Striking a Balance: The Dual Duties of Disclosure and Consumer responsibility in Insurance

In Australia, the Insurance Contracts Act of 1984 established the duty of disclosure, a longstanding principle that insurers and policyholders must adhere to. However, recent developments have introduced a new duty for consumers. In this blog story, we will explore why both the duty of disclosure and the new duty for consumers are essential in maintaining a balanced insurance ecosystem.

The Duty of Disclosure: An Established Pillar

The duty of disclosure, as enshrined in the Insurance Contracts Act, has long been the bedrock of insurance agreements in Australia. This duty places the onus on policyholders to provide insurers with all relevant information when applying for coverage. Such information includes details about pre-existing conditions, past claims, and any other material facts that could impact the insurer’s decision.

The rationale behind this duty is to ensure that insurers have access to accurate and comprehensive information, enabling them to assess risks accurately and set premiums accordingly. For consumers, this means honesty and transparency are paramount when seeking insurance protection.

The New Duty for Consumers

In recent years, the insurance landscape has evolved, and so too has the relationship between insurers and policyholders. Recognizing this shift, Australia has introduced a new duty for consumers under section 20B of the Insurance Contracts Act 1984. The duty to take reasonable care not to make a misrepresentation replaces the previous duty of disclosure in relation to “consumer insurance contracts”.  Consumer insurance contracts include contracts that are wholly and predominantly obtained for personal, domestic or household purposes (retail clients).  All other contracts of insurance such as commercial insurance will remain subject to the traditional duty of disclosure under section 21 of the Act.  This duty, in essence, places the onus on insurers to identify the relevant information they need to assess the risk.

The new duty requires insurers to ask specific questions of the insured.  It cannot rely on the insured providing it with information it deems relevant and the consumer having to take a ‘guess’.  An important point to note from an insurer’s perspective is the need to ensure all questions asked of the consumer, on renewal and inception, are clear and unambiguous.  Furthermore, the insured must be clearly explained the consequences of any misrepresentation made to the insurer.

The new duty for consumers also emphasizes the importance of understanding their policies, reading the fine print, and asking questions if there are uncertainties. It also places a responsibility on consumers to correct any errors in their applications and notify insurers of changes in circumstances that may affect the policy’s terms.

This new duty brings to the fore the issue of negligence. An insurer will not just be able to prove that a representation made by the consumer was factually inaccurate.  It will be up to the insurer to prove the consumers misrepresentation was due to failing to take ‘reasonable care’ when answering the insurer’s questions.

Therefore, if consumer has a disregard for the truth, or is reckless, if they are negligent or careless then that is likely to be proven as a failure to take reasonable care.  Conversely, if a consumer answers correctly, and it later turns out to be the opposite, then that may not in itself be a breach of the duty.

The Duty of Disclosure: A Moral and Legal Obligation

Imagine a scenario where a prospective policyholder, Sarah, is applying for health insurance. Sarah is aware of a pre-existing medical condition but fails to disclose it to her insurer. She believes that omitting this information may lower her premium or prevent her from facing rejection. However, what she doesn’t realize is that her failure to disclose is not just a financial or legal matter; it’s a moral obligation rooted in the duty of disclosure.

In Australia, the duty of disclosure is more than just a fine print in the insurance contract; it’s a fundamental principle of insurance law. It requires policyholders to disclose all material information to the insurer when applying for coverage. Material information refers to any details that could influence the insurer’s decision to accept or reject the application, set the premium, or determine policy terms and conditions.

The implications of non-disclosure extend beyond just Sarah’s case. When policyholders fail to disclose relevant information, it can lead to a chain reaction of issues:

1 Coverage Denial: In cases of non-disclosure, insurers may deny a claim, leaving policyholders in financial distress during their time of need.

  1. Legal Consequences: Non-disclosure can be considered a breach of the insurance contract, potentially leading to legal action.
  2. Legal Consequences: Non-disclosure can be considered a breach of the insurance

Striking the Right Balance

The coexistence of both the duty of disclosure and the new duty for consumers serves a dual purpose:

Fairness and Transparency: The duty of disclosure ensures that insurers receive critical information to make informed decisions, while the new duty for consumers promotes transparency by the insurer asking specific questions of the consumer, specific to the risk and therefore encouraging policyholders to be proactive in understanding their policies.

Responsibility: The new duty for consumers underscores the importance of informed decision-making and actively engaging with insurance contracts. It encourages consumers to take control of their insurance arrangements and stay informed about their coverage.

Risk Mitigation: By having both duties in place, the insurance industry can better manage risks. Policyholders provide insurers with essential information, and insurers, in turn, provide consumers with policies that align with their needs.

In the ever-evolving landscape of insurance contracts, the duties of disclosure and the new duty for consumers play complementary roles. They strike a balance between insurer and consumer responsibilities, fostering fairness, transparency, and mutual trust.

For consumers, understanding these duties is vital to making informed decisions about their insurance coverage. It’s not just a legal obligation; it’s an opportunity to ensure that insurance remains a reliable safety net for all Australians, safeguarding the interests of both insurers and consumers in Australia.

Get professional insurance advice – talk to your Resilium Adviser

You can count on Resilium Insurance Advisers to treat their client’s business like it’s their very own – understanding its potential risks and designing an insurance solution specific to their client’s individual circumstances.


The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact Resilium Insurance Broking or one of our Authorised Representatives around Australia.



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