The Federal Government has recently issued its Response to a report by the House of Representatives Standing Committee on Social Policy and Legal Affairs “Volume One: The Operation of the insurance industry during disaster events” (Report).
Specifically, Recommendation 4 of the Report called for the removal of the exemption enjoyed by general insurers from unfair contract terms laws. The Report followed an earlier report in 2009 by the Senate Economics Legislation Committee and the Natural Disaster Insurance Review Report issued in September 2011 each recommending the same.
The Government’s response is to note that it has released a consultation Regulation Impact Statement on Unfair Contract Terms in insurance and that it will consider introducing legislation once all submissions have been considered (please see our earlier article).
General insurers are currently exempt from the operation of the laws regulating unfair contract terms in consumer contracts under s 15 of the Insurance Contracts Act 1984 (Cth) (ICA). The unfair contract laws are contained in the Australian Securities and Investments Act 2001 (Cth) and they regulate the terms contained in standard form contracts for consumer financial products and services.
A contractual term is generally unfair if that term would cause a significant imbalance in the parties’ rights and obligations under the contract, it is not a term reasonably necessary in order to protect the legitimate interests of a party advantaged by the term, and it would cause detriment to a party if the term were to be applied or relied on. Exclusion clauses are potentially unfair unless made transparent to the consumer and the consumer is given reasonable notice of the effect of such exclusions.
General insurers have argued that, in the case of insurance contracts, consumers are sufficiently protected by the duty of utmost good faith owed by insurers under s 13 of the ICA. Insurers have also pointed out that consumers are protected by the ICA generally and otherwise have recourse to assistance from the Financial Ombudsman Service. Unfair contract terms laws could expose insurers to liabilities not factored into premiums and have unforeseen consequences for reinsurance cover. There is also an argument that in some circumstances voiding a term of a policy that has been deemed unfair could result in the undesirable consequence of reducing cover available.
Advocates for consumers have countered the concerns of insurers and have so far been successful. They expect that unfair contract terms laws will provide protections distinct from and above those provided by the duty of utmost good faith and now both Senate and House of Representatives Committees have issued separate reports recommending that the exemption for general insurers be removed. Insurers apparently need not be concerned that they will be prevented from relying on exclusions which deviate from the standard cover when such exclusions are made clear to consumers.
In quoting from the Report, Mr David Coorey, of Legal Aid NSW has said:
The only standard form contract in this country today that does not have unfair terms legislation is insurance, and that is unacceptable. Out of all the contracts in the country, where a consumer lives or dies, really, on the fine print of a product, you would have thought that insurance contracts would be the one contract where you might have legislation that already applies across the board to every other standard form contract in Australia.
Given the findings of the Report, which includes findings that consumers have a very low level of awareness of insurance contracts or policies, it can be reasonably expected that the exemption for general insurers will be the subject of potential legislative reform – this conclusion is reinforced by the Government’s Response. The recent natural disasters in Australia and awareness that such disasters are likely to become more common will, no doubt, play on the minds of legislators and their advisors. Watch this space.
Addendum: In fact, only days before finalising this article, the Insurance Council of Australia has shown that it is already watching. Issue 7 of the Issues Paper from the current General Insurance Code of Practice 2012 Review has raised directly the general insurance exception from unfair contract terms laws and in doing so refers to the findings of the Report and the Natural Disaster Insurance Review Report.
In a review of the purpose behind the duty of utmost good faith in the ICA, the Review notes that the Australian Law Reform Commission (ALRC) had intended for the duty to operate as a “flexible doctrine, with fairness based content, running throughout and for the duration of the contract” but “the specialised insurance doctrine of utmost good faith has not developed to fulfil the hopes the ALRC had for it”. Consequently, it is no surprise the government is seeking to find a method by which to apply unfair contract terms laws to insurance contracts. The Issues Paper concludes that while insurance contracts are unique, this cannot be a sufficient basis for excluding unfair contract terms laws even though there is an argument that insurance contracts ought to be treated differently.