Are insurance contracts unfair?

In 2008, the Productivity Commission recommended a new national consumer law applying to all industry sectors, including protections against unfair contract terms (UCT). In 2009 the Australian Consumer Law and related reforms were implemented, including the application of UCT protections in relation to most financial products and financial services through the Australian Securities and Investments Commission Act 2001 (ASIC Act).

Those provisions now render void unfair terms in many consumer and (from 2016) small business standard form contracts, but do not apply to many insurance contracts as a result of section 15 of the Insurance Contracts Act 1984 (ICA). Its rationale is that that Act has its own protections for standard insurance contracts and they have special characteristics due to the nature of the risk involved which make them unsuitable for UCT protections. The Corporations Act 2001 (and some other specific regulation) also imposes a number of product Disclosure Statement and other relevant product disclosure requirements on insurers.

However, the position is not clear-cut, with some insurance contracts, for example, private health insurance contracts and state and Commonwealth government insurance contracts, being subject to the UCT laws. A number of other similar jurisdictions also subject insurance contracts to similar UCT laws, and prior reviews have raised concerns over a range of terms potentially disadvantaging consumers, particularly in home building, car, consumer credit and travel insurance.

The Commonwealth announced at the end of 2017 that it intended to extend the UCT regime generally to insurance contracts, and Treasury recently released details of a proposed model at https://static.treasury.gov.au/uploads/sites/1/2018/06/t284394_UCT_Insurance_Contracts_Proposals_Paper_Aug.pdf and invited submissions from industry and the public.  Submissions must be emailed in Word or RTF format to UCTinsurance@treasury.gov.au no later than 24 August 2018.

Submissions should address as appropriate the questions raised in Treasury’s Proposals Paper, having regard to its proposed model. The key elements of the model are:

• Amending section 15 of the ICA to allow the current UCT laws in the ASIC Act to apply to insurance contracts.
• The UCT provisions in the ASIC Act being tailored to accommodate specific features of insurance contracts, in particular:
  • the ‘main subject matter’ of an insurance contract will be defined narrowly as terms that describe what is being insured, for example, a house, a person or a motor vehicle;
  • clarification will be provided that the ‘upfront price’ will include the premium and the excess payable and that these will not be subject to review;
  • a contract will be considered as standard form even if the consumer or small business can choose from various options of policy coverage;
  • when determining whether a term is unfair, a term will be reasonably necessary to protect the legitimate interests of an insurer if it reasonably reflects the underwriting risk accepted by the insurer in relation to the contract and it does not disproportionately or unreasonably disadvantage the insured;
  • examples specific to insurance will be added to the list of examples of kinds of terms that may be unfair, which could include terms that permit the insurer to pay a claim based on the cost of repair or replacement that may be achieved by the insurer, but could not be reasonably achieved by the policyholder;
  • where a term is found to be unfair, as an alternative to the term being declared void, a court will be able to make other orders if it deems that more appropriate;
  • the definition of ‘consumer contract’ and ‘small business contract’ will include contracts that are expressed to be for the benefit of an individual or small business, but who are not a party to the contract;
  • for life policies, as defined by the Life Insurance Act 1995, which are guaranteed renewable, it will be made clear that a term which provides a life insurer with the ability to unilaterally increase premiums will not be considered unfair in circumstances in which the premium increase is within the limits and under the circumstances specified in the policy.