In February 2019 the final report of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry ('the Royal Commission') was delivered.
This highly publicised report incorporated a selection of wide-reaching recommendations, including recommendation 4.7, which recommended that the application of the unfair contract terms regime ('UCT') be extended to include insurance contracts. The government has accepted the recommendations, and has in turn released draft legislation, as well as an explanatory memorandum.
In order for the unfair contract provisions outlined within the Australian Securities and Investments Commission Act to be implemented within the context of insurance contracts, Section 15 of the Insurance Contracts Act, which states that "certain other laws do not apply to insurance contracts", would need to be amended.
Recommendation 4.7 made by the Royal Commission is that "the provisions should be amended to provide a definition of the 'main subject matter' of an insurance contract as the terms of the contract that describe what is being insured". It was also recommended that the duty of "utmost good faith" contained in Section 13 of the Insurance Contracts Act should operate independently of the unfair contract terms provisions.
In making recommendation 4.7, the Royal Commission's primary objectives were to:
- Ensure that consumers and small businesses who do purchase insurance receive the same access to protections from unfair terms in such insurance contracts as they do for other financial services contracts;
- Increase incentives for insurers to improve the level of clarity and transparency with respect to contract terms, and remove potentially unfair terms from their contracts; and to
- Provide appropriate remedies for consumers, as well as enforcement powers for the Australian Government to take advantage of in cases where unfair contract terms are uncovered.
Section 12BG of the Australian Securities And Investments Commission Act 2001 specifically defines a contract term as 'unfair' if:
- It would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
- It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In circumstances where a term is found to be unfair, courts will be given the opportunity to make other orders - although only where the orders are deemed more appropriate than the term being simply declared void.
Some examples of unfair insurance contracts taken from the Treasury's June 2018 'Extending Unfair Contract Terms Protections to Insurance Contracts' Proposals Paper:
Home building insurance: terms that provide that the most the insurer will pay in the event of loss or damage to a building is the cost to the insurer for rebuilding or repairing the building (as opposed to the actual cost of the repair, which may be higher for the insured);
Home building insurance: terms that allow the insurer to require the insured to pay an excess before paying the claim;
Car insurance: terms that require the insured to provide the name, registration and contact details of an uninsured at-fault driver when making a claim. An example from the Consumer Action Law Centre involved an insurer requiring the insured to obtain a letter from the other driver stating that he was at fault and had no insurance cover, but the insured was advised by the police that it was unsafe to contact the other driver;
Consumer credit insurance: terms that prevent an insured from making a disability claim if they were not diagnosed with the disability prior to leaving work; and
Travel insurance: terms that allow a claim to be denied on the basis of a blanket mental health exclusion.
The explanatory memorandum makes clear that it is proposed that the UCT provisions will apply to non-intermediated business. What is less clear is how the involvement of a broker will impact the application of UCT provisions, especially where the policy wording being used is drafted or proposed by the broker.
A useful flow chart is presented in the explanatory memorandum as to when UCT provisions will apply:
Insurers may need to consider whether it will be possible to avoid the application of UCT provisions by the use of optional provisions within a policy.
For more information on unfair insurance contracts, or to discuss how the findings and recommendations of the Financial Services Royal Commission might affect you or your organisation, please don't hesitate to get in touch with Holman Webb's Insurance Law team today.