Australia: But wait… there's more! Unfair contract terms to be extended to insurance contracts
Corporate risk and insurance update

Government to explore options for extension of unfair contract terms to insurance

Bearing gifts we traverse afar...

As consumers look to our Government to 'guide us to thy perfect light', the Productivity Commission, in its 2008 Review of Australia's Consumer Policy Framework, recommended that new generic national consumer laws be implemented across all sectors of the economy. This recommendation included national unfair contract terms (UCT) laws.

The UCT laws were implemented as laws of the Commonwealth, and of Victoria and New South Wales, on 1 July 2010 and now extend to all other States and Territories. The UCT laws apply to most financial products and financial services through the Australian Securities and Investments Act 2001 (ASIC Act). However, UCT laws do not currently apply to insurance contracts.

As part of the pre-Christmas regulation rush (see previous update here), Treasury has now also released a draft regulation impact statement for public consultation in order to receive feedback on potential options to ensure that consumers who purchase insurance are afforded the same level of protection as consumers of financial products and financial services under the UCT laws.

In our March 2010 update (see here), we discussed the implications of applying UCT principles to insurance products. In our view, continued development in this area has the potential to see the broadest reforms to insurance contract regulation since the introduction of the Insurance Contracts Act 1984 (the Act).

Westward leading, still proceeding...

To date, insurers have strongly opposed the application of the UCT regime to insurance on the basis that the Act already adequately protects insureds. In addressing this issue, Treasury identifies at paragraph 2.51 the following key points about the 'problem':

• there is a risk of unfair terms in standard form insurance contracts causing loss or damage to policyholders and third party beneficiaries which, in some situations, could be significant;
• there are existing laws that might help to prevent loss or damage to policyholders due to reliance on unfair contract terms; and
• the extent to which those laws are effective, or potentially effective, to address situations of UCT is debateable, but the existing laws:
• • do not cover the same breadth of circumstances as UCT laws;
  • are directed at providing remedies in individual cases where an objectionable term is sought to be relied upon, whereas UCT laws are directed at eliminating objectionable terms from standard form contracts; and
  • have been identified by the Senate Economics Legislation Committee and the Natural Disaster Insurance Review as not providing adequate protection to consumers.

There also remains some debate as to whether UCT laws for insurance contracts should be implemented via amendment to the Act or rather, by expanding the reach of the UCT laws under the ASIC Act.

Despite identifying a number of 'problems' (e.g. defining what the 'main subject matter' of an insurance contract is) it appears likely that the government will press ahead with the application of the regime and is not likely to let insurers off the hook.

This is on the basis that the current regime arguably provides a more difficult avenue for redress in terms of the onus of proof, remedies and clarity of the relevant test.

Interested parties are invited to comment on the draft regulation impact statement and the closing date for submissions is 17 February 2012.

To review the draft regulation impact statement in full, click here.

For more information, please contact:

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.