Insurers to be covered by the unfair contracts regime

Currently, standard form insurance contracts that are regulated under the Insurance Contracts Act 1984 (IC Act) are specifically excluded from unfair contract terms (UCT) laws.

Several independent and government inquiries, including the recent Financial Services Royal Commission, have recommended extending the UCT regime to include insurance contracts.

To effect this change, the Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 2019 (Cth) Exposure Draft (the Bill) has been released by the Federal Government for consultation and stakeholder comments, with all responses due by 28 August 2019.

Background - UCT’s

Standard form contracts are commonly used by businesses when engaging with consumers.  There is usually very little opportunity for a consumer to re-negotiate the terms that they think are unfair, such contracts typically set out their terms on ‘take it or leave it’ basis.

To remedy this situation, in 2010 UCT laws were introduced.  These laws render a term in a standard form consumer contract void if the term is unfair.

ASIC or a party to the contract can apply to the court for a declaration that a term in a standard form consumer contract is unfair.

However, if the contract is capable of operating without the unfair term, the contract can remain on foot and continue to bind the parties.

Standard form insurance contracts

The IC Act, and the Insurance Contracts Regulations 2017 (Cth) (IC Regulations) designates the following common types of policies as ‘standard cover’:

• motor vehicle insurance;
• home building insurance;
• home contents insurance;
• sickness and accident insurance;
• consumer credit insurance; and
• travel insurance.

Consumers are significantly protected by the regulations which prescribe standard terms of cover for:

• events insured against;
• exclusions; and  
• minimum amounts payable.

Although an insurer can deviate from the standard terms and provide less cover than what is set out by the regulations, if it elects to do so it must notify the insured person or entity.  This notification can either be before or at the time the contract is entered into.  In limited circumstances this may be appropriate 14 days after the contract is entered into.

What makes consumers vulnerable to unfair terms in insurance contracts?

There are a variety of bases on which it is said that consumers are vulnerable to UCTs in insurance contracts:

the majority of retail insurance contracts are standard form contracts and not capable of being subject to genuine negotiation.  Consequently, consumers often have the choice of either accepting a term or not being able to purchase the policy;

insurance contracts are often very long and use complicated language which hinders understanding;

consumers often do not read the terms of the contract before signing;

consumers underestimate the importance of the level of cover provided by the contract, and instead place too great a focus on the premium; and

consumers rely on insurance salespeople to explain the terms of their insurance contract.

What effect will the Bill have?

The Bill comprises two main components.

Firstly, the Bill will amend the IC Act so that the UCT regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) will apply to insurance contracts covered by the IC Act.   

Secondly, the Bill will amend the ASIC Act in order to tailor the present UCT regime and how it applies to insurance contracts. For example:

• it will exclude from the UCT regime terms that define the main subject matter of the insurance contract (that is, what is insured).  Consequently, a person will not be able to challenge a term that concerns the basis for the existence of the insurance contract.  The justification for this is that a person had the choice to enter into the contract based on what was offered.  The amendments will provide that the main subject matter of an insurance contract is limited to the description of what is being insured.
• the ASIC Act currently excludes from the UCT regime a term that sets out the ‘upfront price payable’ under a contract.  However, any consideration that is contingent on the occurrence or non-occurrence of an event (such as payment of an excess upon making a claim) is excluded from the definition of ‘upfront price payable’.  As a result, the definition of ‘upfront price payable’ does not include the excess or deductible payable under an insurance contract.  As such, these terms in an insurance contract would be subject to UCT obligations and could be held to be unfair.  In light of this, the draft amends the ASIC Act so that a term in an insurance contract which sets out the quantum or existence of the excess or deductible payable under an insurance contract will be excluded from the UCT regime if the term is transparent.
• currently the ASIC Act only allows a party to the contract or ASIC to apply to the court for a declaration that a term is unfair.  The amendment will allow for third party beneficiaries of insurance contracts (such as death benefit nominees under a life insurance policy or individuals covered under certain group insurance policies) to bring actions against insurers under the UCT regime, bringing the ASIC Act into line with the current position in the IC Act.  It is important to note that the relevant tests and definitions (i.e. unfairness, standard form contract etc) will not be assessed in relation to the third-party beneficiaries, but the negotiating parties.

Nevertheless, previous safeguards for insurance consumers will still remain.  The duty to act with the utmost good faith imposed on parties to insurance contracts by the IC Act will continue operate and is not impacted by the Bill. 

Lavan comment

The Bill acts as timely reminder that when entering into an insurance contract, you should look beyond the premium and in order to understand the nature of the cover you will be receiving and the true cost of the same.  You will only need the benefit of the policy after the event has occurred.  You need to understand what the policy does and does not cover.

It is important to consider the level of coverage provided by the policy and any other terms of the contract that may significantly abridge your rights and entitlements when making a future claim.

Should you have any questions in relation to this article, please do not hesitate to contact Lavan’s Litigation & Dispute Resolution Team