On 5 June 2025, the Full Federal Court of Australia handed down a decision which provides insurers with clarity on how the unfair contract terms regime as set out in the Australian Securities and Investments Commission Act 2001 (Cth) should apply to insurance contracts.
In issue
In considering a Notification Term, the Full Federal Court addressed the interaction between the Australian Securities and Investments Commission Act 2001 (Cth) and the Insurance Contracts Act 1984 (Cth), when determining:
- whether the notification clause requiring policy holders to notify the insurer if 'anything changes' about their home/contents was impermissibly broad and ambiguous,
- whether the notification clause created significant imbalance by imposing vague obligations on consumers, thereby permitting broader claim-refusal powers under the Insurance Contracts Act 1984 (Cth), and
- the balance between assessing transparency of a clause in assessing unfairness, and the clause being 'reasonably necessary' to protect the insurer's legitimate interests in assessing material risk changes.
The background
The respondent, Auto & General Insurance Company Ltd (A&G) supplied general insurance products including home and contents insurance which included a notification term in its home/contents insurance policies, requiring policy holders to 'tell us if anything changes about your home or contents', and in the event the insured fails to do so, A&G may refuse to pay a claim, reduce the amount it pays, cancel the contract or not renew the contract (Notification Term).
ASIC commenced proceedings against A&G, alleging that the notification term was an unfair contract term within the meaning of s 12BG(1) of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and, as such, was void by operation of s 12BF(1).
The decision at trial
The primary judge reasoned that the word 'anything' in the Notification Term, cannot be given a literal meaning as it would lead to absurdity. The primary judge also reasoned that the word 'changes' refers to information previously provided by the insured to A&G, as the contract was entered into necessarily on the basis of information provided by the insured.
The primary judge held that the Notification Term did not cause a significant imbalance in the parties' rights and obligations, and that the Notification Term only obliged the insured to notify the insurer of changes material to the insured risk.
In regard to the legitimate interests, the primary judge held that the Notification Term, as understood by a reasonable consumer, was reasonably necessary to protect the insurer's legitimate interest in understanding material changes to the insured risk.
The decision on appeal
In April 2024, ASIC appealed the Federal Court's decision, on three grounds:
- the primary judge erred in the construction of the Notification Term as imposing an obligation on the insured to notify A&G if there is any change to the information about the insured's home or contents that the insured disclosed prior to entering the contract,
- the primary judge erred in holding that the Notification Term did not cause a significant imbalance in the parties' rights and obligations under s12BG of the ASIC Act, by adopting an erroneous construction of the Notification Term and failing to take into account the lack of transparency of the Notification, and
- the primary judge erred in holding that the Notification Term was reasonably necessary to protect A&G, the Insurer's, legitimate interests.
Construction of the Notification Term
The majority upheld ASIC's first ground of appeal, and found that the primary judge erred in accepting a non-literal construction of the Notification Term. The court reasoned that the Notification Term made no reference to information about the insured's home or contents previously disclosed by the insured to A&G (at [111]), and while applying its plain meaning would impose an unreasonable burden on the insured, unreasonableness does not equate to absurdity, and 'does not give the court license to rewrite the parties' contract' (at [109]).
Instead, the court held that a materiality-based interpretation should be applied (i.e. the insured is required to notify of changes material to the risk insured).
Did the Notification Term cause a 'significant imbalance' in the rights and obligations of the parties
The court rejected ASIC's argument that the notification clause, taking into account its transparency, created a 'significant imbalance' in the parties' rights, reasoning that the clause was necessary for A&G to assess material changes affecting insured risk, which aligned with the insurer's legitimate interest. The court also considered statutory protections available to the insureds under ss 13 and 54 of the Insurance Contracts Act 1984 (ICA) mitigated potential imbalance, as it moderates the insurer's ability to rely on the Notification Term. The lack of transparency alone does not equate to an unfair term, and does not cause a significant imbalance, as the term itself does not tilt the contract unfairly in the insurer's favour.
Was the Notification Term reasonably necessary to protect A&G's legitimate interests
The court rejected ASIC's appeal on the third ground, and held that the Notification Term was reasonably necessary to protect A&G's legitimate interests.
While lack of transparency of a term is relevant in assessing whether the term is reasonably necessary to protect a party's legitimate interests, it does not of itself mean that the term is reasonably necessary to protect an insurer's legitimate interests. Applying the materiality criterion, and given that the insured was only obliged to notify A&G of changes material to the insured risk, the court found that the Notification Term was proportionate in protecting A&G's legitimate interests.
Implications for you
This case illustrates the importance in ensuring policies are worded clearly, in particular, defining notification terms should be directed to material changes relevant to the insured risk. The case also highlights how the courts will consider and assess whether a particular term of a contract, such as an insurance contract, may be unfair within the meaning of the relatively new unfair contract provisions of the ASIC Act. Although the interpretation of the Notification clause was incorrect, this did not mean the home insurance contract was unfair. This decision noted that that the parties conducted the trial on the basis that the phrase 'the parties rights and obligations under the contract' meant the parties rights and obligations under the contract as modified by the ICA. The majority noted this, but did not resolve the question, such that it now remains to be seen whether future cases will be determined in the same way.
The case is nevertheless useful for clarifying that the mere fact that alternative constructions of a contractual term can be formulated does not mean that the term lacks transparency, and in general for providing guidance on the interaction of the regulation of unfair contract terms by the ASIC Act and the regulation of insurance contracts by the ICA, and how that interaction affects the assessment required to be undertaken by s12BG.
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.
