Chapter 6 Dispute resolution processes
An effective scheme of review for decisions or actions by the industry
that are disputed by the clients should always be a key feature of a
self-regulating system. Dispute resolution processes serve to reinforce the
validity and credibility of a self-regulated industry, and provide consumers
with an accessible and affordable means of recourse that does not involve
expensive, time-consuming litigation via the court system.
This chapter discusses the internal dispute resolution (IDR) and external
dispute resolution (EDR) procedures of the general insurance industry.
Australian Securities and Investments Commission (ASIC) regulations stipulate
that insurers, as Australian Financial Services Licensees, must have IDR
processes for complaints as defined in the Australian Standard AS ISO
10002-2006 for Complaints Handling and must also be a member of an accredited
Complaints or disputes arising out of an insurance claim—whether it be
about denial or adequacy of settlement or conduct of employees—are initially
dealt with through the insurer’s IDR process.
Disputes that are unable to be resolved internally can then be referred
to EDR for decisions that are binding on the insurer. The Financial Ombudsman
Service (FOS) is the ASIC-accredited EDR service for financial service
providers, including general insurers. The vast majority of general insurers
subscribe to FOS.
Internal dispute resolution
General insurers are required, as a provision of their financial
services licence under the Corporations Act, to have an IDR process available
to their clients that meets the standards set out by ASIC.
These standards are specified in ASIC Regulatory Guide 165 (RG 165). The
General Insurance Code of Practice (the Code) also addresses IDR practices.
The Code divides the IDR process into two tiers—complaints and disputes.
Complaints are to be responded to within 15 days where possible, with the
response to include information about escalating the complaint to a dispute if
the complainant is unhappy with the decision. In the dispute stage, particular
employees are assigned to the complainant and a response must be made within 15
days where possible.
IDR is available to all consumers who have a general insurance
complaint, but the Committee heard evidence only in the context of natural
disasters. Statistics kept by insurers are unclear as to how many internal
disputes are related to claims arising from disaster events.
The Committee encountered concerns about general insurance IDR relating
to consumer awareness, timeliness, and general effectiveness in addressing and
Consumer awareness of IDR
According to the Code, insurers undertake to advise clients of their
complaints handling procedures, their IDR procedures, and the free EDR process.
However, the Code specifies that consumers must be informed of the IDR
process only in the event of a claim denial, not at the time of lodging a
claim, or even if a claim settlement is disputed. This means that consumers who
are unhappy with their treatment, the quantum of an accepted payment, or the
claims-handling process in general may be unaware of their right to register a
The Insurance Council of Australia (ICA) told the Committee that:
There are many avenues for a customer to pursue a complaint.
It is incumbent on the industry to maintain information and awareness of that
process so that the consumer can take full advantage of the existing
processes—which are at no cost to them.
However, it is clear that not all insurers make this information readily
available to their clients. The Committee observed varying degrees of consumer
knowledge of their right to dispute claims assessments.
A number of consumers told the Committee that when their insurance
claims were rejected, they were not advised in writing of their right to
request an internal review. During its travels, the Committee found that many
consumers were only made aware of IDR processes after talking to neighbours or
legal aid organisations.
Campaspe Shire Council found that their residents ‘were often not aware
and were not made aware of the internal dispute resolution process that their
insurers may have had’.
Normally a claim does not escalate to a dispute until the claim is
processed and the result fails to satisfy the claimant. However, some claims
were taking so long (more than 6 months) to be processed that clients did not
know where to turn.
The Chairman of the Cassowary Coast Banana Growers Association waited
five months for his claim to be processed, but during that time there was ‘no
discussion’ of internal dispute resolution options.
The adequacy of any IDR process is necessarily reliant on consumer
awareness of its existence.
165 stipulates that insurers must provide a final response to complainants
within 45 days. Final responses to
disputes are to be made in writing, with information on external dispute
resolution if the complainant is unhappy with the decision. This timeframe
covers the entire process, regardless of the timeframes set by the Code for
each tier of IDR.
