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Australia – Government Releases Draft Unfair Contracts Bill For Insurance Contracts.

26 May, 2013

 

The Federal Government has issued a draft Bill to amend the Insurance Contracts Act 1984 (IC Act) to give consumers protection against unfair contract terms in standard form general insurance contracts. The Insurance Contracts Amendment (Unfair Terms) Bill 2013 (Amendment Bill) largely duplicates the unfair contract terms provisions from the Australian Securities and Investments Act 2001 (ASIC Act) and provides ASIC with the equivalent enforcement and investigation powers it has under the ASIC Act to administer the new unfair contract term provisions in the IC Act.


As highlighted in a previous article (click here) on this subject, insurance contracts have been exempted from the unfair contract terms (UCT laws) in the ASIC Act otherwise applicable to financial products and services. 


The Amendment Bill follows a long period of consultation between government, industry and consumer interest groups. The challenge has and continues to be how best to amalgamate the UCT laws in a way that reflects the existing consumer protections in the IC Act. While the Amendment Bill goes some way to incorporate the UCT laws, there are a number of challenges presented by the proposed draft.


What is in the Amendment Bill?


The Amendment Bill changes the UCT laws regime in the following ways:

 

  • (a) The regime will apply to consumer contracts that are standard form consumer contracts of general insurance only. Life insurance contracts are not included.
  • (b) If a term is found to be unfair, the insurer will be in breach of the duty of utmost good faith under the IC Act. Further, a breach of the IC Act will be a breach of a financial services law under the Corporations Act 2001 (Corporations Act) for insurers who are also Australian Financial Services licensees. A breach of the UCT laws may be reportable to ASIC depending on the significance of the breach.
  • (c) Where a term is declared unfair, the insurer may not rely on that term. This is different from the UCT laws under the ASIC Act where a term of a contract is void if it is unfair. 
  • (d) A term in a standard form consumer contract of general insurance is unfair if the term:

     

    • (i) would cause a significant imbalance in the parties’ rights and obligations arising under the contract; 
    • (ii) the insurer cannot prove that the term is reasonably necessary in order to protect its interests – in particular, that the term reflects the underwriting risk accepted by the insurer; and
    • (iii) would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
  • (e) A court may take into account any matters it thinks are relevant when determining whether a term is unfair, but it must take into account:

     

    • (i) the extent to which the term is transparent; and
    • (ii) the contract as a whole.
  • (f) A term is transparent if the term is:

     

    • (i) expressed in reasonably plain language; 
    • (ii) legible; 
    • (iii) presented clearly; and
    • (iv) readily available to any party affected by the term.
  • (g) The UCT laws will not apply to a term in a standard form consumer 
  • contract of general insurance to the extent the term:

     

    • (i) defines the main subject matter of the contract; 
    • (ii) sets the upfront price payable under the contract; or
    • (iii) is a term required, or expressly permitted, by a law of the Commonwealth or a State or Territory.
  • (h) ASIC and consumers will be able to take court action if they consider a term is unfair.
  • (i) ASIC will have available the same enforcement, investigation and information gathering powers which are currently available to it to administer the UCT laws in the ASIC Act.

 

Challenges presented by the current draft of the Amendment Bill

 

It is a challenge to provide a workable model that will be acceptable to all key stakeholders while being sympathetic to the current consumer protections already contained in the IC Act. This is particularly so when, at the same time, the long awaited reforms to the ICA Act are also making their way through the Senate in the form of the Insurance Contracts Act Amendment Bill 2013. The 12 month transition period proposed by the Amendment Bill may not allow insurers sufficient lead time to prepare for the changes that will invariably be required to business processes and disclosure documents. 

 

We have picked out 3 issues with the current Amendment Bill that we think epitomise this challenge.

 

(a) Standard form consumer contracts of general insurance – what a mouthful!


