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Unfair Terms in Insurance Contracts – Draft Regulation Impact Statement Released.

22 December, 2011

 

Stakeholders have been invited to comment on a draft Regulation Impact Statement (“RIS”) on options for extending the unfair contract terms to insurance.
 
Unfair contract terms
 
The Commonwealth introduced provisions protecting consumers against unfair contract terms (“UCT”) provisions in the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) in July 2010.  These apply to most financial products and financial services.  However the UCT laws do not apply to insurance contracts.
 
Following on from a paper seeking comments on options to address unfair terms in insurance contracts in 2010 (see our alert on this here), there has been a further consultative process undertaken by the Government in 2010 and 2011 which has resulted in the draft RIS.
 
Why current regulation is not enough
 
The Government seeks to address the problem of “the current imbalance between protections offered under the existing regulation of insurance contracts and that which currently applies to other financial products and services, which may result in actual or potential disadvantage or loss to consumers due to insurance contracts containing terms that are harsh and/or unfair.”
 
The draft RIS discusses the disadvantages of existing regulation on insurance contracts.  These disadvantages are similar to those discussed in our alert on the previous consultation paper. 
 
In summary, the draft RIS found that:
 
(a) Whilst requirements for pre-contractual disclosure should help to prevent policyholders being ‘surprised’ by exclusions or conditions, parties may not read policies before making a claim.
 
(b) Policy documents were seen to be relatively long and complex and it could not be assumed that consumers will read and fully understand these documents either before or after purchase.
 
(c) The proposed one-page disclosure for home building and home contents insurance policies may not necessarily mean that every exclusion or limitation will be highlighted.
 
(d) The statutory duty of utmost good faith in the Insurance Contracts Act 1984 (Cth) (“ICA”) is rarely used to challenge terms in court.
 
(e) Sections 53 and 54 of the ICA would overlap to some degree with the UCT laws but they are limited in scope to specific types of terms.
 
The UCT laws were argued to provide broader consumer protection.
 
Suggested Options
 
The options provided in the Draft RIS to address the above problem are largely the same as those canvassed in the previous consultation paper.  These are:
 
(a) Option A – Status Quo:  No change, problem would continue to be addressed through the operation of section 14 of the ICA (which provides that neither party to an insurance contract may rely on a term in the contract if to do so would be to fail to act with the utmost good faith).
 
(b) Option B – Enhance existing ICA remedies:  Existing remedies in the ICA, particularly section 14, would be modified to improve their effectiveness to prevent the use of unfair contract terms in standard insurance contracts with consumers.  Section 15 (which provides, except in relation to compensatory damages, that other legislation which provides for judicial review of insurance contracts on the grounds they are harsh, oppressive, unconscionable, unjust, unfair or inequitable and which provides relief to insureds from consequences in law of making a misrepresentation,  do not apply to insurance contract) would continue in operation so that the UCT provisions of the ASIC Act would not apply.
 
(c) Option C – Permit the unfair contract terms provisions of the ASIC Act to apply to insurance contracts:  Changes to the operation of section 15 would be made to permit the UCT provisions in the ASIC Act to operate in addition to, and alongside, the ICA remedies.
 
(d) Option D – Extend ICA remedies to include unfair contract terms provisions:  The ICA would be amended to include remedies relating to unfair contract terms similar to that in the ASIC Act.  Section 15 would continue in operation so that the unfair contract terms provisions of the ASIC Act would not apply.
 
(i) Option E – Encourage industry self-regulation to better prevent use of unfair terms by insurers:  Use of unfair terms by insurers would be addressed through self-regulatory means, such as a specific section dealing with the issue in, for example, the General Insurance Code of Practice.
 
The draft RIS preferred options C and D.
 
Should the UCT provisions apply to terms that seek to limit liability in insurance contracts?
 
If the UCT laws were to apply to insurance, further questions are:
 
(a) Should the ‘main subject matter’ of an insurance contract be clarified to make explicit whether terms that seek to limit liability in an insurance contract are either:
 
(i) considered to be within the ‘main subject matter’ of an insurance contract, and hence would not be subject to UCT provisions; or
 
(ii) not considered to be within the ‘main subject matter’ of a contract, and hence would be subject to UCT provisions.
 
(b) Given the potential impact on insurers in the event that a policy exclusion may be declared void, should remedies be restricted to exercise by a regulatory authority?
 
The last option was seen as a compromise to address concerns on the part of insurers about uncertainty and the associated costs that would result if terms that seek to limit liability could be declared void.  The draft RIS states that ASIC, as the responsible regulator, would be very unlikely to launch legal action seeking that terms be declared unfair without providing insurers with a reasonable opportunity to address the issue, and any actions that were ultimately brought are unlikely to be without merit.
 
Going forward
 
The closing date for submissions is 17 February 2012.
 
Should consultations justify the need for introducing provisions regarding unfair contract terms in insurance, legislation could be introduced as early as 2012-13.  If reforms were to be introduced, it is currently envisaged that a two year transition period would apply from the date any legislation comes into effect.
 
 
For further information, please contact:
 
Mandy Tsang, Mallesons Stephen Jaques
mandy.tsang@mallesons.com
 
Philip Ward, Mallesons Stephen Jaques
philip.ward@mallesons.com
 
 

 

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