Although the Code provides for 15-day timeframes for responding to
complaints and again for disputes, the Code contains the qualification, in both
tiers, that ‘in cases where further information, assessment or investigation is
required we will agree reasonable alternative time frames’.
From the anecdotal evidence received, it is clear that many insurers did
not contact complainants to negotiate ‘reasonable alternative time frames’ and that
many consumers experienced lengthy delays in the IDR process.
The Carisbrook Flood Recovery Committee advised that the ‘timeframes set
out in policy documents appeared not to be adhered to.’ The Central Goldfields Shire Council said in July 2011 that there were still ‘residents
and businesses processing through IDR. This is unacceptable.’
The Caxton Legal Centre advised that, following the January 2011
Queensland floods, 90 per cent of their clients’ IDR cases were unresolved
as of September 2011 and that:
Very few IDR responses are returned within the 45 days. Some
IDR submissions have been with the insurer for more than 12 weeks. There seems
to be particularly long delays associated with body corporate insurers with
delays routinely exceeding three months in those matters.
No information was received from FOS about any identified issues arising
from monitoring compliance with Code standards for IDR relating to disaster claims.
Often people who are experiencing such delays in IDR do not know where to
turn for recourse. The Caxton Legal Centre commended FOS for ‘establishing a
registration process for disputes that could be undertaken before or during
IDR. Normally disputes are not registered with FOS until after IDR is completed
which slows the process slightly at that point.’
According to RG 165, the objective of IDR is to resolve disputes
‘genuinely, promptly, fairly and consistently’, and the benefits of effective
IDR procedures include ‘the ability to identify and address recurring or
The Committee found that legal aid organisations are critical of the
insurance industry’s IDR procedures. In fact, Caxton Legal Centre stated that:
… most reputable banking institutions are generally much
better than insurers at understanding the benefits to all parties in good IDR
processes and, correspondingly, at engaging in conciliatory practices at that
early stage … There seems, to the Caxton lawyers, to be an industry wide
general aversion to IDR and direct negotiation in the insurance sector.
Although initially difficult to see why this would be the case given the time
and cost associated with FOS and court, Caxton notes that in a banking dispute,
the argument is normally about payment flowing from the customer to the bank,
leaving banks at a loss if disputes are protracted. The opposite is true of
disputes between insurers and their customers.
Legal aid organisations assisted numerous consumers through an IDR
procedure, and are able to comment on widespread—rather than individual—IDR practices
among insurers in their IDR processes that are not genuine or prompt. Legal aid
organisations were dissatisfied about time delays and the ineffectiveness of
IDR procedures. For example, Caxton Legal Centre noted that some insurers are ‘treating
the IDR stage as a “tick box” process’.
The receipt of pro forma responses is a cause for concern about the genuineness
of IDR procedures. The ILS submitted that ‘we can write very detailed dispute
letters only to have a pro forma letter as a reply’ with no mention of the
specific and genuine concerns raised in the dispute letters.
Ms Karen Cox, Coordinator, ILS, told the Committee that:
We have engaged in good faith in trying to resolve these
issues and in making lengthy submissions to insurance companies’ internal
dispute resolution processes. Usually all we get in response is a couple of
lines, little more than pro forma. We are now considering that that was
probably, in all but a few exceptional cases, a waste of time.
Caxton Legal Centre even received pro forma letters with incorrect
The responses received from the insurer were very similar and
in some instances one client’s name had been used on both responses. This
indicates that the insurer had undertaken a ‘copy and paste’ approach to their
Legal aid organisations also criticise the insurance industry’s
preference for multi-tiered IDR procedures. In addition to the two tiers of
complaints and disputes, in practice many insurers’ first-point-of-contact
staff try to resolve a complaint themselves within 24 hours before referring
the complainant to either tier. These complaints tend to go unrecorded, with
responses made verbally rather than in writing.
It is unclear, in these instances, how consumers would be aware of their right
to formal dispute resolution should they disagree with the verbal advice at
point of contact.
