Regulation will extend existing unfair contract terms regime to insurance products

Currently, insurance contracts are exempt from the existing unfair contract terms (UCT) regime in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). In respect of other standard form contracts, the UCT regime operates to void terms of consumer contracts or small business contracts if they are declared by a Court to be unfair.

However, after many years of debate and following the recommendation in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Australian Government will be extending the provisions of the UCT regime insurance contracts.

The amendments will be introduced via the Financial Sector Reform (Hayne Royal Commission Response - Protecting Consumers (2019 Measures)) Bill 2019 (the Bill). If the is passed by the Australian Parliament in its current form, the unfair contract terms regime will apply to standard insurance contracts made, renewed or varied on and from 5 April 2021.

The application of the UCT regime to insurance contracts will require a review of existing policy wordings, and has the potential to result in a wave of coverage disputes. In commercial lines, underwriters and brokers will need to carefully consider whether policies issued to small and medium enterprises (SMEs) will be caught by the regime.

If a contract does fall within the regime, although there will be an exemption for the term that describes what is being insured (the main subject matter), conditions and exclusions could be open to challenge. In such a case, an insurer will need to show that a term is "necessary to protect the legitimate interests of the insurer". This may require an insurer to provide actuarial data to support a condition or exclusion.