The Assistant Treasurer has released an Exposure Draft of the Insurance Contracts Amendment (Unfair Terms) Bill 2013 (the Bill). The closing date for public consultation is 31 May 2013.
As foreshadowed in our March 2013 client update, the proposed unfair contract terms regime for insurance contracts will be based on the unfair contract terms regime that currently applies under the Australian Securities and Investments Act 2001 (ASIC Act) to most other, non-insurance financial products and services. Under the draft legislation the Insurance Contracts Act 1984 (the ICA) would be amended to apply, with slight modifications, the unfair contract terms regime provisions from the ASIC Act to standard form consumer contracts of general insurance.
Proposed unfair contract terms regime
Section 15 of the ICA currently excludes insurance contracts from the operation of any other Act (Commonwealth, State or Territory) that provides relief in the form of judicial review of, amongst other things, unfair contracts. Significantly this provision currently excludes the operation of subdivision BA of the ASIC Act which governs unfair contract terms in standard form consumer contracts. The proposed Bill would insert a new subsection 15(3) to the ICA as follows:
"…certain standard form consumer contracts of general insurance are capable of being made the subject of relief under the applied enforcement provisions of the ASIC Act."
This would operate as an exception to section 15 of the ICA, with the effect that a standard form consumer contract of general insurance will now be capable of being made the subject of relief under the enforcement provisions of the ASIC Act applied, as modified under the ICA. Either a party to a contract or ASIC may bring a claim for relief under the proposed regime.
Standard form consumer contract of general insurance
The Exposure Draft legislation provides that a standard form consumer contract of general insurance is a consumer contract that is a standard form contract and a contract of general insurance. The regime will not apply to a contract of life insurance1. A consumer contract is defined in the Exposure Draft Bill as:
"a contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption."2
A contract of general insurance will be presumed to be a standard form contract unless another party to the proceeding (which will invariably be the respondent insurer) proves otherwise, in which case the court may take into account matters which it thinks relevant. Factors which the court must take into account in making this assessment are listed at section 15E of the Exposure Draft Bill and include3:
- whether one of the parties has all or most of the bargaining power relating to the transaction;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; and
- whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
The meaning of 'unfair'
Under the proposed regime a term of a standard form consumer contract of general insurance will be unfair if4:
- it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In determining whether a term of a general insurance contract is unfair a court may take into account such matters as it thinks relevant. It must consider the extent to which the term is transparent5, (i.e. expressed in reasonably plain language, legible, presented clearly and readily available to any affected party6), and the contract as a whole7. Statutory guidance on the types of terms which may be regarded as unfair is provided at section 15C, for example:
- a term that permits, or has the effect of permitting one party but not another party to avoid or limit performance 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 determine whether the contract has been breached or to interpret its meaning.
However, the examples listed in section 15C are expressly stated to be without limitation and whether a term is considered unfair will be determined on a case by case basis.
In recognising the uniqueness of the insurance contract and the need to balance the interests of the consumer and the insurer, clarification has been included in the unfair contract terms regime in the Exposure Draft Bill about what is reasonably necessary to protect the legitimate interests of an insurer. Section 15B(5) of the Draft Exposure Bill provides:
"an insurer under a standard form consumer contract of general insurance is taken to have proved that a term of the contract is reasonably necessary in order to protect the legitimate interests of the insurer, if the insurer proves that the term reflects the underwriting risk accepted by the insurer."
The insurer will bear the onus of proving that the term reflects its underwriting risk. This provision seems intended to address calls by the insurance industry for the regime to recognise legitimate underwriting risks faced by insurers.
The unfair contract terms regime in the ICA will not apply to a term in a general insurance contract that defines the main subject matter of the general insurance contract, sets the upfront price payable or is a term required, or expressly permitted by a law of the Commonwealth, or a State or Territory. This provision is equivalent to the ASIC Act with no modifications in its application to general insurance contracts.
Consequences for insurers
Section 15A of the Exposure Draft Bill provides that an insurer will fail to comply with the duty of utmost good faith if a term of the contract is declared to be an unfair term or the insurer purports to rely on such a term8.
The proposed unfair contract terms regime specifically provides that the general insurance contract will continue to operate if it can operate without the unfair term being relied upon9. It is expected that an insurer that has a term in a general insurance contract declared to be unfair under the new regime, would amend the term in subsequent general insurance contracts10 to ensure that contracts do not fall subject to the regime in the future.
Powers of the Australian Securities and Investments Commission
Section 15G of the Draft Exposure Bill inserts the enforcement and investigations provisions of the ASIC Act into the ICA in relation to unfair terms in general insurance contracts11, with some technical modifications for general insurance contracts. The applied enforcement provisions of the ASIC Act that would apply include court remedies, such as a declaration that a term is an unfair term, injunctions, or orders to redress loss or damage12. The applied investigation and information-gathering provisions of the ASIC Act would also apply, including powers of ASIC to investigate, examine persons, and inspect books.
Currently, section 55A of the ICA provides that ASIC may apply to bring an action or continue an action against an insurer on behalf of insureds on public interest grounds, where it is satisfied that an insured will suffer damage from the terms of an insurance contract, the conduct of the insurer or breaches of the ICA13. The Draft Exposure Bill proposes that section 55A would be amended to preclude ASIC from taking such action for general insurance contracts if the loss or damage suffered is as a result of an unfair term in a general insurance contract. Instead, ASIC would be able to use its powers under the applied enforcement provisions of the ASIC Act14.
The regime proposed by the Draft Exposure Bill is equivalent to the ASIC Act with slight technical modifications for general insurance contracts. This will allow the insurance industry to be guided by cases that have been subject to the ASIC Act regime, in particular having regard to:
- the impact of the regime on policy terms, conditions and pricing;
- the application of the definition of unfair; and
- those terms of a general insurance contract that will be considered defining the main subject matter or setting the upfront price payable.
Whilst substantial effort has been made to define 'general insurance contract' and 'unfair' in the draft legislation, these issues will still be open to assessment by the court based on any matter it considers relevant, and the industry may end up reverting to those cases that have been considered under the ASIC Act, bearing in mind the uniqueness of general insurance contracts.
Generally, it is expected that consumers will benefit from the unfair contract terms regime in the ICA, and insurers, insurance brokers, and the industry's advisers will incur additional costs in relation to understanding the legislation and reviewing their contracts in this regard in order to ensure compliance with the transparency and plain language requirements of the new regime, and defending actions brought by consumers or ASIC seeking a review of a term under the new unfair contract terms regime in the ICA.
In order to mitigate such costs the Government has suggested that the industry should adopt a conservative approach in amending standard contract terms, refer closely to ASIC guidance and engage with ASIC when reviewing their contracts. It will remain to be seen whether this will in fact assist the industry and reduce such costs.
The Bill released for public consultation in Australia may provide enhanced guidance to the UK in regards to the unfair terms regime that the Department for Business, Innovation and Skills is currently reviewing. We may see the UK draw on the Draft Exposure Bill in amending its regime, particularly, given the aim of the Law Commission and Scottish Law Commission is to bring together the Act and the Regulations under a single regime in favour of consumers.