Legal aid organisations claim that these multi-tiered IDR processes,
unlike direct IDR procedures common in the banking sector, slow down the
process and frustrate complainants. Legal Aid NSW notes that:
… a very significant number of consumers experience extensive
delays in resolving claims. They are funnelled into a maze of systems and
reviews, which become overwhelming and ultimately defeating. Many consumer
advocates refer to this multi-tiered IDR as the IDR black hole. Legal
Aid NSW and other similar organisations have for many years been assisting
consumers to navigate their way through it.
The ILS submitted that there was not a meaningful attempt to resolve
disputes as it is in the insurer’s interest if complainants withdraw from the
process out of fatigue:
There is so little engagement in IDR that it would be fair to
say that consumers could reasonably skip IDR and go straight to EDR on the
basis that IDR is just a delaying tactic. That said, the outcome that is best
for consumers is to have the insurer genuinely engaged in IDR.
In a 2011 report, ASIC noted similar criticism by consumer advocates of
the multi-tier system for having ‘the effect of frustrating and ultimately
deterring some complainants’.
The ILS recommended that ASIC amend its IDR regulatory guides to
discourage multi-tiered systems and conduct audits of insurers’ compliance.
The Committee has grave concerns about the genuineness of general
insurers’ IDR procedures, and questions whether they achieve the objectives set
out in RG 165. Given the failure to notify consumers of their IDR rights and
the indefinite delays, current IDR practices can hardly be called effective.
Moreover, the lack of consistent reporting practices means that objective
appraisals cannot be conducted, and insurers cannot monitor significant or
This is highly unacceptable. It is apparent that the current
self-regulatory approach has failed to protect consumers by appropriately
regulating or monitoring IDR procedures.
The Committee recommends that RG 165 be amended to ensure that insurers
advise clients about their IDR procedures up-front at time of claim lodgement
and to disallow multi-tiered IDR processes. These recommendations are detailed
in Chapter 7.
External dispute resolution
Financial service providers are required by ASIC to be a member of an
EDR system accredited by ASIC. For general insurers this EDR system is FOS, which
is an amalgamation of various financial service oversight bodies, including the
former Insurance Ombudsman Service.
The EDR system provides consumers with the opportunity for an
independent assessment of a dispute that has not been resolved to satisfaction through
internal dispute resolution mechanisms. Accessing FOS is free to consumers, as
it is paid for by the financial service provider with whom the complainant is
It is important to note that FOS adjudicates disputes related to all
financial service providers, not just insurers.
In 2010–11, out of a total of 30 283 financial service disputes,
FOS adjudicated 5 627 general insurance disputes, of which 650 were
related to extreme weather events. The recent extreme
weather events contributed to a 32 per cent increase in disputes about home
building insurance and a 41 per cent increase in contents insurance
disputes from the previous year. Statistics are not yet
available on disaster-related general insurance disputes registered by FOS
since 1 July 2011.
The Committee examined consumer awareness of FOS, barriers to
participation, the impact of legal aid, and the effectiveness of FOS.
Duty of insurers
According to RG 165, the final response that insurers are required to
submit to complainants who enter IDR, must be in writing and must include information
about the client’s right to EDR and contact details for FOS.
A review of general insurance IDR procedures conducted by ASIC in August
2011 found that, contrary to RG 165, insurers may not always provide final
responses, along with information on accessing free EDR through FOS, in
FOS advised the Committee that in one instance, a consumer received a
letter denying the claim without providing information on EDR.
Anecdotally, many more people who spoke to the Committee did not remember
receiving any communication about FOS.
Moreover, the multi-tiered IDR system utilised by many insurers
contributes to confusion about what constitutes a ‘final response’. As mentioned
above, complaints dealt with immediately through first point-of-contact staff
are not usually responded to in writing, let alone recorded. Furthermore,
complaints at the first tier are also often not responded to in writing; in
cases where they are, they mention only the next tier of IDR but not EDR.
Insurers evidently do not consider a first-tier decision to be a ‘final
response’. However, in reality, the decision made at the first tier of IDR is
the final response for many consumers, if they decide not to pursue the issue.
