As the insurance industry in Australia continues to come to grips with its exposure to the unfair contracts act regime, court guidance as to what ‘unfairness’ means, is welcome.
The Federal Court has handed down a recent decision which, through examples, contributes to the understanding of what ‘unfairness’ means. Although set in the context of the conduct of a bank, the application of the principles discussed in the case are no less relevant to insurers. Why? - Section 15 of the Insurance Contracts Act now provides as follows: -
Certain other laws not to apply
(1) A contract of insurance is not capable of being made the subject of relief under:
(a) any other Act; or
(b) a State Act; or
(c) an Act or Ordinance of a Territory.
(2) Relief to which subsection (1) applies means relief in the form of:
(a) the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable; or
(b) relief for insureds from the consequences in law of making a misrepresentation;
but does not include:
c) relief in the form of compensatory damages; or
d) relief relating to the effect of section 12BF (unfair contract terms) of the Australian Securities and Investments Commission Act 2001. (My emphasis)
Section 12BF of Australian Securities and Investments Commission Act 2001 (Cth), in broad terms renders certain terms which are unfair, void. Section 12BG of Australian Securities and Investments Commission Act 2001 (Cth) defines what is unfair.
A term of a contract (such as an insurance policy) will be considered 'unfair' if it can cause a significant imbalance in the parties' rights and obligations arising under the contract, it is not reasonably necessary in order to protect the legitimate interests of the party who seeks to take advantage of the term, and it can cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In determining whether a term is unfair, a court can take into account whatever matters it considers relevant, but it must take into account how the term is expressed (plain language, legible, clear presentation and availability) and the contract as a whole.
The usefulness of this latest case is not that it expounds any new legal theory. Its usefulness is that offers numerous ‘real life’ examples of clauses which the parties before the Court, accepted were unfair.
These clauses fell into one or more of four broad categories being indemnification clauses, event of default clauses, unilateral variation or termination clauses and conclusive evidence clauses.
You agree to indemnify us against all loss or damage we may suffer as a result of issuing a bank guarantee or paying a claim to the beneficiary.
Event of default clauses
any promise you made to us, or information you gave to us, is untrue or misleading; or
any money that you owe anyone else is not paid when it is due to be paid; or
anything happens which in our reasonable opinion affects your ability to pay us the money owing or to keep to any agreement or security, or our rights under any security or our ability to recover the money owing,
then you are in default under this agreement
Unilateral variation or termination clauses
We may change fees and charges or add new fees and charges without your consent at any time.
Conclusive evidence clauses
We may give you a certificate about a matter or about an amount payable in connection with this facility agreement. The certificate is sufficient evidence of the matter or amount unless it is proved to be incorrect.
Cases such as this and the legislative framework offer the Australian insurance industry clear and extensive guidance about what is unfair, and the consequences of terms being found as such.
Now it is just a case of the industry responding.
The name of the decision is Australian Securities and Investment Commission v the Bank of Queensland Ltd  FCA 957.