In December 2012, the Australian Federal Government announced its intention to amend the Insurance Contracts Act 1984 (Cth) (the ICA) to deal with unfair terms in consumer insurance contracts. Draft legislation in the form of the Insurance Contracts Amendment (Unfair Terms) Bill 2013 (the Bill) has now been published.

The Bill proposes to introduce into the ICA provisions dealing with unfair contract terms in standard form consumer insurance contracts. The proposed changes are seen as an attempt to bring insurance contracts in line with statutory unfair contract terms provisions relating to other standard form consumer contracts and to bolster consumer rights in this area.

The Current Position

Until now, consumer insurance contracts for the most part have been excluded from other statutory regimes dealing with unfair contract terms (by reference to section 15 of the ICA). This exclusion has been seen as a reflection of the unique nature of insurance contracts and their terms.

The majority of consumer insurance contracts and their provisions have been governed solely by the ICA, which provides the following protections for consumer policyholders in relation to unfair terms:

  • sections 13 and 14 set out a reciprocal duty of good faith, which prevents the consumer or the insurer from relying on a term that would breach the duty of utmost good faith;
  • section 37 mandates that insurers bring to the consumer’s attention any term that would not typically be included in such a contract of insurance;
  • section 53 prevents insurers from varying the terms of an agreement which would prejudice the insured; and
  • section 54 details the specific scenarios where an insurer may not refuse to pay out in respect of claim based on the conduct of the insured.

The Bill

The proposed amendments to the ICA are aimed at introducing unfair contract terms provisions similar to those contained in the Australian Securities and Investments Act 2001 (the ASIC Act) which apply to general consumer contracts.

Under the Bill and in line with the ASIC Act, a term in a standard form consumer insurance contract will be considered unfair if:

  • it causes an imbalance in the parties’ rights and obligations under the contract; and
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment to a party if it were applied or relied upon.

It is intended that the new unfair terms provisions of the ICA will apply only to standard form consumer contracts which are also contracts of general insurance (with the exception of life insurance contracts). As to what constitutes a consumer contract, it is defined under the Bill as a contract where at least one of the parties is an individual and whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption. The Bill creates a presumption that a contract of general insurance is a standard form contract unless otherwise challenged.

In determining whether the consumer contract is a standard form contract and where this is in dispute, the Bill provides that a court must take into account, amongst any other matter it considers relevant, the following:

  • whether one of the parties has all or most of the bargaining power in the transaction;
  • whether the contract was prepared by one party before any discussion by the parties about the transaction;
  • whether one party was required to accept or reject the terms of the contract or whether a party was given an effective opportunity to negotiate terms of the contract; and
  • whether the terms of the contract take into account the specific characteristics of another party or the transaction.

The Changes

The Bill proposes to introduce the following provisions into the ICA to deal with unfair terms in such standard form consumer insurance contracts:

  • the ICA’s unfair terms provisions will form part of the duty of utmost good faith, such that if a term is found to be unfair, the insurer will be in breach of the duty of good faith under the ICA;
  • for insurers who are Australian Financial Services license holders, a breach of the ICA relating to utmost good faith can potentially result in ASIC exercising certain powers under the Corporations Act, including the imposition of administrative sanctions against the license holder;
  • where a term is found to be unfair, the remedy available will be that the insurer may not rely on the term;
  • consumers or ASIC may challenge unfair terms in insurance contracts;
  • ASIC is empowered to administer and enforce the new unfair contract terms regime;
  • it will be a defence to an unfair term if it is shown that the term is reasonably necessary to protect a legitimate interest, with the onus of proving this falling on the insurer;
  • the regime will not apply to a term to the extent that the term defines the main subject matter of the contract, relates to the premium payable under contract, or is required or expressly permitted by law;
  • where a dispute arises, a Court is obliged to take into account the extent to which the term is transparent and the contract as a whole when determining whether a term is unfair; and
  • as to whether a term is transparent, the term should be expressed in reasonably plain language, it should be legible, presented clearly, and readily available to any part affected by the term.

The Impact

The Bill is currently subject to public consultation and potential further amendment. What insurers and consumer protection groups will no doubt be watching is whether clarity is added to the potential defences set out in the Bill.

For example, the Bill provides that the regime will not apply to a term to the extent that it defines the main subject matter of the contract. What constitutes the main subject matter has not been elaborated upon in the current draft of the Bill or the explanatory memorandum. It is unclear whether its application will be restricted to the principal terms of the contract/insuring clause or whether it is given wider application to include the exclusions and conditions specific to the particular policy and the relevant risk.

A further defence provided by the Bill is where an insurer demonstrates that a term is reasonably necessary in order to protect the legitimate interests of the insurer, in other words the term reflects underwriting risk. While it appears that this provision was introduced to reflect the unique nature of insurance contracts, in the absence of clarification, the concern is that the competing interest of consumer protection will seek to limit this defence.

What’s next?

Submissions on the draft Bill were due by 31 May 2013 and we await the outcome of the consultation process.