This article was written by Peta Stevenson, Sarah Yu, Mandy Tsang and Astrid Sugden.
On Tuesday, Treasury released an exposure draft of the Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 2019 (the Bill) to extend the unfair contract terms (UCT) regime to insurance contracts.
Proposed Changes
In summary, the Bill:
- amends the Insurance Contracts Act 1984 (Cth) (ICA) to allow the UCT regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to apply to insurance contracts governed by the ICA; and
- extends the UCT regime to such insurance contracts with some adjustments.
The Bill sets out the following key adjustments to the UCT regime to make it specific to insurance contracts:
- What constitutes the main subject matter: a term which defines the main subject matter of an insurance contract will only be excluded from the application of the UCT regime to the extent that it describes what is being insured;
- Treatment of excesses: a term which sets the quantum or existence of the excess or deductible under the insurance contract will also be excluded from the UCT regime, provided that it is a "transparent term" and that it is disclosed at or before the time the contract is entered into; and
- Enforceability: third party beneficiaries under insurance contracts will be allowed to bring actions to seek a declaration that a term of an insurance contract is an UCT.
The Bill also provides that the extension of the UCT regime to insurance contracts will apply in addition to the existing duty of utmost good faith under the ICA.
Proposed Changes
The extension of the UCT to insurance contracts has been in discussion for a long time with several reviews recommending its extension since 2008. Commissioner Hayne's recommendation to extend the UCT regime to insurance contracts in his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry gave the final push.
Options as to how to extend the UCT regime to insurance contracts were canvassed in a Treasury proposal paper released in June 2018 (Proposal Paper) which was subject to consultation with and submissions by industry participants (please refer to our previous article by clicking here). The Bill adopts most of the changes outlined in that proposed model.
Issues for Discussion
The Bill fails to address a number of concerns previously raised by the insurance industry in response to the Proposal Paper[1]:
- Main subject matter: if a narrow interpretation of the main subject matter of an insurance contract is limited to "what is being insured", then terms of an insurance contract setting out the risks covered would be reviewable with insurers required to justify why they are necessary to protect their legitimate interests. Insurers may therefore be unable to rely on terms which form the basis of their contracts and may need to reprice the risks being underwritten. This may in turn affect the scope of cover under their policies and lead to the imposition of higher premiums. The suggestion of adopting the EU approach which exempts from the UCT regime terms which "clearly define or circumscribe the insured risk and the insurer's liability" has not been accepted;
- What is being insured: it may not always be easy to identify the 'thing' that is being insured under a contract of insurance, e.g. what is the thing being insured in relation to management liability insurance or a travel insurance policy;
- Additional premium: it is not clear that any additional premium which is payable by reason of an endorsement to the insurance contract should be excluded from the UCT regime as part of the "price payable";
- Not using the term "standard form contract": the industry suggested that instead of using the definition of "standard form contract", the extended UCT regime should apply to "eligible contracts" under the ICA and contracts that are wholly personal and domestic property insurance as defined in the Corporations Regulations. This would capture the types of policies most commonly held by consumers and allow certainty as to where the UCT regime applies. This suggestion has not been accepted;
- Alternative to voiding term: the proposal to allow a court to make alternative orders other than declaring an UCT void has not been included; and
- Life insurance: the problems that arise with the term that defines the main subject matter of a life insurance policy being the life insured as other key terms (e.g. disability definitions, benefit limits, waiting periods and eligibility criteria for cover to commence) will be potentially voidable.
Some critiques have been taken on board. For example, the Bill and Explanatory Memorandum (EM) make clear that the UCT regime sits independently of the duty of utmost good faith in the ICA, and that a finding that a term is a UCT will not automatically constitute a breach of that duty. This is particularly important in light of recent amendments which make section 13 of the ICA (the duty of good faith) a civil penalty provision and allow ASIC to seek declarations or pecuniary penalty orders or to issue infringement notices. Nevertheless, it is possible that some scenarios may give rise to relief under both sets of provisions.
Other suggestions from industry which have been adopted include using the definition of "unfair" as set out in the ASIC Act, rather than tailoring it to insurance contracts, and extending the transition period from 12 months to 18 months (although query whether this period is adequate).
The UCT regime will add yet another layer of regulatory compliance on top of existing rules governing policy terms, namely:
- rules around pre-contractual disclosure, i.e. the "standard cover" rules in sections 34 to 37 of the ICA, "unusual term rules" under s 37 of the ICA and Product Disclosure Statement rules;
- rules preventing insurers from relying on specific terms; and
- as noted above, the duty of utmost good faith.
The UCT regime will double up with some of these existing rules. For example, the requirement to present a term which sets out the quantum or existence of any excess or deductible payable under the insurance contract "transparently" overlaps with the PDS requirements under the Corporations Act 2001 (Cth). Most insurance contracts which will be subject to the UCT regime will also be subject to the PDS regime. An insurer is already required to provide a PDS which includes information about the cost of the product at the time of, and after, its purchase and to ensure that the information is worded and presented in a clear, concise and effective manner. Query how such requirements interact with what is considered "transparent" under the UCT regime.
Insurers will need to navigate these differing regulatory requirements when considering their policy terms.
Impact upon insurers
Insurers will need to firstly consider which of their products would fall within the definition of "standard form contract" and then review the contract in light of the UCT requirements. This will likely be an extensive task, especially if the narrow definition of main subject matter remains. Such an exercise will also need to take into account the Product Design and Distribution Obligations and ASIC's Product Intervention Power (please see our alert on this here).
How to have your say
The Government is taking submissions until 28 August 2019. To review the Bill and associated documents please click here. For further information regarding the Royal Commission, please refer to our Royal Commission Hub by clicking here.
If you have any questions, please get in touch with any of our contacts.
[1] See for example the submissions of the Insurance Council of Australia (https://treasury.gov.au/sites/default/files/2019-03/Insurance-Council-of-Australia_5.pdf) and the Financial Services Council (https://treasury.gov.au/sites/default/files/2019-03/Financial-Services-Council_3.pdf).
