Australia: Unfair Terms In Insurance Contracts - A Storm In A Teacup?

Section 15 of the Insurance Contracts Act 1984 (Cth) provides that a contract to which the Act applies is not capable of being made the subject of relief, under any other Act, in the form of judicial review on the ground that the contract is "harsh, oppressive, unconscionable, unjust, unfair or inequitable".

This may be about to change, under the new Australian Consumer Law.

The Australian Consumer Law is an initiative of the Federal Government which, among other things, targets "unfair" terms in standard-form (ie non-negotiated) consumer contracts.

A national consumer law was recommended by the Productivity Commission in April 2008 and agreed to at a meeting of the Council of Australian Governments on 2 October 2008.

On 11 May 2009 Treasury released exposure draft provisions for public comment.

The Australian Consumer Law takes the form of amendments to the Trade Practices Act 1974 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). On 24 June 2009 the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) was introduced into the House of Representatives. The next day the Bill was referred to the Senate Economics Legislation Committee. On 7 September 2009 the Senate Committee released its report. This report is discussed below.

Under the Bill, a term of a contract is "unfair" if:

"(a) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

The Bill includes 13 examples of unfair terms. Three of these (which are potentially applicable to certain types of insurance contracts) are:

  • "a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract";
  • "a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract"; and
  • "a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied ... under the contract".

A term of a "consumer contract" will be void if the term is unfair and the contract is a standard-form contract.

A "consumer contract" is relevantly defined as:

"... a contract for ... a supply of goods or services ... to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption."

But for section 15 of the Insurance Contracts Act, this definition would generally catch retail insurance products when sold to an individual.

It appears that in the early stages of drafting the new provisions, the operation of section 15 might not have been considered.

Section 14 of the Insurance Contracts Act prohibits a party to a contract of insurance relying on a provision of the contract where to do so would be to fail to act with the utmost good faith.

Section 15 of the Act was included because the Australian Law Reform Commission considered that a general judicial power of review would be both undesirable and unnecessary. The Commission said:

"In the context of insurance, however, a provision for general judicial review is probably unnecessary ... Both parties to an insurance contract are subject to the requirement of uberrima fides [ie utmost good faith]. This should be restated as a contractual duty between the parties. Neither party should be entitled to rely on a contractual provision when to do so would involve a breach of the duty of utmost good faith. That should provide sufficient inducement to insurers and their advisers to be careful in drafting their policies and to act fairly in relying on their strict terms."

The Senate Committee received submissions both for and against allowing insurance contracts to continue to be exempt from judicial review on the ground of unfairness. Consumer action and legal aid groups in particular wanted the exemption removed.

The Committee came down on their side and recommended that the exemption be removed, by way of an amendment to the Act (rather than an amendment to the Bill). Coalition Senators were divided on the issue.

The Committee said:

"The committee believes it is important that section 15 of the [Insurance Contracts Act] is now addressed in light of this legislation to introduce national unfair contract law provisions. This is in line with the recommendation of the [Cameron-Milne] 2004 review of the ICA."

The Cameron-Milne Report (June 2004) was a comprehensive review of the Insurance Contracts Act which had been conducted with support from Treasury. That Report had concluded that "the consequences of repealing section 15 are too uncertain to take that step", but had recommended that the issue be revisited if a nationally consistent model for review of the consumer unfair contracts is developed".

On 12 February 2007, following consideration of the Cameron-Milne Report, Treasury released the exposure draft Insurance Contracts Amendment Bill 2007 for public comment. This did not propose any amendments to section 15.

Throughout 2007 Treasury had productive discussions with stakeholders but, unfortunately, with the December 2007 election and change of government the long-awaited Insurance Contracts Amendment Bill got moved to the back burner.

In theory, the Bill currently before Parliament could be amended to include an amendment to section 15 as a consequential amendment. Alternatively, Treasury might be asked to re‑think its approach to section 15, as part of its Insurance Contracts Amendment Bill project.

Perhaps the National Insurance Brokers Association should be given the last word. In its submission to Treasury in response to the exposure draft provisions, it said:

"... the comments made in this submission are made not on behalf of insurance companies but on behalf of insurance brokers who represent the public that purchases insurance ...
The Insurance [Contracts] Act was developed specifically to cover unfair situations that arise in relation to insurance contracts. Over a number of years it has continued to provide a high level of protection for consumers entering into insurance contracts.
It makes no sense whatsoever to apply general contractual legislation to insurance contracts. It would provide no additional consumer protection ... It would simply be confusing as to which piece of legislation should apply and it would add an unnecessary complication to the existing arrangements."

Watch this space.

Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth)

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