Australia: Proposal to extend the unfair contract terms regime to insurance contracts

On 30 July 2019, the Federal Government released, for consultation, the draft Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 20191, being its draft legislation to extend the unfair contract terms regime found in section 12BF-12BM of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to insurance contracts (by amending the ASIC Act and the Insurance Contracts Act 1984 (Cth)).

The release of the draft Bill for consultation follows the 2017 Senate Economics Committee Inquiry into the general insurance industry and recommendations made by Commissioner Hayne in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry published on 1 February 2019 (Final Report), with the stated purpose of the draft Bill reflecting 4 of those recommendations.

Proposed changes

The draft Bill proposes to amend the Insurance Contracts Act to enable the unfair contract terms regime to apply to insurance contracts covered by the Insurance Contracts Act. It also proposes to amend the ASIC Act to tailor the existing unfair contract terms regime in its application to insurance contracts. The proposed changes seek to:

  • ensure that the current exclusion from the unfair contract terms regime of terms that define the main subject matter of a contract remains, but based on the definition of main subject matter of the contract as being limited to the description of what is being insured;
  • exclude from the unfair contract terms regime terms that set the quantum or existence of the excess or deductible in an insurance contract, as long as they are presented transparently; and
  • allow for third party beneficiaries of insurance contracts to bring actions against insurers under the unfair contract terms regime.

The proposed changes are to apply to standard form insurance contracts where at least one party is a consumer or a small business as defined in section 12BF of the ASIC Act. Relevantly, this means individuals purchasing personal, domestic or household insurance and businesses employing under 20 people.

A contract will still be a "standard form contract" even if the consumer/small business have options to choose, say, levels of premium, excess or sum insured and if placed by a third party broker, but only if they also do not have the ability to negotiate the underlying terms and conditions governing the contract

The proposed changes do not alter the exclusion from the unfair contract terms regime of any term defining the upfront price payable of an insurance contract and do not seek to impact the obligation of utmost good faith that parties to an insurance contract have to each other, as outlined in section 13 of the Insurance Contracts Act. That said, it is clear that some scenarios may give rise to relief under both the unfair contract terms regime and section 13.

Main subject matter

The Federal Government considers that having a broad, rather than narrow, definition of what comprises the main subject matter of an insurance contract, would undermine the extension of the unfair contract terms regime to insurance contracts and anticipate that this will result in an "increased number of terms being subject to the fairness test under the law, thereby increasing the benefit to consumers and small businesses and also the likely impact on insurers".

However, a potential effect of this is that it opens up most terms in an applicable insurance contract to be contested. If that is correct, and there is a risk that insurers cannot rely on the terms of their contracts, then they will likely price this additional risk accordingly, and this will be passed on to consumers/small businesses.

We expect that this aspect of the draft Bill will be challenged by the insurance industry.

Transparent excess and deductible terms exclusion

This is merely to ensure that excess and deductible terms are clearly stated to the insured at the time of purchasing the insurance contract. If they are not, they will be susceptible to challenge

Third party beneficiaries

Third party beneficiaries of insurance contracts2 have the ability to bring actions under the Insurance Contracts Act; however, the unfair contract terms regime in the ASIC Act only allies to contracting parties. The proposed amendments would allow the unfair contract terms regime, as it applies to insurance contracts, to be available to third party beneficiaries.

However, third party beneficiaries will only be able to bring actions for unfair contract terms if the contracting party is a consumer or small business, the insurance contract is a standard form contract and the relevant unfairness relates to the contracting party, and not the third party beneficiary.

Implications

These proposed changes should be of interest to insurers that write consumer products or insure in the SME market with standard form products. The main apparent risk of the changes is the narrow definition of what is the main subject matter of an insurance contract. This may have the effect of opening up all the terms of an applicable contract to scrutiny and the risk of being voided by the unfair contract terms regime. In turn, this may cause a significant premium increase for the relevant products.

Next steps

The draft Bill has been published for consultation purposes only. There are also other potential regulatory changes in the pipeline arising from the Final Report, including, but not limited to, claims handling.

Interested parties are invited to comment on the draft Bill, with all submissions to be made by 28 August 2019.

Footnotes

1 Together with an Explanatory Memorandum and Regulation Impact Statement

2 A person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends – section 11 of the Insurance Contacts Act 1984 (Cth).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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