Call for caution as unfair insurance contract terms debate heats up

In February 2018, the Consumer Action Law Centre released a report titled ‘Denied: Levelling the Playing Field to Make Insurance Fair’ (the Report). The Report promoted the need to extend the provisions of unfair contract terms within the Australian Consumer Law (ACL) to the insurance industry.

This report, at its core, argues to better the bargaining position of the consumer when obtaining an insurance policy. It argues that there is inadequate recourse for consumers whose claims are rejected on policy terms, which in other contexts may be found to be unfair or unjust. The Report lists the following as the markers of an unfair or unjust term: 

1. There is a significant imbalance in the parties’ rights and obligations;
2. It is not reasonably necessary to protect the legitimate business interests of the advantaged party; and
3. It would cause financial or other detriment to the individual if it were applied or relied on.

The Report was released when many major players in the insurance industry were already on notice – the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017, with the first round of public hearings beginning in March 2018. As at February 2018, the Commission had received more than 385 submissions, with over 10 per cent of these relating to insurance. By March, the total number of submissions had jumped to 1,894.

The Commission has, to date, uncovered a large and concerning amount of widespread industry misconduct, with some cases according to Senior Counsel assisting the commission, potentially constituting criminal conduct.

Therefore, with the current regulatory climate heavily focused on reigning in certain industry conduct and protecting consumers, would the extension of the ACL’s unfair contract terms to the insurance industry improve the industry as a whole?

As a starting point, we must first turn to the current context of the insurance market and its players.

Demand for insurance and the impact on providers over time

Demand for insurance in various areas has increased over the years. Although this demand may have first been driven by compulsory regulatory regimes (such as compulsory third party insurance, workers’ compensation insurance and insurance in superannuation schemes), it has now gained significant momentum by reason of the sophistication of consumers.

This trend is attributed to the improved access to information in the digital age and the rise of insurance experts such as agents and brokers, along with employers, lenders, and trustees of superannuation funds who are increasingly obtaining insurance on behalf of consumers. 

Nonetheless, we must remember that many vulnerable consumers do not have access to such resources and that consumer protection legislation is, by and large, designed to ensure that those who cannot afford such expertise can rely on baseline protections.

Unsurprisingly, the overall demand for insurance has caused market saturation of various insurers and brands, offering a plethora of options for consumers. Increased saturation has led to increased competition between insurers; with the need to stay competitive dictating the premiums, the scope of cover, the policy terms, and especially the customer experience. The impact of this competition occurs not just when customers take out policies, but also when they make claims.

When insurers are competing in a heavily saturated market, one would expect that building on a retained customer base and keeping costs low are the most viable ways to hold and expand market share. In turn, it is in the interests of insurers to front-load the actuarial considerations of what risk they are willing to cover, and formulate policies that are as clear as possible.

Such measures not only avoid the costs of a protracted claims dispute, but also the branding consequences in a market where most consumers have access to far-reaching platforms on social media. In particular, consumer advocacy groups are able to quickly influence the purchasing decisions of large groups of consumers via national campaigns.

It is appropriate then, to next consider, the current regulatory regime for the insurance industry. The starting point, of course, is the Insurance Contracts Act 1984 (Cth) (the Act).

Current regulatory regime

The Report deals with some of the rights and obligations of insurers and consumers under the Act, however, it does not appear to delve into the detail of the outworking of these provisions by the Courts.

While the depth and width of the application of the provisions in the Act cannot be comprehensively captured in this forum, the writers note the following practice points:

1. The requirements on insurers to provide information (with specifications for timing and content) to every consumer before entry or renewal of policies.    
2. The application of the Contra Proferentem Rule, so that any term deemed to be ambiguous in an insurance policy is read against the insurer.
3. The obligations to act with utmost good faith under the Act is simply the start of the obligations on the insurer. Apart from the implications from Court decisions, the conduct of most insurers, particularly in the ‘claims processing’ stage are further policed by codes of practice (which again have specifications for timing, content and conduct of the insurer), the breach of which expose insurers to penalties.    
4. Section 54 of the Act, which deals with the conduct of the consumer after the entry into the policy, offers a comprehensive remedy to protect consumers against technical policy exclusions to claims that have not been caused or contributed to by the insured.
5. Section 47 of the Act affords protection to consumers by further limiting the circumstances where insurers can rely on a policy terms to exclude claims.

Insurance consumer protection in other forums

Apart from the Act, there are protections in place for consumers under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), including consumer protections similar to the ACL, for misleading and deceptive conduct and, to a limited extent, unfair terms of consumer contracts and small business contracts.

Finally, in our view, the effectiveness of the Financial Ombudsman Service (FOS) to redress consumer complaints has been underestimated in the Report. Of note, is the rebalancing of the bargaining position between a consumer and the insurer achieved by:

1. requiring insurers to inform consumers of their right to agitate their compliant with FOS;    
2. requiring insurers to submit without exception to the FOS process, including to pay FOS’ fees;
3. making the decision of FOS binding on the insurer but not the consumer;    
4. having no adverse costs consequence to a consumer for agitating a dispute with FOS;
5. affording limited recovery of a consumer’s costs and other expenses from the insurer; and    

6. perhaps most significantly, empowering FOS by its terms of reference, to make determinations having regard to matters beyond the operation of the regulatory regimes, including good industry practice.

Is additional regulation required?

There is no doubt that the current Royal Commission is exposing a wide range of conduct that falls below community standards, with the insurance industry implicated. It appears the public, and in turn the politicians, will not let the status quo continue. The Report certainly capitalises on this sentiment; however, there may be a risk that the Report’s proposed measures will expose insurers and consumers to the costs of disputes being double-handled by more than one regulatory authority, with the consequence of increased premiums being borne by consumers if the double-handling leads to substantial costs increases for insurers.

Having grappled with the interplay of market variables and current regulatory regimes, the writers caution an overly regulatory approach, especially given the protections outlined above that are afforded to insurance consumers under the Act and other regulatory regimes. As the Honourable Kenneth Hayne AC QC, Commissioner of the Royal Commission, is not expected to hand down his final report until 1 February 2019, it may be more prudent, for both insurers and consumers, to wait until the final report’s recommendations before calling for sweeping regulatory reform.

In the meantime, the insurance industry will be well aware of the standard of conduct that is expected from both the community and regulators – that is, increasing transparency, fairness, and a reasonable and quick resolution of disputes. To consumers of insurance products, we say this: fact check, read the documents, ask questions, research, get professional advice, do what you need to do to understand the arrangement you are signing up for, before (metaphorically) signing on that dotted line.