Landlord’s interests and amendments to the Insurance Contracts Act

Now more than ever, landlords need to be aware of recent amendments to the Insurance Contracts Act 1984 (Cth), to ensure their interests are adequately protected under their insurance policies or those taken out by their tenants.

These amendments, which came into force in June 2013, include some key changes in relation to third party beneficiaries under an insurance contract.

Over the past 12 months, we have noticed that many landlords are still unaware of these provisions, or are not fully clear about their status under the amendments. This article briefly explains the changes and points out some areas for landlords to take note of when looking at their insurance arrangements.

When is a landlord a third-party beneficiary?

Section 48(1) of the Act allows a person to recover from an insurer if the insurance policy “extends” to that person, even if the person is not a party to the contract. These persons are known as third party beneficiaries.

Section 11(1) of the Act defines third party beneficiaries under an insurance contract as “a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.”

Where issues arise is when it’s unclear whether the “benefit” of an insurance contract extends to a third party. The entire insurance policy contract must be carefully examined to determine whether the relevant person is covered as a third party beneficiary.

Landlords should ensure that their status is defined

Some policies allow the benefit of the contract to extend to parties who are noted on the policy, while others do not.

Describing a landlord as a “noted party” or “interested party” doesn’t generally confer full third party beneficiary rights on the landlord. By noting a party on a policy, the insurer is made aware that another party has an interest in the property, but doing this may not confer a right to claim under the policy.

If a landlord wishes to be named as a third party beneficiary, they must ensure that insurance contract expressly and clearly extends the policy’s benefits to them.

Duty of good faith obligations of third-party beneficiaries

Section 48(2) of the Act confers the same obligations on third party beneficiaries who claim under the policy as if they were the named insured. This includes the duty to act with the utmost good faith towards the other party, which is implied into all insurance contracts under the Act.

The duty of good faith now applies to a third party beneficiary once the insurance contract is entered into. A party who breaches this duty will now be in contravention of the Act (section 13(2)).

Unlike a named insured, third party beneficiaries are not subject to the duty of disclosure as the named insured before the contract of insurance is formed.

Third party beneficiaries in no better position than insured

Before the Act was amended, it was uncertain as to whether an innocent third party beneficiary could be prejudiced by the insured’s conduct. The Act’s explanatory memorandum clarifies this position in the following section:

“1.146. The intent of sections 48 and 48AA (as amended) is that third party beneficiaries should be in no better position, in terms of their ability to claim, than the insured. An insurer should be entitled to raise defences relating to the conduct of an insured, including conduct occurring prior to the time the contract was entered into.

This makes it clear that an innocent third party beneficiary may be prejudiced in its claim by the insured’s conduct, either before or after the insurance contract was formed. Landlords need to bear this in mind if they intend to rely as third party beneficiaries on their tenants’ insurance policies.

This article provides general comments on the recent amendments to the Act and should not be taken as legal advice. We recommend coming in to speak to our lawyers for expert legal advice for your particular matter.

For more information, please contact:

Tom Read
Special Counsel