06 July 2018

Unpacking Treasury’s proposal to extend unfair contract terms protections to insurance contracts – what it means for you

This article was written by Mandy Tsang, Peter Yeldham, Georgia Cowley and Riana Cermak

Foreshadowed by the Federal Government in late 2017, Treasury has now released a proposal paper outlining the planned extension of the unfair contract terms laws to standard form insurance contracts. If implemented, the reforms (which will require amendments to the Insurance Contracts Act 1984 (Cth) and the ASIC Act 2001 (Cth)) are aimed at increasing consumer protection for those taking out home building, car, consumer credit and travel insurance. Submissions on the proposal paper are open until 24 August 2018.

Summary of the proposal

The unfair contract terms laws which came into force in 2010 do not currently apply to insurance contracts regulated by the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act). Like King Canute with his palm facing the oncoming ocean, the insurance industry should brace itself for the arrival of this wave in the medium-to-long term. The insurance industry now has an opportunity to provide comment and input on how best to implement such reform.

On 18 December 2017, the Hon Kelly O’Dwyer MP, Minister for Revenue and Financial Services announced that the Government will extend the unfair contract term provisions to contracts of insurance with proposals to be released in early 2018. This proposed change is part of a broader package of reforms for the insurance industry.

In relation to the extension of the unfair terms regime, the Commonwealth Treasury released a proposal paper on 27 June 2018, titled “Extending Unfair Contract Terms Protections to Insurance Contracts” (Proposal Paper). The Proposal Paper seeks submissions on a proposed model to affect the extension of unfair contract terms, which would essentially involve:

  • amending section 15 of the Insurance Contracts Act to allow the unfair contract terms laws in the Australian Securities and Investments Commission Act 2001 (Cth)(ASIC Act) to apply to insurance contracts regulated by the Insurance Contracts Act; and
  • tailoring the unfair contract terms laws in the ASIC Act to accommodate specific features of insurance contracts, including by:
    • narrowly defining the “main subject matter” of an insurance contract;
    • providing that a term will be reasonably necessary to protect the legitimate interests of an insurer if it reasonably reflects the underwriting risk accepted by the insurer, and does not disproportionately or unreasonably disadvantage the insured;
    • allowing courts an alternative to declaring the an unfair term “void”, such as ordering that the insurer may not rely on the unfair term; and
    • for life insurance policies, specifying that terms allowing the life insurer to unilaterally increase premiums will not be unfair if the policy increase is pursuant to the terms of the policy.

The Proposal Paper also sketches two alternative options to amending the Insurance Contracts Act, namely:

  • enhancing the existing Insurance Contracts Act remedies (particularly the duty of utmost good faith) to increase their ability to provide for unfair contract terms remedies, which may entail:
    • introducing a definition of “unfair term” that reflects the definition in the ASIC Act;
    • providing that an unfair term will be a breach of the duty of utmost good faith;
    • reversing the onus of proof, so that insurers bear the onus of demonstrating an alleged unfair term is not a breach of the duty of utmost good faith; and
    • providing consumers and ASIC with standing to seek remedies for any disadvantage suffered; or
  • to introduce a stand-alone set of unfair contract terms protections in the Insurance Contracts Act largely mirroring those in the ASIC Act.

The Proposal Paper is fairly anodyne on which approach is to be preferred and is open-minded about unintended consequences which may arise from any legislative reform. In this vein, the general theme of the questions are whether the proposal is supported, any disadvantages or advantages of the proposal, whether there is any cost burden on insurers (and the magnitude of those costs), and whether the remedies proposed are sufficient. The Proposal Paper and questions can be found here.

What could this mean for insurers?

The unfair contracts regime would, in theory, apply to insurance contracts in addition to the disclosure requirements imposed by insurers under the Corporations Act¸2001 and the existing protections in the Insurance Contracts Act. The analysis included in the Proposal Paper is only pitched at a high-level, but it is clear the intention of the reforms is to add to the consumer protections already in place to better arm insureds in taking out insurance cover, particularly where insurance policies are often provided on a “take it or leave it” basis, with little room for negotiation. It may be that Treasury will wait for the industry response before further developing its explanation of how the reform will achieve the stated purpose.

  • We anticipate Insurers may have concerns about (at least) the following matters: whether the reforms will render some of their “standard” policy terms and conditions as unfair
  • whether the reforms are necessary in light of the existing protections for insureds under the Insurance Contracts Act and the detailed disclosure obligations imposed on insurers by the Corporations Act, which already aim to minimise confusion about what a policy does and does not cover; and
  • the potential reversal of the onus of proof, which will require insurers to bear the burden of proving a term is not a breach of good faith should they wish to successfully defend the allegation that a term is unfair.

The extension of the unfair contracts regime will clearly provide consumers with an additional pathway through which they may be able to obtain relief. The new cause of action may be “tacked on” to claims already founded in existing protections. We anticipate many insurers will necessarily need to undertake a wholesale review of their policy terms and conditions if the reforms are legislated, resulting in significant upfront costs. If terms are construed as unfair by the courts, further reviews and swift amendments will be required or insurers will be at risk of inviting claims.

The Assistant Treasurer, when announcing the reform, indicated that the reforms were intended to “place downward pressure on insurance premiums through increased accountability and transparency within the industry…”. Given the increased risk to insurers of a challenge to cover and the upfront costs insurers are set to incur, we query whether the reforms will have the proposed effect of reducing premiums or whether we will see the costs of affected insurance policies go the other way.

Submission questions and what will happen next

Submissions are open until 24 August 2018 by email or post. Our view is that with such a timetable, and presumably further consultation to follow, any reform on unfair contracts is unlikely to be passed in this Parliamentary session. However, it is definitely something to keep on the radar as the outcome of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (particularly with respect to insurance) could shake things up even further (and possibly accelerate this timeline).

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