What Lies Beneath - ASIC and Unfair Insurance Contracts

Introduction


On 5 April 2021, a fundamental change to the Insurance Contracts Act 1984 (Cth) commences.


From that date, Section 15 will no longer protect new or varied contracts of insurance which the Act governs, from relief relating to the effect of section 12BF (unfair contract terms) of the Australian Securities and Investments Commission Act 2001.


Section 12BF relevantly provides that: -


(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.


Responsibility for policing this change to Act and its wider implications has been placed into the capable hands of the Australian Securities and Investments Commission.


So how has ASIC prepared itself for this change and the challenges which it brings?


Preparations


ASIC has been reviewing a range of insurance contracts and, recognising the spirit of the forthcoming change, it has encouraged insurers to remove or change terms which: -


  • give insurers a unilateral discretion to do something;

  • create barriers for lodging a legitimate claim;

  • apply beyond specific situations;

  • impose timeframes which insured might not otherwise be able to meet;

  • it might not be feasible for the insured to comply with;

  • impede collaboration between the parties around decision-making processes; and

  • render the contracts obscure.


ASIC has given the insurance industry a clear sign of what types of clauses it believes sit outside Section 12BF.


So, what can ASIC do if an insurer misses that sign? And what are the potential consequences.


Consequences


Terms Declared Void


Relevantly ASIC’s principal power is to seek a declaration that a particular term of the contract is void[1].


The consequent issue is whether the balance of the contract is capable of operation when one or more of its terms has been declared void. Certainly, Section 12BF(2) contemplates the possibility that the contract might no longer operate.


So, there is an important issue beyond simply rendering the term of a contract of insurance void. What happens to the contract and, therefore, its parties?


Relief


The first step is to identify the status of the contractual relationship between the parties and what the parties’ rights are bearing in mind that all or part of the contract has been found to be void.


The insured may prefer (and be able) to continue the contract (less those terms which have been determined to be void) until it expires. Alternatively, the insured may wish to rescind the contract because it can no longer operate as the parties had intended.


This expression ‘rescind’ was usefully summarised by Meagher JA in Carbone v Metricon Homes Pty Ltd [2018] NSWCA 296 (7 December 2018) as follows: -


‘’(It) may relevantly refer either to the prospective discharge of executory rights and obligations under a contract (termination) or to the treatment of a contract as never having been formed (rescission ab initio)’.


If there is recission, its derivation (the operation of the terms of the contract or the operation of law) will determine how the parties to the contract of insurance are to be compensated. As Dixon and Evatt JJ explained in Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd [1936] HCA 6; (1936) 54 CLR 361 at 379 by way of example:


‘When the parties themselves have provided for the determination of the contract on a given contingency, the consequences flow altogether from their contractual stipulation and are governed by their intention, either actual or imputed.’


The second step, therefore, is to determine what that compensation should be if the contract of insurance is rescinded.


There are limits as to how the compensation is to be calculated, but, in the case of an insurance policy, it should not be assumed that the compensation will be limited to the return of the premium.


The contract of insurance may say what is to happen but if it is silent on that point, it will up to the courts to determine what relief (including compensation) should be paid free from any guidance from the parties about what they had intended.


Key Point


The key point is to recognise that this change to the Insurance Contracts Act is not to be treated lightly.


The consequences of a term of a contract of insurance being found void are, potentially, more profound than many may think.


____________________________________ [1] Section 12GND of the ASIC Act

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