When on 18 December 2017 the Commonwealth Government announced its intention to extend unfair contract term provisions to insurance contracts, the industry collectively held its breath. Of course with the Hayne Royal Commission having commenced 14 December it seemed unlikely anything further would happen during 2018.
However, not being predictable, on 27 June 2018 the Department of Treasury released a proposals paper which is available here.
Responses are open until 27 July 2018, leaving scant time for the stakeholders to review the 9,000 word document and have their say. But what does it really say?
What are the unfair contract terms laws?
In 2010, unfair contract terms (UCT) laws were introduced to all businesses in all sectors – except insurance – who use standard form contracts in their dealings with consumers. In 2016, these laws were extended to provide protections to small businesses from unfair contract terms.
The UCT laws exist to void a term in a consumer or small business contract which is ‘unfair’. This can mean that it would cause a significant imbalance in rights and obligations; is not reasonably necessary; or would cause detriment if applied or relied upon.
What are the proposed amendments?
At its heart, the proposed amendments will amend section 15 of the Insurance Contracts Act 1984 (Cth) (ICA) to allow the UCT laws in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to apply to insurance contracts regulated by the ICA, which includes both general and life insurance contracts.
There will also need to be amendments to the UCT laws in the ASIC Act to accommodate specific features of insurance contracts such as the fact that insurance contracts may have a wide range of options for policy coverage and still be in a ‘standard form’.
One of the more potent reasons the Insurance industry has resisted the idea of unfair contract term laws is that there are already three protections in place for those buying insurance, being:
- Pre-contractual disclosure – everybody who enters into the contract is meant to be fully aware of the terms;
- Duty of utmost good faith – nobody can rely upon terms if to do so would be to fail to act with the utmost good faith; and
- Rules limiting insurers from relying on certain terms (everybody’s favourites: sections 53 and 54 of the ICA for example).
The proposed reforms will, in theory:
- Even the playing field of consumers and small businesses, providing them access to the same protection from unfair terms in insurance contracts as they do for other contracts for financial products and services;
- Incentivise insurers by improving the clarity and transparency of contract terms, and remove potentially unfair terms from their contracts; and
- provide ASIC-backed enforcement powers and remedies for consumers.
Is this unique?
Insurance contracts in the United Kingdom, EU and New Zealand are not excluded from the relevant UCT laws in each of those jurisdictions.
However, this isn’t necessarily the whole story. Will exposing insurance contracts to UCT provisions effectively render centuries of jurisprudence regarding the duty of utmost good faith nugatory?
The scene has been set for potentially the most significant change to insurance contract regulation since the introduction of the ICA with barely a month to respond.