Unfair contract laws to be extended to insurance

Since 2010, Australia has had laws dealing with unfair contract terms (UCT Laws) in consumer contracts. These are contained in sections 23 to 28 of the Competition and Consumer Act 2010 (ACL) and, in respect of financial products and services, sections 12BF to 12BM of the Australian Securities and Investment Commission Act 2001 (ASIC Act). From 12 November 2016, the scope of the UCT Laws was extended to ‘small business contracts’ (a small business is one that employs less than 20 people, including casual employees employed on a regular and systematic basis).

The UCT Laws do not apply to insurance contracts because section 15 of the Insurance Contracts Act 1984 (IC Act) states that a contract of insurance is not capable of being made the subject of relief under any other Act, or a State Act, or an Act or Ordinance of a Territory. However, the Government announced in December 2017 that it would extend the UCT Laws to apply to contracts of insurance in 2018.

The Federal Government has finally released a Proposals Paper in respect of the proposed extension of the UCT laws. The proposed model involves amending section 15 of the IC Act to allow the UCT Laws in the ASIC Act to apply to insurance contracts regulated by the IC Act (ie, general and life insurance contracts). It would also involve tailoring the UCT Laws in the ASIC Act to accommodate specific features of insurance contracts. In particular, this would mean:

• the ‘main subject matter’ of an insurance contract will be defined narrowly as terms that describe what is being insured, for example, a house, a person or a motor vehicle and
• clarification will be provided that the ‘upfront price’ will include the premium and the excess payable and that these will not be subject to review.

There has been significant discussion in the industry around these two points in particular, given the unfair contracts provisions in the ASIC Act do not apply to a term of a contract to the extent that the term defines the ‘main subject matter’ of the contract, or sets the ‘upfront price’ payable under the contract. For this reason, insurers want the main subject matter of an insurance contract to be defined broadly (to prevent the UCT Laws covering too many of the fundamental terms of the insurance contract), and the ‘upfront price’ to also be defined broadly (ie, to ensure terms relating to payment of additional premiums, and fees and charges, are not subject to the UCT Laws).

The application of the proposed model to insurance contracts would also mean that:

• an insurance contract will be considered as standard form even if the consumer or small business can choose from various options of policy coverage
• when determining whether a term is unfair, a term will be reasonably necessary to protect the legitimate interests of an insurer if it reasonably reflects the underwriting risk accepted by the insurer in relation to the contract and it does not disproportionately or unreasonably disadvantage the insured
• examples specific to insurance will be added to the list within the ASIC Act of examples of kinds of terms that may be unfair, which could include terms that permit the insurer to pay a claim based on the cost of repair or replacement that may be achieved by the insurer, but could not be reasonably achieved by the policyholder
• where a term is found to be unfair, as an alternative to the term being declared void, a court will be able to make other orders if it deems that more appropriate
• the definition of ‘consumer contract’ and ‘small business contract’ will include contracts that are expressed to be for the benefit of an individual or small business, but who are not a party to the contract
• for life insurance policies, as defined by the Life Insurance Act 1995, which are guaranteed renewable, it will be made clear that a term which provides a life insurer with the ability to unilaterally increase premiums will not be considered unfair in circumstances in which the premium increase is within the limits and under the circumstances specified in the policy.

The UCT Laws have had a significant impact on other providers of financial services that use standard form contracts, particularly the banks, which have had to make changes to fundamental contractual terms relating to default, breach and indemnity. It is likely that retail insurance policy documents will also need a similar overhaul to comply with the proposed model for applying the UCT Laws to insurance.

Hall & Wilcox has significant experience working with banks and other financial services providers in relation to the application of the UCT Laws and in assisting insurers with regulatory issues and policy drafting.