The Insurance Contracts Amendment Bill 2013 passed through the Upper House on Thursday 20 June 2013. Its passing will be noticed by few outside the insurance industry; an industry which according to Aon’s latest Australasian Risk Survey ranks regulation and legislative change on top of its list of concerns.
The proposals which comprise the majority of the amendments were first raised in 2003 in a major review of the Insurance Contracts Act conducted by Nancy Milne and Alan Cameron. There is no good reason why the proposed reforms have taken 10 years to find their way into amending legislation, apart from what would seem to be higher priorities for successive governments and some bad luck (the reforms came dangerously close to being enacted in 2010 but were stalled by the prime minister being replaced and the parliament dissolved).
Whilst there is no prescribed phobia for fear of legislation, those in the insurance industry who suffer from it ought not be unduly alarmed by the reforms. Some are absolutely necessary, such as the ability to send notices under the Act electronically (at the moment notices can’t be validly sent by email). A number of the changes will necessarily result in increased compliance costs for insurers, involving changes to policy wordings and additional in-house training.
The legislation also contains the following reforms (amongst others):
- Enabling ASIC to take action against insurers for breach of the duty of utmost good faith by making it a breach of the Act;
- Extending the duty of utmost good faith to third party beneficiaries;
- Providing ASIC with powers to vary, suspend or cancel an insurer’s license for breach of the duty of utmost good faith;
- Making changes to the duty of disclosure when eligible contracts of insurance are entered into and renewed (eligible contracts include motor, home, sickness and accident, consumer credit and travel);
- Obliging insurers to clearly inform insureds about their duty of disclosure.
- Extending the rights of third party beneficiaries; and
- Providing rules governing the distribution of funds recovered by way of subrogation.
The most controversial of the proposed changes was not included in yesterday’s amendments but is seemingly on the way - imposing unfair contract term (UCT) laws on standard (retail) policies of insurance. The UCT laws have been promoted by consumer groups as being necessary to ensure fairness in claims handling (among other things). UCT laws already apply to consumer contracts for other financial products and financial services, with general insurance being exempt.
If introduced a court will render void terms in insurance contracts that are seen to be unfair. A term will be unfair if:
- It would cause a significant imbalance in parties’ rights and obligations under the contract;
- It would cause detriment to a party if relied on; and
- It is not reasonably necessary to protect the interests of the party relying on it.
There are sensible arguments that can be and have been raised in opposition to the application of UCT laws to policies of general insurance. But will the world as insurers know it end if the UCT laws are introduced? If similar legislation in the UK and public reaction to it is any guide, then the answer would appear to be no.
Insurance contracts in the UK have been subject to unfair contract terms legislation since 1999. By all reports it has not caused insurers in the UK too many headaches. The Financial Services Authority (FSA) in the UK released a Guidance Paper on 31 January 2012, which examined the operation of these laws in the UK. The report provided some examples of terms of insurance contracts that had been found to be unfair. The main examples included:
- Terms to do with cancellation of the policy.
- Technical or legal language in contracts which consumers may find confusing. Examples given were words such as “indemnify?, “tort?, “consequential loss?, “force majeure?, and “time is of the essence?. In these cases, the FSA required insurance companies to clarify their wording so that no consumer would be disadvantaged. The FSA also noted that terms which excluded liability for consequential loss without further explanation were likely to be struck out as unfair.
In Australia, the Insurance Contracts Act 1984 already provides consumers with safeguards regarding cancellation of contracts. An insurer is prevented from doing so unfairly. There is no equivalent legislation in the UK.
So, to the extent that the UK experience serves as a guide, it may be that Australian insurers will need to review their policy wordings and remove, or better explain, terms that are not part of everyday language. Having said that, Australian insurers are well advanced in the use of plain English, in both policy documents and notices provided under the Insurance Contracts Act and the Corporations Law.
Legislation introducing the unfair contract terms laws won’t be introduced in the last week that this Parliament sits. It will be for the next one. At the moment there is no suggestion that a conservative government would not pass the laws. If the Bill is passed, then one would hope that the UK experience is an indication that the transition will be a smooth one. Time will tell.