This confusion is not beneficial to policy-holders.
During the course of the inquiry, the Committee encountered similar
findings to ASIC, with many witnesses telling the Committee that they were not advised
by their insurer of the availability of external dispute resolution. Most had
heard about external dispute resolution through a community visit from FOS or via
legal advice. The CILS survey found that more than 65 per cent of respondents
were not given information about EDR.
Several financial counsellors identified a lack of knowledge about FOS;
one financial counsellor reported that a client ‘did not know about FOS until I
spoke to him and his insurer at no stage told him about Internal Dispute
Resolution or External Dispute Resolution’.
The FOS advised the Committee that in at least one instance, a consumer
received a letter denying a disaster-related claim without providing
information on EDR. The Committee suspects
that there were many more instances of this.
The Natural Disaster Insurance Review (NDIR) report also concluded that
‘consumer rights to EDR are often not disclosed’ by insurers in the IDR process.
It is important that consumers are informed about their rights to access
EDR and that information about FOS clearly explains the independent and free
nature of the service. A community legal centre relayed the story of an elderly
client whose claim had been denied, who declined to approach FOS as mentioned
in the final response letter because ‘he and his wife could not afford a lawyer
or the cost of legal proceedings’.
Barriers to participation in EDR
Lack of consumer awareness of the right to free, independent EDR
services is a key barrier to consumer participation in EDR and obviously to the
effectiveness of an EDR system. Low awareness of the EDR must then cast doubt
on FOS statistics of disputes as any measure of the general insurance
industry’s performance and consumer satisfaction.
Where insurers neglect their obligation to inform consumers of their
right to EDR, consumers need to be able to access this knowledge through other
means. Thus, the onus of informing consumers about FOS has fallen to FOS,
consumer and legal advocates and local governments.
Unfortunately, general awareness of FOS as an EDR scheme for insurance
disputes is low. A recent FOS survey showed that only about a quarter of respondents
knew that if they have a dispute with their insurance company, they should take
it to FOS. Mr Price, Ombudsman
General Insurance, admitted to the Committee that ‘people are ignorant about
the existence of [FOS]’. This is especially the
case in rural areas, where some people ‘feel isolated and do not know how to
proceed in disputes’.
In 2010–11, FOS staff participated in events to raise awareness of the
organisation, with the geographical spread of the events roughly in line with
the distribution of the Australian population. However, the general
public comprised only one per cent of the audience members represented at these
events, although consumer advocates constituted eight per cent of the audience
members. FOS also engaged in media promotion, produced flood-specific fact
sheets, and established a dedicated natural disasters hotline which received
between 103 and 181 calls per month from January to June 2011.
Additionally, FOS partnered with legal aid organisations to improve
community awareness. The ILS told the Committee that these activities were well
received and Legal Aid Queensland said:
The eight or nine seminars we did with [FOS] had upwards of
1 200 people attend. The extra 25 community forums we did following that
had another probably 1 200 or 1 500 people in attendance.
Local governments, such as the North Grampians Shire Council, Buloke
Shire Council and Somerset Shire Council, invited FOS to their localities.
During the course of the inquiry it was revealed that other areas had little
knowledge of FOS, so FOS then conducted public meetings in those areas.
The restrictive Terms of Reference that FOS operates under are another
barrier to participation. That is, FOS can only accept cases that fall within
its Terms of Reference, which preclude certain types of products, such as
livestock. FOS only accepts general
insurance disputes for retail general insurance policies, residential strata
title insurance products, and small business insurance products.
This means that those who have farm insurance disputes with their
insurer are unable to access FOS for EDR. Similarly, FOS does not adjudicate on
In addition, there is a monetary barrier. FOS can only adjudicate cases
involving values up to $500 000, with a compensation limit of
$280 000. Mr Price acknowledged
that this is ‘an issue in particular for home and content type insurance.
