Australia: Unfair contract terms: Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272

Summary

The case of Australian Securities and Investment Commission (ASIC) v Auto & General Insurance Company Ltd [2024] FCA 272 holds significant importance as it marks the first instance of the Federal Court applying the new unfair contract terms in the Australian Securities and Investments Commission Act 2001 (ASIC Act) to insurance contracts. The case revolves around an alleged unfair contract term found in a Product Disclosure Statement (PDS) issued by Auto & General Insurance Company for a standard form underwritten home and contents insurance policy (which was marketed through various insurers including Budget Direct, ING, Virgin and Qantas).

The case shows that the provisions in the ASIC Act, which now relate to insurance contracts, are to be read in conjunction with the protections set out in the Insurance Contracts Act 1984 (ICA) limiting the exercise of rights and powers provided by the contract.

Background to the case

In April 2021, the ASIC introduced new protections against unfair contract terms into the ASIC Act. These protections, a direct outcome of a recommendation by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, aim to ensure that consumers and small businesses are afforded the same protection from unfair terms in insurance contracts as they are in other financial services. Additionally, they encourage insurers to enhance their transparency and eliminate potentially unfair terms.

The amendments resulted in contracts of insurance governed by the ICA being subject to subdivision BA of the ASIC Act, which, amongst other things, states that contracts are void if a term is "unfair". Unfair is defined in s12BG as a term that:

• Causes a significant imbalance in the parties' rights and obligations.
• Is not reasonably necessary to protect the legitimate interests of the party who the term would benefit.
• Would cause detriment to a party if it were to be applied or relied on.

The PDS, published in March 2021, had a significant reach, with approximately 1.3 million customers entering into insurance contracts based on its terms. One of these terms was a "Notification Clause", which obliged customers to inform the insurer "if anything changes" about their home and contents. ASIC alleged this term was unfair under S12BG of the ASIC Act, citing the following reasons:

• It is ambiguous about what needs to be disclosed.
• It imposes an obligation on customers that they cannot meet, given the definition of "anything" is unclear.
• It allows Auto & General Insurance a broader basis to refuse or reduce claims if consumers fail to meet the notification requirement.
• It could mislead customers about their rights and obligations because it fails to explain the existence or effect of s54 of the ICA (which operates to limit the circumstances in which an insurer can reduce or deny a claim).

Much of the case argument centred around the nature of insurance contracts, insurers' duty to act with utmost good faith, and the insurer's failure to reference s54 of the ICA in the PDS so customers know the insurance contract is subject to this limitation provision.

The Judgement

The Judge found that the Notification Clause in the PDS was not unfair and that the duty to disclose required under the contract was "simply a reflection of the nature of the contract". The Judge held that the information to be provided by customers was reasonably necessary to protect the insurer's interests. The Judge took a practical approach to the obligations in the Notification Clause, noting that the information was necessary for the insurer to gather information and choose which risks to insure against.

Auto & General Insurance Company called evidence from underwriters and claims managers as to its claim and risk management procedures, how risks are identified and the basis upon which premiums are set and decisions around underwriting policies and guidelines are made. The Judge noted that it is consistent with the purpose of an insurance contract that an insurer would require an insured to disclose any changes to the information disclosed to preserve the balance of risk and reward inherent in the bargain. The Judge noted it was up to the insurer, not the insured, to assess the risk which is the basis for the Notification Clause.

ASIC submitted that the words "any changes" were ambiguous and broad, but the Judge dismissed this suggestion, noting that the idea the words meant "any change" (such as the comings and goings in a household, the purchasing of groceries etc) was absurd. The Judge referred to the contract as a whole to identify what was intended by the word "changes" as it related to the insured risk.

In respect of how the unfair contract terms in the ASIC Act affect a customer's rights and obligations under s54 of the ICA, ASIC submitted that if s54 of the ICA is not taken into account when considering the application of the unfair terms of the ASIC Act, then insurers can refuse claims and cancel policies even in circumstances where a failure to notify has not caused prejudice to the insurer. It was submitted that the Notification Clause would trigger the imbalance that s54 of the ICA seeks to redress. ASIC submitted that a term may be unfair under S12BG of the ASIC Act notwithstanding the ameliorative operation of the ICA and that the unfair contract terms regime in the ASIC Act should operate independently of the duty of good faith under the ICA.

The Judge rejected this argument. The Judge held that the ICA governs contracts of insurance and that the obligations under the ICA operate in addition to the unfair contract provisions in the ASIC Act. The Judge noted that the insurer's rights, which arise upon a breach of the Notification Clause, are therefore qualified by the obligations under Part II of the ICA that insurers must act with utmost good faith and consistently with commercial decency and fairness. Therefore, when assessing the fairness criteria in s12BG of the ASIC Act, courts must look at the implied provisions of utmost good faith contained in the ICA to determine if a clause in an insurance contract is unfair and, therefore, void. In doing so, the Judge held that commercial decency and fairness would prevent the insurer from exercising the rights set out in the Notification Clause to the prejudice of a customer unless the changes notified by the customer had prejudiced the insurer's interests.

Conclusion

The judgment is an excellent summary of how clauses in insurance contracts are to be read in the context of the overall legal environment in which the contract operates. The court's assessment of the interaction between the unfair contract terms provisions in the ASIC Act and the ICA shows that when deciding whether a term is "unfair" pursuant to s12BG of the ASIC Act, the effects of s54 of the ICA must be considered. The case shows that the provisions in the ASIC Act, which now relate to insurance contracts, are to be read in conjunction with the protections set out in the ICA limiting the exercise of rights and powers provided by the contract.

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