The Federal Government released the Insurance Contracts Amendment (Unfair Terms) Bill 2013 (Amendment Bill) which amends the Insurance Contracts Act 1984 (Cth) (ICA) to provide protection for consumers against unfair contract terms in respect of standard form general insurance contracts. The Amendment Bill follows in the footsteps of the Insurance Contracts Amendment Bill 2013 (Cth). Our alert on that Bill can be found here.
The Amendment Bill largely replicates the unfair contracts regime contained in the Australian Securities and Investments Commission Act 2001 (ASIC Act) that applies to financial products and services. Until now, general insurance products have been carved out from the operation of any other Commonwealth, State or Territory Act that provides relief in the form of judicial review of unfair contract terms through the exemption contained in ICA s 15. This exemption extended to exclude the application of subdivision BA of the ASIC Act, which regulates unfair contractual terms in consumer financial products and services. Comment on this draft Bill was closed for public comment on 31 May 2013.
Application of the Amendment Bill
The Amendment Bill applies to “standard form consumer contracts” of general insurance only. The regime will not be applicable to life insurance products. A “standard form consumer contract” of general insurance is defined in the Amendment Bill as a contract where “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.” There is a presumption that a contract will be a standard form contract of general insurance, unless otherwise proven. In determining whether the requirement of “standard form consumer contract” is satisfied, the Court must consider:
- the respective bargaining power of the parties;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
- whether a party was required to accept the terms to gain cover;
- the degree of negotiation between the parties; and
- whether the contract takes into account the specific characteristics of the insured or the particular transaction.
The Amendment Bill further provides that in order to administer the new unfair contract terms, ASIC will have equivalent enforcement and investigation powers to those it currently has under the ASIC Act. The changes introduced by the Amendment Bill will commence 12 months after receiving Royal Assent.
Under the proposed regime, a term of a standard form consumer contract of general insurance will be unfair if:
- it would cause significant imbalance in the parties’ rights and obligations arising under the contract;
- the insurer cannot prove that the term is 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 upon.
In determining whether a term is unfair, a court may take into consideration any matters that it deems relevant but it must take into account the extent to which the term is transparent. Transparency will be determined on the basis of whether a term is: expressed in reasonably plain language; legible; presented clearly and readily available to the party affected by the term; and consistent with the contract as a whole. It will be presumed that a term of a consumer contract is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term, unless that party proves otherwise.
An insurer will be taken to have proved that a term is reasonably necessary to protect their legitimate interests if they prove that the term reflects the underwriting risk accepted by the insurer. This concept is not defined, but presumably refers to a term that is significant to the nature and the price of the risk that is being underwritten in the policy or, rather, is the subject matter of the risk itself. This may mandate that insurers consider the evidence they can rely upon to adequately demonstrate that the term contained in the policy is necessary to underwriting the risk assumed.
A non-exhaustive, indicative list of terms that may be considered unfair is provided in the Amendment Bill. Whilst these examples provide statutory guidance, they do not prohibit the use of those terms, nor do they create an absolute presumption that these terms are unfair. Examples include terms that permit (or have the effect of permitting) a party to unilaterally:
- avoid or limit performance of the contract;
- renew or not renew the contract; and
- determine whether the contract has been breached or to interpret its meaning.
A term of a standard form consumer contract of general insurance will be unaffected by this new provision to the extent that the term either:
- defines the main subject-matter of the contract;
- sets the upfront price payable under the contract; or
- is a term which Commonwealth, State or Territory law expressly permits or requires.
The Explanatory Memorandum accompanying the Amendment Bill does little to illuminate the scope of what is considered to be a term that defines the “main subject-matter” of the contract, other than to note that a:
“party cannot challenge a term concerning the basis for the existence of the contract… the main subject matter of the contract may include the decision to purchase a particular type of good, service, financial service or financial product… it may also encompass a term that is necessary to give effect to the supply or grant, or without which, the supply or grant could not occur.”
Unlike many other types of financial products which are of a savings and investments nature, a contract of general insurance is a facility for transferring risk. It responds only when a contingency more or less adverse to the insured happens. Identifying the term or terms necessary to give effect to such risk transfer, or without which the risk transfer could not happen, may not be easy. The subject matter of the contract may be confined to the insuring clause. Claims conditions, for example, are also likely to be terms necessary to the transfer of risk. No doubt other provisions will also arguably come within the “main subject matter nexus”.
An upfront price payable under a standard form consumer contract of general insurance is defined as consideration that is:
- provided, or is to be provided, for the supply under the contract; and
- disclosed at or before the time the contract is entered into.
It does not include any other consideration that is contingent on the occurrence or non-occurrence of a specified event.
Consequences and comments
An insurer looking to rely upon any term deemed to be ‘unfair’ under the Amendment Bill, will fail to comply with its overriding duty to act in the utmost good faith. The Amendment Bill provides that a standard form consumer contract of general insurance will continue to operate if the unfair term can be severed, such that the contract will continue to operate without the impugned term being relied upon.
As a result of this regime, insurers, brokers and industry advisers are likely to incur additional costs understanding the legislation and its impact upon standard form general insurance contracts, and in any actions by consumers or ASIC seeking to review a term subject to these amendments. These reviews could be internal or external (through disputes being referred to the Financial Ombudsman Service or court action).
Insurers may seek to mitigate any potential increase in cost through embarking upon a review of their standard contract terms and approaching ASIC when assessing their contracts against these standards of unfairness. Further clarification is needed on several key terms contained in this Amendment Bill and the operational aspects of these in practice. A welcome consequence of public comment and consultation will be refinement of these key terms.