The recent decision by the Federal Court of Australia demonstrates the increasing consumer focus on Insurance Contracts, driven by the Australian Securities and Investments Commission (ASIC). This case marks the first judicial examination of potential unfair contract terms within insurance contracts since such protections were introduced under the amended ASIC Act in 2021. The decision, which ruled in favour of the insurer, highlights the importance of considering clauses alongside the context of the regulations as imposed by Section 13 of the Insurance Contracts Act 1984 (Cth) which is concerned with the duty to act in good faith.
The Notification Clause
The decision highlights the importance of considering the broader legal and contextual framework that insurance contracts operate in. The case involved a clause in Auto & General’s pre-disclosure statement, referred to as a “Notification Clause” which is a relatively standard feature across most insurance contracts. The clause stated:
“While you are insured with us, you need to tell us if anything changes about your home or contents”.
Additionally,
“During the term of the policy, if the Insured failed to comply with this clause, A&G could take several actions detrimental to the Insured including the refusal of the claim or reducing a payout amount”.
ASIC’S CHALLENGE
ASIC challenged this clause alleging that it is an unfair contract term as it is vague and ambiguous when considering what changes the Insured must disclose. For instance, it was unclear whether minor changes such as someone staying temporarily in another home, or a temporarily higher level of purchases such as groceries needed to be reported. The clause also gave Auto & General power to refuse or reduce claims beyond that allowed under Section 54 of the Insurance Contracts Act. ASIC argued that requiring the Insured to notify the Insurer of any change imposed an impractical and onerous burden on consumers.
ASIC held that by requiring the Insured to inform their office of “any” changes to their situation would put a burden and impractical requirement on the insured. ASIC also argued the Notification Clause had the potential to mislead Insureds and unfairly prejudice the complaint process and the ability to challenge any refusal or reduction of an insured’s policy.
AUTO & GENERAL’S DEFENCE
Auto & General Insurance presented process required when identifying risks and how this determines what premiums are set and decisions made. This outline demonstrated when assessing “acceptable” or “unacceptable” policy changes, the insurer will conduct a reasonable care assessment to consider the circumstances around the failure to notify and whether any “misrepresentation” was caused by the Insured. Auto & General successfully argued that the construction of the Notification Clause calls for the Insured to notify their Insurer of any changes which would have been relevant prior to inception of the insurance contract. Auto & General contested ASIC’s argument and interpretation of the literal, everyday meaning of the word “anything”.
THE COURT’S RULING
Justice Jackman found that the clause was not unfair as it did not create a significant imbalance between the rights of the respective parties. The Court held that regardless of the contract terms, insurers are bound by Section 13 of the Insurance Contracts Act which requires insurers to act in utmost good faith to ensure commercial standards of decency and fairness are upheld. Thus, an insurer could not reject or reduce a claim solely due to the failure to comply with the Notification Clause unless it was reasonable to do so.
The Court also acknowledged that Auto & General had a genuine interest in being informed of changes to an Insured’s circumstances, as it could affect their decision to continue coverage. His Honour highlighted that the statements, when read along with the policy, confirms the requirement to notify the insurer of any changes that are relative to the information previously provided to the insurer rather than minor changes such as grocery costs. Insurers have a right to refuse or adjust claims if the insured’s failure to disclose changes leads to an increase of risk beyond what would have been accepted under the original policy.
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