In July 2010, the Australian Government introduced new provisions providing relief in relation to unfair contract terms in consumer contracts into the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (Act No. 44 of 2010 inserting ASIC Act Part 2, Division 2, Sub-Division BA ss12BF to 12BM; similar provisions were also introduced into the Australian Consumer Law dealing with contracts that are not relating to financial products or services).
At the time, those provisions were not applied to contracts of insurance. However, the Government continued to work with key stakeholders, including consumer groups and the insurance industry, to consider whether, and if so how, the unfair contracts legislation would be applied to insurance.
On 20 December 2012, the Assistant Treasurer, David Bradbury announced that the Government will legislate to protect consumers from unfair terms in insurance contracts. The proposed unfair contract terms laws for insurance will be introduced into the Insurance Contracts Act 1984 (Cth) (IC Act). While they will be based on the provisions in the ASIC Act, the new provisions will take account of the unique features of insurance contracts.
But given the substantial protections already found in the IC Act, are the unfair contract terms provisions really necessary to protect consumers from unfair terms? How will the unfair contract terms provisions interrelate to the more directly tailored protections already found in the IC Act? And will the provisions restrict the right of insurers to decide on the scope of cover they are willing to provide and price the policy accordingly?
THE UNFAIR CONTRACT TERMS PROVISIONS OF THE ASIC ACT
The provisions apply to standard-form consumer contracts that are either a financial product or a contract for the supply, or possible supply, of financial services. A consumer contract is a contract where a supply is made to an individual for personal, domestic or household use or consumption (see s12BF (3) of the ASIC Act). A term in such a contract that is unfair is rendered void by the ASIC Act.
A term will be unfair if:
- It would cause a significant imbalance in the parties' rights and obligations arising under the contract
- It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
- It would cause detriment (whether financial or otherwise) to a party if it were to be applied and relied on.
In determining whether a term is unfair, a court must take into account:
- The extent to which the term is transparent (in the sense that it is presented clearly, legibly, in plain language and readily available to the consumer)
- The contract as a whole.
The onus of proving that the term is reasonably necessary to protect the legitimate interests of the party advantaged by the term falls on that party.
The ASIC Act provides a "grey list" of the types of terms that may be unfair. That list highlights that the concept of reciprocity of rights and obligations is central to the concept of fairness. As such, the "grey list" includes a range of terms that give significant rights to one party (but not the other) in relation to termination, penalties, variation (including any right to vary the price) or limitations to that party's performance. The grey list also targets provisions that impose limitations upon a party's rights to sue or which affect the evidentiary burden.
The unfair contract terms provisions of the ASIC Act do not apply to terms that:
- Define the main subject matter of the contract
- Set the upfront price payable
- Are required or expressly permitted by Commonwealth, state or territory legislation. Importantly, in the context of this article, the unfair contract terms provisions of the ASIC Act do not apply to contracts of insurance.
APPLICATION OF UNFAIR CONTRACT TERMS TO INSURANCE
While the Government has not yet publicly released draft legislation (exposure draft legislation will be released this year), draft legislation has been discussed with key stakeholders on a confidential basis, including consumer advocates and the insurance industry.
The Treasurer's announcement gives some indication of the form of what is proposed:
1. The provisions will be based upon the ASIC Act provisions but tailored to take account of the unique features of insurance contracts.
One important aspect of the ASIC Act provisions that is likely to be retained is the definitions of "standard form" and "consumer contract". That is, the provisions will only apply where the insured is an individual who has purchased the policy for personal, domestic or household purposes. The range of policies affected is therefore likely to be similar to (but not necessarily co-extensive with) those policies that are "prescribed contracts" under the IC Act.
It is also likely that the new provisions will maintain the key concepts of "significant imbalance" and "legitimate interest". The concept of "imbalance" generally involves the weighing of the benefits conferred on the seller or supplier by a term of the contract against the countervailing benefits conferred on the consumer, in each case considering the context of the contract as a whole. The concept of "legitimate interest" would require the insurer to prove that the term was necessary to protect its commercial interest as the issuer of the policy.
