Introduction
After extensive submissions and consideration, the Australian Treasury Department has released a proposed bill (‘Bill’) which, if passed in Parliament, will require insurers to double down on their efforts to reduce any unfairness in their policy wordings or face the risk of significant and even personal penalties.
The context for insurers and others in the insurance industry is clear - 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)
But this is just the tail. A real sting is emerging.
How Might Things Change?
Background
Section 12BF of Australian Securities and Investments Commission Act 2001 (Cth), in broad terms, renders void certain contractual provisions which are unfair.
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 upon.
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.
Insurance Contracts
Does Section 12BF touch every contract of insurance?
Section 12BF references consumer contracts (being contracts at least one of the parties to which is an individual who essentially acquired the contract for personal, domestic or household use or consumption) or small business contracts (to which one of the parties to the contract employs fewer than 20 persons and either the upfront price for the contract does not exceed $300,000 or the period of the contract is longer than 12 months and the upfront price payable under that contract does not exceed $1,000,000)[1].
Whether it be a consumer contract or a small business contract, its further qualifications must be that: -
The contract is a standard form contract; and
The contract is a financial product or a contract for the supply or possible supply of services that are financial services.
The insurance contract must match these requirements noting that under the Bill some changes to these requirements are proposed.
Imposing Personal Responsibility
One of the significant changes which the Bill proposes is to amend Section 12BF to impose personal responsibility for unfair terms arising in one of two ways.
Firstly, the amended 12BF will impose personal responsibility on a person who enters a contract of insurance which contains an unfair term which that person proposed. Doing so is a contravention of the Act and is a contravention for each proposed unfair term.
Secondly, if a person applies, relies upon or purports to apply or rely upon an unfair term, that too is a contravention of the Act.
Who is a 'person'?
While the Act does not specifically define the expression ‘person’, it is worth noting that Section 2C of the Acts Interpretation Act 1901 says that in any Act, expressions used to denote persons generally (such as 'person', 'party', 'someone', 'anyone', 'no-one', 'one', 'another' and 'whoever' ), include a body politic or corporate as well as an individual.
Remedies and Penalties
A finding that a term is ‘unfair’ opens a number of remedies which can affect the operation of the contract. The Bill intends to broaden and strengthen those remedies.
But the eye-catching change proposed is the scope of penalties which a Court may impose upon finding that a person has breached the Act in proposing, applying, or relying upon an unfair term.
The starting point is that these new contraventions will be classified as breaches of civil penalty provisions[2]. The financial penalty for the individual who breaches such a provision can be more than $1,000,000 and for a body corporate it can be more than $10,000,000[3].
That is not to mention the other remedies which may be imposed such as redressing the financial consequences which the breach caused.
Key Point
The Exposure Draft Explanatory Materials observed the following: -
‘On the 21 November 2018, the Government released the Review of Unfair Contract Term Protections for Small Business: Discussion Paper. Information gathered through the 2018 review suggested that while the unfair contract term regime had improved protections for small business in certain industry sectors, it did not provide strong deterrence against businesses using unfair contract terms in their standard form contracts’.
The proposals in this Bill appear to address this perceived weakness in the existing regime - extensively.
The name of the Bill is Treasury Laws Amendment (Measures for a Later Sitting) Bill 2021: Unfair Contract Terms Reforms.
____________________________________ [1] Clause 47 – limit of employees lifted to 100 and limit of upfront price lifted to $10m. [2] Section 12GBA(6)(a) of ASIC Act 2001 [3] Section 12GBCA of ASIC Act 2001
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