$280 000 is barely sufficient to cover the rebuilding of a home these
Impact of legal aid
As discussed above, there can be many difficulties for consumers in
achieving a satisfactory result with IDR processes, and legal aid organisations
have been important in guiding and supporting consumers, at no cost, through
the process. Legal aid organisations are able to advise and assist consumers in
their dealings with FOS.
Victorian Legal Assistance Forum (VLAF) stated that:
Our experience clearly confirms that the availability of free
legal services enhances people’s access to EDR, and helps individuals realise
the benefits they are entitled to under their insurance policies.
Caxton Legal Centre submits that legal aid is important to consumers in
‘facilitating timely access to FOS decision makers, including the Ombudsman, in
relation to a range of matters for the purposes of interim decisions and
The Queensland Government praised community legal centres for their
contribution to assisting victims of the floods and cyclones with insurance
However, there are concerns that access to legal aid is limited. The
Committee’s online survey found that almost three-quarters of respondents were unaware
that free legal advice was available for insurance claims advice.
The National Pro Bono Resource Centre commented that:
Recent Australian experience of disasters has shown that
people do not necessarily identify insurance issues as legal issues and will
not seek legal assistance for an insurance problem unless they are effectively
referred from another service.
Even so, following the Victorian and Queensland floods, legal aid
organisations were overwhelmed by the volume of clients seeking assistance with
their insurance claims and in particular with dispute processes relating to
Legal practitioners who offer legal advice and representation for a fee
often are unaware of the free services of FOS that clients can be referred to. Moreover,
FOS noted that ‘there is ignorance within the legal fraternity about how
beneficial something like FOS can be’, perhaps because FOS does
not usually award legal costs.
Such a possibility leads NIBA to caution that ‘those promoting legal
solutions may not be advising their clients of the availability of a free,
independent dispute resolution process that is binding on the insurer’.
FOS notes that few consumers have legal representation before FOS, and
that ‘while consumers are not disadvantaged if not represented, legal
representation will often assist in the identification of the issues in
dispute.’ However, Mr Price
advised the Committee that legal representation can add to delays, saying that
‘there are matters where I have completed site visits on that I just want to
resolve, but I am waiting for Legal Aid to put in their further information.’
Legal aid organisations have expressed concern that consumers need legal
assistance to cope well with the EDR system at FOS. Mr Paul Holmes, senior consumer
advocate lawyer, Legal Aid Queensland, told the Committee that their clients
know that they can pursue EDR without legal representation to avoid delays, but
only two clients opted for this course of action. Mr Holmes said that this:
… suggests that insurance is far too complicated for the
ordinary consumer to feel comfortable in dealing with it. That is particularly
reinforced with me when we had a lawyer ring up the other day seeking our
assistance with their own claim.
Caxton Legal Centre informed the Committee that it does not have the
resources to provide legal assistance to clients beyond the IDR process, and
There have been many clients who have required extensive
reassurance and support to decide to continue their matter [to FOS]
unrepresented. Caxton lawyers are very concerned about how a lot of these
clients will fare as self-represented complainants in FOS.
Consumer advocates raised concerns in their submission about the
effectiveness of FOS in cases where consumers lack legal representation:
Insurance is an extremely complex area of law and insurance
cases are challenging even for solicitors. It is unlikely that an unsupported
consumer will be able to bring all relevant facts and law to the attention of
the decision-maker in an insurance dispute.
In addition to limited access to free legal assistance, the resources of
legal aid organisations and community legal centres are over-stretched for the
workload that follows wide-scale natural disasters.
The ILS, the only free specialist legal service in Australia, has
recurrent funding of $70 000 per year from the Australian Government until
2013, and one-off funding of $130 000 from Legal Aid NSW for the 2011–12
In the wake of the Victorian bushfires in 2009, a number of legal aid
organisations and community legal centres established the temporary Bushfire
Legal Help project which, apart from $220 000 from the Australian
Government, was ‘largely unfunded and was resourced by its members by the
reallocation of existing resources and goodwill’.