2. The provisions will apply to terms governing the scope of and limitations in cover.
The Treasurer's press release states "the worst nightmare for many people facing a traumatic moment in their lives is finding out they will not have their insurance claims paid because the fine print in a contract unfairly favours the insurance companies" and "consumers deserve to know that insurance companies won't simply take their premiums and hide behind unfair terms to leave them high and dry when it comes time to pay out a claim".
This indicates that any "subject matter" exception to the provisions will be either amended or construed narrowly such that the "subject matter of the contract" will not be "cover". There may be some aspects of cover, however, that are so central to the policy that they are regarded as forming part of the "subject matter of the policy" (which is excluded from the reach of the unfair contract terms provisions in the ASIC Act). Depending on the drafting adopted in relation to insurance, this distinction may raise similar issues for the courts as currently exist in relation to the application of section 54 of the IC Act (refer FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd  HCA 38; Johnson v Triple C Furniture & Electrical Pty Ltd  QCA 282; Highway Hauliers Pty Ltd v Matthew Maxwell  WSC 53).
It is not clear how the concepts of "significant imbalance" or "legitimate interest" would apply to coverage terms where the product has been priced by the insurer based on the scope of risk that the insurer is prepared to accept.
3. If a term is found to be unfair, the principal remedy will be that "the insurer cannot rely on that term". However, the court may also order "other remedies".
This is to be distinguished from the principal remedy under the ASIC Act by which an unfair term is "void". The distinction is an important one. If a grant of cover in a policy of insurance was drafted in such a way that it was "unfair", the result that the term was "void" would not benefit the insured. It remains to be seen what "other remedies" it is proposed a court could order. Perhaps a court may have some power to vary or rewrite a term to excise that part of the term that is considered "unfair".
4. ASIC will have a range of enforcement powers to administer these new laws.
This statement suggests that a finding that a term is "unfair" may have regulatory as well as legal implications. It is also likely that ASIC will have powers to take proceedings to have a term declared unfair.
5. The new regime will provide for an adequate transition period, and will apply to all new and renewed insurance contracts entered into after commencement.
6. At this stage, the amendments will apply to general insurance only. Further consideration will be given to the application of unfair contract terms laws to life insurance contracts in the future.
BUT DOESN'T THE IC ACT ALREADY ADDRESS ANY UNFAIRNESS?
Insurers have questioned whether there was any need for the unfair contracts terms legislation to be applied to insurance contracts. Most, if not all, of the issues that have historically caused an imbalance of rights between insurers and insureds have already been made the subject of more specifically targeted remedies or relief under the existing provisions of the IC Act.
It is difficult to see what work the unfair contract terms provisions have left to do in a number of the areas already governed by the IC Act. For example, the following issues, which might otherwise be thought to be the province of the unfair contract terms provisions, are comprehensively dealt with in the IC Act in a manner that is both fair and certain:
- Circumstances in which an insurer may cancel a policy (section 60 IC Act)
- Notice required to be given by an insurer where it seeks to cancel the policy (section 58 IC Act)
- The need for "transparency" in relation to non-standard or unusual terms (sections 35 and 37 IC Act)
- Notice to be given by an insurer where it does not intend to offer renewal of the policy (section 58 IC Act)
- Conditions which, where breached, provide the insurer with rights that are out of proportion to the prejudice suffered by the insurer (section 54 IC Act).
Notwithstanding that, consideration of the "grey list" provided at section 12BH of the ASIC Act gives some guidance to the types of terms in an insurance policy that might be considered to be unfair and are not currently the subject of specific remedy or relief by the IC Act (though arguably a sufficient remedy is provided by the duty of utmost good faith at ss 13 and 14 of the IC Act). Thus, applying the above tests, a term in an insurance contract may be unfair where:
- The term allows an insurer to determine an issue relevant to coverage "in its absolute discretion"
- The term requires the insured to establish a matter relevant to coverage to a particular standard different to, or possibly greater than, the usual balance of probabilities eg "to the satisfaction of the insurer"
- The term prevents an insured from cancelling the contract at any time or for any reason (but preserves for the insurer the rights of cancellation in the IC Act)
- The term provides for a "minimum premium" or allows the insurer, in the event of cancellation by the insured, to retain premium greater than the pro rata proportion plus a reasonable estimate of the insurer's processing costs.
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