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.
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.
The IC Act, and the Insurance Contracts Regulations 2017 (Cth) (IC Regulations) designates the following common types of policies as ‘standard cover’:
Consumers are significantly protected by the regulations which prescribe standard terms of cover for:
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.
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:
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.
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 and Dispute Resolution Team