Despite much consternation on the part of insurers, Treasury has released the Insurance Contracts Amendment (Unfair Terms) Bill 2013 which amends the Insurance Contracts Act 1984 (Cth) (ICA) to impose unfair contract term (UCT) provisions in respect of general insurance contracts. The legislation is open for public comment until 31 May 2013.
The legislation has not adopted the Corporations Act definition of ‘retail’ to delineate the contracts to which the UCT provisions apply. The Draft Bill instead applies to ‘consumer contracts’, defined as:
…a contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominately an acquisition for personal, domestic or household use or consumption.
This may lead to some uncertainty. For example, this could create ambiguity where a policy covers assets that are used for both domestic and business purposes. Uncertainty may also arise in respect of travel insurance for a combined holiday and business trip. A standard policy of insurance may or may not be subject to the UCT provisions depending on the conduct of the insured rather than the terms of the policy. This may create inherent uncertainty for insurers.
For UCTs to apply, the contract must also be a ‘standard form contract’. In determining whether this requirement is satisfied, the Draft Bill provides that a court must consider:
- the bargaining power of the parties
- whether the contract was prepared by one party before discussing it with the other
- whether a party was required to accept the terms to gain cover
- whether there was negotiation, and
- whether the contract takes into account specific characteristics of the insured.
The Bill allows a court to also consider any other matters that may be relevant. Presumably, most ‘personal, domestic or household’ policies will satisfy this requirement given the policies are based on a standard PDS.
Under the draft Bill, a terms is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not 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 on.
Notably, a term is reasonably necessary (and therefore not unfair) if the insurer proves that the term reflects the underwriting risk accepted by the insurer. The onus is on the insurer to establish that the term is necessary. Such a caveat is open to a number of interpretations and the Explanatory Memorandum provides no explanation of how this exception will operate. Without further explanation, insurers could arguably avoid the application of the UCT provisions by drafting underwriting guidelines clearly articulating that a clause reflects the underwriting risk.
If a clause is deemed unfair, it will be unenforceable (but the balance of the contract may be preserved). The Draft Bill also inserts provisions allowing ASIC to enforce the UCT provisions.
What’s not covered?
As discussed above, the UCT provisions will not operate in respect of policies where the insured is not an individual or the policy is not acquired wholly or predominantly in respect of personal, domestic or household use.
In addition, the Draft Bill provides that UCTs will not apply to a term that defines the main subject-matter of the contract – a requirement that has already been the subject of considerable debate. The Explanatory Memorandum provides no guidance as to the interpretation of the phrase; however the provision is identical to section 12BI of the ASIC Act 2001 (Cth). ‘Main subject matter’ is not explicitly defined in either the ASIC Act 2001 (Cth) or the Competition and Consumer Act 2010 (CCA). However, the Explanatory Memorandum of the CCA provides the following guidance:
5.59 The exclusion of terms that define the main subject matter of a consumer contract ensures that a party cannot challenge a term concerning the basis for the existence of the contract. [Schedule 1, item 1: Chapter 2, Part 2-3, paragraph 26(1)(a)]
5.61 The main subject matter of the contract may include the decision to purchase a particular type of good, service, financial service or financial product, or a particular piece of land. 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.
However, in other financial products and services, the ‘main subject-matter’ can usually be readily identified as the actual product purchased. In contrast, in respect of contracts of insurance, it is arguably the contract itself that is the product. Therefore, without further clarity, the phrase ‘main subject-matter’ is uncertain when applied to insurance contracts.
One interpretation is that the contract in its entirety is the subject-matter and therefore completely excluded from the UCT provisions. However, the more likely interpretation is that the phrase will be interpreted narrowly. If so, the ‘main subject-matter’ would be the ‘essence of the contract’ and not the scope of cover.
The Draft Bill also excludes clauses that set the upfront price payable or are required, or expressly permitted, by law.
Despite finally releasing the Draft Bill, there are still many unanswered questions in respect of the scope of the UCTs and exactly how they will operate in an insurance context. Hopefully, further amendment and clarity will flow following public submissions. Nevertheless, there is a reasonable argument that UCTs are unnecessary given the protections already in place in the ICA which applies to most insurance contracts, regardless of the circumstances of acquisition.
If parties wish to make a submission, they can do so here. The closing date for submissions is 31 May 2013.