled. Dismissing industry submissions that s59 affords the same opportunity, it proceeds primarily on the assumption ‘a notice given under s59 states that the policy will be cancelled and does not give the insured an opportunity to prevent the cancellation’.
• It considers its approach provides consistency in decision-making as FOS applied a similar interpretation to the application of s210(5).

It is AFCA’s expectation, compliance with s210(5) ‘should not be difficult’ to achieve.

Despite adopting its position, AFCA reiterates fairness may require a different outcome in some circumstances. Seemingly, strict compliance with s210(5) will not always be enough with AFCA specifying it is ‘unlikely’ to find the cancellation is fair where ‘a consumer has made all reasonable efforts to pay the premium, but has not done so’. AFCA anticipates this may arise in the following situations:

• where ‘an insured makes a mistake about which amount in an insurer’s notice needs to be paid and then does not pay the amount needed to avoid the cancellation’; or
• where ‘the insured had funds in an account, the account could be debited, but for some reason the insurer has been unable to debit the account’; or  
• ‘If a customer has told the insurer that they are experiencing financial hardship, but the insurer chose to cancel the policy without attempting to explore other arrangements’.

AFCA further specifies that by contrast, it may decide to uphold a cancellation in the absence of a strict compliance with s210(5). AFCA provides the example of an ‘insurer’s notice [which] is clear and unambiguous but contains a small error (e.g. the date of cancellation is wrong)’ and the insured has not taken any steps to pay the required premiums.

When is the notice ‘given’ for the purpose of s210(5)?

Section 210(5) is silent as to how written notice is to be ‘given’ to the policy owner. To that end, a key aspect of AFCA’s approach is that ‘notice’ is not ‘given’ on the date it is issued. AFCA has clarified that it will deem a notice sent by:

• Email - to have been given ‘on the date the email is sent’, in accordance with the requirements under the Electronic Transactions Act 1999 (Cth);
• Post - to have been given or received ‘on the seventh working day after it was posted’, in line with the current iteration of s160 of the Evidence Act 1995 (Cth). Whilst arguments may be advanced that the Evidence Act has no intended application in disputes before AFCA, AFCA’s approach is clear and unequivocal that s160 applies ‘unless the insurer can show the notice was delivered earlier’. This carve out otherwise appears to be consistent with the wording in s160 which contains a rebuttable presumption.

AFCA otherwise considers it is best practice for insurers to inform a customer about the impending cancellation using multiple communication methods, for example, text and email.

What happens to the outstanding premiums?

AFCA concludes that if it ‘finds the policy was not correctly cancelled, then the customer must pay any outstanding premiums’. It expects that where an insured is unable to pay the outstanding premium amount in full, ‘a reasonable repayment plan should be put in place. This should not stop the insurer for assessing any claim in the meantime’.  

Implications

The life industry backed by strong legal opinion and common sense has long argued that the s210(5) cancellation procedure is restricted to certain life policies and that s59 is the correct section for most cancellations for non-payment of premiums. Against this background, the release of this paper must be disappointing although not unexpected.

Legislative reform may one day clarify the true meaning of the arcane s210(5) and of course the matter could be determined in a court, however for the time being, it seems that the issue has now for most practical purposes been determined by AFCA and effective cancellation of life policies for non-payment of premiums will now have to be s210(5) compliant.