Has the Federal Court killed the unfair contract terms regime for insurance?

By Philip Hopley and Georgia Francis

The Federal Court of Australia has handed down the first decision on the application of the unfair contract terms (UCT) regime to insurance policies.[1]

Background

In April 2023, ASIC commenced enforcement proceedings against Auto & General Insurance because of a blanket notification provision in its home and contents insurance policies.

ASIC’s complaint concerned the insurer’s use of a provision requiring policyholders to ‘tell us if anything changes about your home and contents‘ – this is a commonly used provision in these types of policies.

ASIC considered the notification requirement to be too broad. It argued the provision met the statutory criteria for unfairness under the ASIC Act 2001 (Cth) because:

• it created a significant imbalance in the parties’ rights. Without it, insureds would have no obligation to inform insurers of any changes to their insured risks. The provision gave the insurer a wide discretion to deny a claim if it was not complied with;
• it was not reasonably necessary to protect the insurer’s legitimate interests because it conferred broader rights than could ever be enforced against an insured; and
• it would cause detriment to an insured if it was relied on through the insurer reducing or rejecting a claim for non-compliance with the provision.

Decision

In dismissing ASIC’s claim, Justice Jackman found ASIC failed to demonstrate the provision was unfair, despite its potential to cause detriment and its lack of transparency. In summary:

• The notification term, when interpreted correctly, didn’t require policyholders to disclose ‘anything’ in a literal sense. Such an interpretation would be absurd and contrary to the implied term of utmost good faith in section 13 ICA, which would have prohibited any ‘opportunistic reliance’ by the insurer on the term. The policy provision concerned only the disclosure of any changes to the information previously provided by the insured through the application process.
• The insurer had a legitimate interest in being able to choose which risks it would insure against and the provision, properly interpreted, was proportionate and reasonably necessary to protect this interest.
• The court determined that one aspect of the test for unfairness was met because the provision would inevitably cause detriment to an insured if the insurer relied on it. However, this alone didn’t make it unfair. Additionally, the court accepted the provision lacked transparency because its true meaning, as construed, was not expressed in a way consumers could readily understand.

From a pure UCT perspective, this decision followed established principles to determine the issue of unfairness.

Implications

This decision gives rise to a number of significant issues:

• At the very least, the bar for a finding of unfairness under the UCT regime in an insurance contract is now established to be a high one. A provision in a contract of insurance must be assessed according to whether an insurer would be permitted to rely on it under the ICA first. Terms should not be construed literally or in isolation from the legal environment that applies to them.
• It is arguable that the practical outcome of this decision is to neutralise entirely the UCT regime for insurance contracts.
  • Provisions in policies must be construed by reference to the implied duty of utmost good faith under section 13 ICA before embarking on an assessment of unfairness under the UCT regime.
  • Justice Jackman described the duty of utmost good faith under section 13 as ‘a paramount provision‘ that, following a recent decision of the High Court, requires insurers to exercise their rights and powers consistently with commercial standards of decency and fairness.[2]
  • If section 13 operates to qualify any unfairness expressed in the terms of a policy, then what work does the UCT regime have to do? This is precisely the point the insurance industry raised when it initially opposed the expansion of the UCT regime to insurance contracts.
• When construing a contract of insurance – for UCT reasons or otherwise – there should be a focus on considering the issue of utmost good faith first before applying section 54 ICA. This is not typically how insurers tend to approach this issue. Moreover, section 13 may produce an outcome without the need to consider section 54.