How the Insurance Contracts Act 1984 applies to business liability policies

The Insurance Contracts Act 1984 (Cth) is the main law governing insurance policies in Australia, and most of it applies to business liability insurance in the same way as to home or car insurance. The provisions that matter most to a business are: the duty of utmost good faith (section 13), the duty of disclosure (section 21), the remedies an insurer has if you fail to disclose (section 28), the protection against claims being refused for post-contract acts that caused no loss (section 54), and the special notification rule for claims-made policies (section 40). Reforms in 2021 changed the disclosure duty for consumer policies, but business policies generally still carry the full section 21 duty.

This guide is part of the public liability cost overview. It is general information, not legal advice. For which policies you must hold in the first place, see compulsory business insurance; for how claims-made cover interacts with the Act, see public liability versus professional indemnity.

Which policies the Act covers

The Act applies to most general insurance contracts, including public and products liability, professional indemnity, management liability, cyber and business packs. Some contracts are carved out by section 9 or other laws, including marine insurance (governed by the Marine Insurance Act 1909, which can include some transit and cargo cover), reinsurance, and state workers compensation and CTP schemes. If your business buys transit or marine cargo insurance, check which Act applies.

Section 13: utmost good faith

Each party must act towards the other with the utmost good faith in every matter arising under the contract, including claims. For the insurer, that means handling claims fairly, honestly and promptly, and not relying on technicalities in a way that is unfair. A breach by the insurer is also a breach of the Act, which ASIC can act on. For you, it means honesty in the proposal and in claims.

Section 21: the duty of disclosure

Before the policy is entered into (and on renewal, extension, variation or reinstatement), you must tell the insurer every matter that you know, or that a reasonable person in the circumstances could be expected to know, is relevant to the insurer's decision whether to insure you and on what terms.

You do not have to disclose matters that:

reduce the risk;
are of common knowledge;
the insurer knows or should know in the ordinary course of its business; or
the insurer has waived, for example by not asking about them.

Section 22 requires the insurer to clearly inform you in writing of the nature and effect of the duty before the contract is entered into. If it does not, it may not be able to rely on a failure to disclose, unless the failure was fraudulent.

Why business policies still carry the full duty

From 5 October 2021, for consumer insurance contracts (policies obtained wholly or predominantly for personal, domestic or household purposes), the duty of disclosure was replaced by a duty to take reasonable care not to make a misrepresentation. A policy bought for a business is generally not a consumer insurance contract, so section 21 continues to apply. A sole trader's public liability policy is still a business policy.

Section 28: what happens if you fail to disclose

Situation	Insurer's remedy
Failure to disclose or misrepresentation was fraudulent	The insurer may avoid the contract from the start
Not fraudulent, and the insurer would not have offered cover at all	The insurer's liability can be reduced to nil for the claim
Not fraudulent, and the insurer would have offered cover on different terms or at a higher premium	Liability is reduced to the amount that puts the insurer in the position it would have been in if it had been told

Illustrative example: a cafe does not mention that it hosts live music events. The insurer shows it would have charged a 25% higher premium. On a covered claim of $40,000, the insurer may argue for a proportionate reduction based on the premium it would have charged, although the method depends on the facts. See non-disclosure and business insurance claims.

Section 54: acts after the policy started

If the insurer could refuse a claim because of something you did or failed to do after the policy started, such as breaching a condition, it cannot refuse the claim just for that reason. It can only reduce its liability by the amount that fairly represents the extent to which its interests were prejudiced. If the act could reasonably be regarded as capable of causing or contributing to the loss, the insurer can refuse the claim, unless you prove that the act did not cause or contribute to it.

Illustrative example: a policy requires fire extinguishers on site during hot works. An injury occurs from a trip hazard on a day when no extinguisher was present. Because the missing extinguisher did not cause the trip, section 54 would generally stop the insurer refusing the claim on that ground.

Section 40: claims-made policies

For claims-made policies such as professional indemnity, section 40(3) protects you if you notify the insurer in writing of facts that might give rise to a claim as soon as reasonably practicable after becoming aware of them and before the policy expires. The insurer cannot then refuse the later claim merely because it was made after the policy ended. See claims-made notification and run-off.

Other useful sections

Section 48: a person who is not a party to the policy but is specified or referred to in it as insured (such as a principal noted under a principal's indemnity extension) can generally claim under it.
Section 51: in limited situations, such as when the insured has died or cannot be found, an injured third party can recover directly from the insurer.
Section 56: the insurer may refuse a fraudulent claim, although a court can order payment of part if refusing all would be harsh and the fraud was minimal or insignificant.
Sections 59 to 63: the insurer can cancel only on grounds the Act allows, such as non-payment or failure to disclose, and must give written notice.

Reforms that are now in force

Change	In force from	Effect for business policyholders
Unfair contract terms protections extended to insurance contracts	5 April 2021 (new and renewed contracts)	Unfair terms in standard form small business policies can be declared void
Consumer duty to take reasonable care replaced disclosure	5 October 2021	Applies to consumer policies; business policies keep section 21
Claims handling and settling became a financial service	1 January 2022	Insurers and claims handlers must be licensed and act efficiently, honestly and fairly
Penalties for unfair terms; wider small business definition (under 100 employees or under $10 million turnover)	9 November 2023	Using or relying on unfair terms can attract penalties

Frequently asked questions

Does the Act let me cancel my business policy?

Most policies let you cancel and receive a pro-rata refund, less any fees set out in the policy. Check the cancellation clause and any premium funding contract, which may have its own terms.

Can an insurer refuse a claim because I paid the premium late?

If the premium was unpaid and the policy was validly cancelled, there may be no cover. Insurers must follow the Act's notice rules before cancelling.

Does the Act apply to policies placed with overseas insurers?

The Act generally applies to contracts governed by Australian law, which includes many policies placed with Lloyd's underwriters and other authorised insurers. For unauthorised foreign insurers, check the policy's governing law clause and get advice.

Where can I read the Act?

The current version is on the Federal Register of Legislation.

Sources

Federal Register of Legislation — Insurance Contracts Act 1984 and ASIC Act 2001
ASIC — guidance on claims handling, unfair contract terms and the 2021 reforms
Treasury — background to the Financial Services Royal Commission reforms
AFCA — how insurance disputes are decided in practice