Unfair Contract Terms Regime Extended to Insurance Contracts

Part 2, Division 2, Subdivision BA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) provides a scheme for the protection of consumers and small business from unfair contract terms contained in standard form contracts for financial products and services (UCT Regime).

The scheme operates to enable a court to remove unfair terms from contracts falling within the scheme, leaving the contract to continue in force as if the unfair term(s) had not been written in.

Prior to the Hayne Royal Commission into the Financial Services Industry, insurance contracts covered by the Insurance Contracts Act 1984 (Cth) (IC Act) were specifically excluded from the UCT Regime.

The Commonwealth Government has now moved to implement recommendation 4.7 of Financial Services Royal Commission by extending the UCT Regime to IC Act insurance contracts. The Financial Services Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth) (FSSR Act), with its amendments to the ASIC Act and IC Act, gives effect to this recommendation by bringing IC Act insurance contracts, entered into, varied, amended or renewed, after 5 April 2021, under the UCT Regime.

The UCT regime operates in addition to the duty of utmost good faith and enables an insured, including any third-party beneficiaries, to an IC Act insurance contract to invoke the Court’s power to declare an unfair term void.

A term of an IC Act insurance contract will be unfair if each of the following conditions are met:

  1. the term would cause a significant imbalance in the parties; rights and obligations arising under the contract;

  2. the term is not reasonably necessary in order to protect the legitimate interests of the party that would be advantaged by the terms; and

  3. the term would cause detriment to a party if it were to be applied or relied on.

Section 12BH of the ASIC Act sets out a non-exhaustive list of the kinds of terms that will be considered unfair. Ultimately, whether a term of an IC Act insurance contract is unfair is for a Court to determine on a case-by-case basis.

The Explanatory Memorandum to the FSSR Bill, however, foreshadows that a term that allows the insurer to, instead of making a repair, elect to settle the claim with a cash payment calculated according to the cost of repair to the insurer, rather than how much it would cost the insured to make the repair, may be unfair.

The expansion of the UCT Regime has potential ramifications for insurers across the board, and in particular in relation to the cash settlement of claims. Before electing to cash settle a claim, insurers should consider whether the relevant policy provisions are fair. Cash settlement provisions that permit the insurer to cash settle based on the cost of repair the insurer would pay through its commercial networks rather than the market cost (i.e. the cost which the insured would be subject to in the private market), should be closely considered.

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