The proposed definition of a standard form consumer contract of general insurance is not only a mouthful but is potentially confusing, complicated and unnecessarily circular given the policy intent of the reforms. The term is defined as being both a standard form consumer contract and a contract of general insurance. The focus is on insurance acquired by an individual predominantly for personal, domestic or household use. As such, a simpler approach would be to align the application of the UCT laws with either the concept of eligible contracts of general insurance under the IC Act, or general insurance products for retail clients as defined in Section 761G of the Corporations Act. 

 

This approach would offer no less protection to consumers and would have the benefits of both avoiding gaps which can arise from the application of different definitions and remaining consistent with the consumer protections in the IC Act in relation to eligible contracts. 

 

Take, for example, the current marketing campaign by an insurer offering motorists the option of customising their car insurance policy depending on how regularly they use their car, where it is garaged, who drives it etc. This suggests that there is negotiation and customisation of policy terms that reflects the specific characteristics of the insured. If this is indeed the case, such a policy may not fall within the definition of a standard form contract under the Amendment Bill so the protections afforded by the UCT laws may not be available, even though it would otherwise be considered an eligible contract of insurance for the purposes of the IC Act.


(b) The test of transparency – why another test?


The Amendment Bill proposes the same provisions as the ASIC Act by requiring that a court must take into account the extent to which an allegedly “unfair” term is transparent. This ignores the fact that general insurance contracts are already subject to two similar tests, namely:

 

insurers must clearly inform their insureds (as required under the IC Act); and policy terms must be clear, concise and effective (as disclosure documents under the Corporations Act). 

 

The introduction of this third test of transparency, while consistent with the ASIC Act, introduces a layer of complexity and raises questions about the extent to which a test of transparency adds to, or differs from, the existing obligations.


(c) The concept of underwriting risk

 

Throughout the consultation process leading up to the release of the Amendment Bill, insurers expressed concern about the potential for the UCT laws to be used to rewrite a policy of insurance, thereby fundamentally changing the nature and price of the insurance risk. This uncertainty undermines an insurer’s ability to appropriately price a risk, reserve adequate capital and ensure reinsurance protection.

 

No clarity on main subject matter exemption


On this basis, insurers submitted that clarity on the main subject matter exemption was critical for insurance contracts. The UCT laws under the ASIC 
Act exempt terms that make up the main subject matter of a contract from review for unfairness.


This request appears to have been ignored as the Amendment Bill and Explanatory Memorandum offer no explanation on how this exemption might apply to insurance contracts. This is disappointing given the extent to which the issue has been commented on. It also runs counter to the approach in other international jurisdictions with respect to similar consumer protection provisions. Instead, the Amendment Bill introduces a novel concept of a term that is reflective of underwriting risk.


Terms dealing with underwriting risk cannot be unfair


The new provision appears to operate so that, if an insurer can prove that a term of an insurance contract reflects the underwriting risk accepted by it, the insurer will have proven that the term of the contract is reasonably necessary to protect its legitimate interests. By definition, therefore, it cannot be an unfair term.

 

But, what exactly does underwriting risk mean? It is not defined and no description is offered in the Explanatory Memorandum. Presumably, it refers to a term that is significant to the nature and price of the risk underwritten in the policy or is core to the subject of the risk. 


This presents some real challenges, particularly for products that are not individually underwritten. For example, take a sickness and accident insurance policy that excludes all pre-existing medical conditions. Is the underwriting risk the insuring clause, or the insuring clause as narrowed by the exclusion?

 

Insurers will need to consider their insurance contracts through the prism of underwriting risk and the type of evidence that they may need to demonstrate that a term in a policy has been key to underwriting the risk.


Conclusion 


Overall, the Amendment Bill makes minimal changes to the operation of the UCT laws as they apply to insurance contracts. Given the extent of industry consultation and the range of issues that have been ventilated between the parties, one might have expected to see a greater customisation of the UCT laws for insurance contracts. Nevertheless, now that the proposed Amendment Bill is available for public comment, we have a solid platform on which to make comment and seek appropriate refinements.

 

 

For further information, please contact

   

Rebecca Whittle, Partner, Henry Davis York
rebecca_whittle@hdy.com.au
 

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