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Australia – Unfair Contracts Legislation And Its Proposed Application To Insurance Contracts.

20 April, 2013

 

Under proposed new changes to the Insurance Contracts Act, insurers will 
become liable for “unfair” terms in general insurance contracts. While 
both general and life insurance contracts have been exempt from unfair 
contracts legislation in the past, this change will see responsibility placed 
on insurers to avoid such terms in policy documents issued to domestic 
consumers. Consumers and ASIC will have new rights of recourse for 
unfair insurance terms, which may result in the impugned term being held 
void and unenforceable.


What is unfair contracts legislation?


Under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), consumers are afforded considerable protections from unfair terms in contracts. Under the Act, a consumer is someone whose acquisition of goods or services is predominantly for personal, domestic or household use (ASIC Act s 12BF(3)). If a term is contained within a standard form consumer contract (such as a mobile phone contract or credit card contract), and is deemed unfair, that term will become void (ASIC Act s 12BF(1)). If the contract is able to operate without that term, it will continue to bind the parties (ASIC Act s 12BF(2)).

 

The ASIC Act provides a specific definition of “unfair”. In order to establish a contractual term as unfair, you must prove that the term:

 

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and 
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and 
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on ( ASIC Act s 12BG(1)).

 

In determining whether a term is unfair, a court must also consider the 
transparency of a term and the existence of the contract as a whole ( ASIC Act s 12BG(2)). Terms deemed unfair will often be those which burden or prejudice one particular party. For example, a term that permitted one party (but not the other) to terminate the contract is an example of an unfair term (ASIC Act s 12BH(1)(b)).

 

The current exemption for insurance contracts


Significantly, insurance contracts are currently exempt from existing unfair 
contracts legislation. The Insurance Contracts Act 1984 (Cth) (Insurance 
Contracts Act) states that a contract of insurance cannot be made the 
subject of relief under any other Act (Insurance Contracts Act s 15).

There are several underlying reasons for the exclusion of insurance contracts from unfair contracts legislation. In particular, there are already significant protections for policyholders under the Insurance Contracts Act. These include:

 

  • Requirements of pre-contractual disclosure, which ensure notification of unusual terms (Insurance Contracts Act s 37)  and a minimum level of cover for prescribed events (Insurance Contracts Act s 35) (for example, home contents insurance ensures standard cover for loss caused by storms and flooding).
  • The duty of utmost good faith, which prevents parties from relying on terms which violate that duty (Insurance Contracts Act s 14).
  • Rules on reliance on specific terms, which prevent reliance by insurers on terms allowing the variation of policies to the prejudice of the other party (nsurance Contracts Act s 53)

 

Further, the Corporations Act 2001 (Cth) (Corporations Act) also protects 
policyholders’ interests to a degree, for example by prohibiting misleading or deceptive conduct in relation to a financial product or service (Corporations Act s 1041H).


What are the proposed changes?


Following considerable debate in recent years, it is proposed that the 
unfair contracts legislation (contained within the ASIC Act) be “imported” 
into the Insurance Contracts Act and appropriately modified to reflect the 
Insurance Contracts Act and the nature of general insurance contracts. Draft legislation to this effect is expected later this year. The change will apply to all new and renewed general insurance contracts entered into following the commencement of the amendment.


Under the proposed changes, both the Australian Securities and 
Investments Commission (ASIC) and consumers may take action in court 
against insurers for unfair terms. 


Where a term is held unfair by the court, the remedy available will be that 
the insurer may not rely on that term. Additionally, the court may consider 
whether a different (more appropriate) remedy is available.

 

It has also been proposed that the unfair contracts legislation be added to 
the provisions of the Insurance Contracts Act that deal with utmost good faith rather than embedded as stand-alone provision. If implemented, a breach of the unfair contracts legislation may also result in a finding of a breach of utmost good faith by an insurer, giving rise to the possibility of additional sanctions being imposed. 


However, the government has also recognised the unique nature of insurance contracts (as distinct from other consumer contracts to which the unfair contracts legislation currently applies). If a term reflects the underwriting risk accepted by the insurer, then the term will be reasonably necessary to protect a legitimate interest – which, by definition, cannot be “unfair”. 


In particular, the unfair contracts legislation will not apply to insurance terms to the extent that they:

 

  • define the subject matter of the contract; or
  • set the upfront price payable under the contract; or
  • are required or expressly permitted by a Commonwealth/State/Territory law.


There has been considerable debate between the industry consumer groups and the government as to what should constitute the subject matter of an insurance contract. Put simply, does it mean all terms that go to determining the scope of the insurance contract including exclusions and conditions of cover, or just the insuring clause that describes the subject matter of the insurance – such as the particular car, home or individual covered. It remains unclear where the pendulum will come to rest on this issue. 

 

The changes will not apply to life insurance contracts at this stage, but the government has reserved its position to reconsider this position in the future. 


Why is the situation changing?


The proposed changes are the result of extensive consultation between the Federal Treasury, the insurance industry and consumer advocates. Despite the very significant degree of protection already afforded to policyholders under current legislation, consumer advocate groups have pushed for an extra layer of protection. 


It is suggested that under the new regime, policyholders will be able to better understand terms and the risks associated with them. Similarly, consumers have long held concerns about the role of unfair terms in dismissing otherwise valid claims: the changes are meant to assure consumers that insurers will no longer “hide behind” unfair terms.


Who will the change affect, and how?


Importing unfair contract legislation into the Insurance Contracts Act will 
create some challenges for insurers. 


The Media Release issued by Mr David Bradbury MP on 20 December 2012 suggested that the amendments will apply only to “standard form” insurance contracts. This is likely to be a reference to standard cover in eligible contracts of insurance as prescribed by the Insurance Contracts Regulations1985, such as motor vehicle, home buildings, home contents, sickness and accident, consumer credit and travel insurance contracts. Insurers who write this type of business will need to review their standard form contracts to identify whether there are terms that may be unclear, confusing or operate unfairly and to ensure that potentially unfair terms are removed from policy documents.


Insurers will need to consider what terms in a contract might reasonably 
reflect the underwriting risk they accept and ensure that processes 
and procedures accurately reflect these risk assessments. If terms are 
subsequently challenged, an insurer will need to have sufficient evidence to demonstrate the importance of such terms in defining the underwriting risk it has accepted and the price it charged for doing so. 


For domestic consumers, the changes offer the comfort of knowing the unfair contracts legislation will apply to their insurance contracts as well as other standard form consumer contracts. 


However, it is not yet clear how these provisions will interact with the 
Insurance Contracts Act, when or if the amendments will be introduced into law and whether the changes will provide real, as opposed to perceived, additional protections against unfair contract terms.

 

 

For further information, please contact

   

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

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