What can Be Unfair About a Contract of Insurance?

Updated: Mar 4

Introduction

The notion that a contract or its terms might be unfair is not new. Right?

Over the years there have been many cases from the High Court of Australia down which have focused on unfair contracts. Principles have been carved in stone. Statutory regimes have been set up to ameliorate, rectify or even adjust the rights of parties to unfair contracts.

But what about contracts of insurance?


Section 15 of the Insurance Contracts Act 1984 (Cth) provides: -


(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 relief in the form of compensatory damages.


The thinking in 1984 was that the parties’ duty of utmost good faith would offer them sufficient protection from unfair terms. That thinking has changed. It now seeks to align the Insurance Contracts Act with an underlying policy which ‘respects true freedom of contract and seeks to prevent the abuse of standard form consumer contracts which, by definition, will not have been individually negotiated: Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377; (2016) ATPR 42-517 at [54(a)], Jetstar Airways Pty Ltd v Free [2008] VSC 539 at [112][1].


The Change

Introduction


Over recent years successive Federal Governments in Australia have passed laws [2]which broadly build protections into ‘consumer contracts’[3] and ‘small business contracts’[4]. These laws generally provide that a term of such a contract is unfair if it introduces significant imbalance, unnecessary protection or detriment into that contract.


On 17 February 2020, the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 received Royal assent. With effect from 5 April 2021, this Act will amend, amongst other things, the Insurance Contracts Act (Cth) and Australian Securities and Investments Commission Act 2001 (Cth).

Those amendments will weaken section 15 to the benefit of insured.

Amendments to Section 15

From 5 April 2021, section 15 will provide: -

(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.

Section 12BF of the Australian Securities and Investments Commission Act 2001

Section 12BF relevantly provides: -

(1) A term of a consumer contract or small business contract is void if:


(a) the term is unfair; and


(b) the contract is a standard form contract; and

(c) the contract is:


(i) a financial product; or


(ii) a contract for the supply, or possible supply, of services that are financial services.


(2) The contract continues to bind the parties if it is capable of operating without the unfair term.

Unfair


The notion of unfairness brings us back to the notions of significant imbalance, unnecessary protection or detriment.


Examples of unfair terms include terms which introduce unexpected payment arrangements, require the insured to take impossible steps before cover is available or require the insured to pay the excess before the insurer pays the claim.

Relief


A party to the contract of insurance, a third party beneficiary or the Australian Securities and Investments Commission can ask the Federal Court of Australia to find a term unfair and, therefore, void. If the Federal Court makes such a finding, the future of the contract will depend upon whether it can still operate free of the void term.


The Federal Government has entertained introducing civil penalties as well. On 6 November 2020, Commonwealth, State and Territory governments agreed to strengthen the existing unfair contract term protections to include:


  • making unfair contract terms unlawful and giving courts the power to impose a civil penalty;

  • increasing eligibility for the protections by expanding the definition of small business and removing the requirement for a contract to be below a certain threshold;

  • improving clarity on when the protections apply, including on what is a ‘standard form contract’.

Legislation implementing these reforms is well under way.


General Observations - Limits


There are a couple of important general observations which need to be made about the limitations to the new regime.


Firstly, there are limits to the types of contracts of insurance which this new regime will reach. Those limits can be summarised as follows: -


  • Contracts of insurance governed[5] by the Insurance Contracts Act;

  • Contracts entered on or after 5 April 2021;

  • The consumer or small business contracts; or

  • Specifically excluded medical indemnity insurance contracts.


Secondly, there are limits on the terms which the new regime will reach. Those limits are: -

  • terms which define the main subject matter of the contract;

  • upfront and transparent terms setting the premium and deductible; and

  • terms required by law.


Key Point


On 28 May 2020, the Federal Court of Australia upheld an application by the Australian Securities and Investment Commission that terms in contracts issued by the Bendigo and Adelaide Bank were unfair and void from the inception of the contract[6].


ASIC Commissioner Sean Hughes said shortly afterwards that,


‘ASIC is committed to protect small business owners of Australia from unfair terms in loan contracts, particularly where business borrowers are confronted with inflexible standard terms.’


‘Yesterday’s judgment shows that ASIC will take the necessary steps to enforce the law. Importantly, insurance firms should be preparing to extend these obligations in insurance contracts’.


‘We are pleased the Government backed us with additional funding that was ear-marked to enforce this area of the law.’


The tone is set and for insurers, insured and the wider insurance industry, the new dawn is nigh.





Disclaimer: This Insight is prepared for general information purposes. You should seek separate advice on the application of these principles to your own set of facts and circumstances.


__________________________________________

[1] ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716.

[2] the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001.

[3] A consumer contract is a contract where at least one party is an individual who acquires goods or services wholly or predominantly for personal, domestic or household use.

[4] A contract where at least one party is a business that employs fewer than 20 people and the upfront price payable under the contract is below certain monetary thresholds: $300,000 for a contract of less than one year's duration and $1,000,000 for a contract that is one year or longer in duration. [5] See sections 8,9 & 9A of the Insurance Contracts Act 1984 (Cth). [6] ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716.

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