The Australian Government also provided one-off funding of $200 000
to Legal Aid Queensland after the Queensland floods and cyclones of 2010, and
the Insurance Council of Australia contributed a further $250 000. These
funds ‘enabled LAQ and Caxton Legal Centre to devote the time of their lawyers
to helping people affected by floods and cyclones’.
In Western Australian, no government or industry funding was provided
for insurance difficulties following the bushfires of February 2011, but WA
Legal Aid coordinated insurance specialist volunteers to provide pro bono
Similarly, legal aid organisations in Victoria did not receive additional
funding from governments or the insurance industry after the 2010 and 2011
This lack of funding for specialist insurance legal assistance meant
that the legal aid network was unable to adequately meet the demands of
consumers following recent natural disasters around the country.
The VLAF submits that this places consumers at a disadvantage:
The limited funding for civil legal aid by governments over
the past 15 years causes injustice when those who cannot afford robust legal
representation are seeking to assert their rights against well resourced
FOS stated that ‘experience with the Queensland flooding confirms the
need to ensure that community and legal services are adequately funded and
One of the recommendations of the NDIR report was that ‘Commonwealth and
State governments provide funding for legal advice and assistance with
insurance disputes following natural disasters’.
However, legal aid organisations stress that it is not just additional
funding that is required in times of catastrophes, but an on-going investment
in free specialist insurance legal services for consumers. Ms Jenny Lawton,
Professional Support Lawyer, Victoria Legal Aid, told the Committee that ‘if we
do not have funding to build that capacity and if we cannot maintain that
capacity, then even throwing funds in after a disaster is not enough’.
NSW Legal Aid recommended more funding for the ILS as well as funding
for specialist insurance legal services to be established in each state and
territory. Choice concurred with
Effectiveness of dispute resolution
In January 2012, FOS indicated that 50 per cent of insurance disputes
relating to the January 2011 Queensland floods had not been resolved.
Disputes are still being registered with FOS as new information becomes available
or internal disputes escalated. It is thus too early to comment with any
reliability on the effectiveness of external dispute resolution. Moreover, the
Committee only heard evidence about general insurance disputes, not all the
disputes that FOS deals with.
The barriers to participation mentioned above, do lessen the
effectiveness of FOS insofar that its reach and remit are reduced.
A joint submission from consumer advocacy groups recommended that FOS
consider establishing a consumer advisor position—along the lines of existing
industry advisors—for assisting applicants with managing their disputes, and
that FOS report more comprehensively and transparently on its investigations of
Overall, the Committee heard some positive feedback about FOS from
consumers, insurers and consumer advocates. However, the Committee is highly concerned
that many people who would benefit from taking their claim to FOS decided not
to pursue that option due to ‘complaint fatigue’.
The Committee is completely appalled that some consumers may not have pursued
EDR because they were not informed of it by their insurer. While FOS may
provide satisfactory EDR processes, the EDR system cannot realistically be
viewed as effective given the barriers to participation. Again, this is an
unacceptable failing of industry self-regulation and, to a certain degree, FOS
for not sufficiently promoting it services. Consequently, as with IDR, the
Committee concludes that RG 165 should be amended to ensure that information
about claimants’ rights to EDR is required to be provided at the time of claim
In addition, knowledge about FOS is low and this contributes to poor
representation and protection for consumers. There is a need for FOS to be more
widely-known, responsive and visible. Accordingly, the Committee recommends in
the strongest terms that FOS implement the following:
n a name change to
‘Insurance and Financial Ombudsman Service’, which could assist in raising the
profile of the service and also make the role more apparent to consumers;
n commit to developing
a disaster-response plan that provides an ongoing physical presence in affected
areas for three months following a disaster event; and
n remove the monetary
limit on disputes that may be considered by FOS.
Further, the Committee considers that expanded availability of, and
access to, free legal assistance and consumer advice would be of great
assistance to claimants, particularly following disaster events where claims
may be complex. Legal assistance should be freely available to all those
affected by a disaster event, regardless of financial circumstances.
In the concluding chapter, the Committee provides its recommendations
for enhancing the effectiveness of the external dispute resolution system
through a more systematic and comprehensive regulatory approach.