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Insurance & Reinsurance

Client Update: Unfair terms in insurance contracts options paper released

18 March 2010

In brief: The Federal Government has released an options paper inviting comments to assist it in addressing the Senate Economics and Legislation Committee's recommendation on the Trade Practices Amendment (Australian Consumer Law) Bill concerning existing laws' ability to protect consumers from unfair terms in insurance contracts. The Insurance Contracts Amendment Bill 2010, which introduces significant amendments intended to enhance consumer protection, has also been introduced into Parliament. Partner Dean Carrigan and Senior Associate Abby Gill report.1

Background

  • In our Focus: Impact of national consumer law on the insurance industry, we discussed the potential impact of the Trade Practices Amendment (Australian Consumer Law) Bill (the Consumer Law Bill) on the insurance industry. The Consumer Law Bill will regulate unfair contract terms in financial products and expand the Australian Securities and Investments Commission's (ASIC) enforcement powers.  However, it has limited application to insurance contracts, due to section 15 of the Insurance Contracts Act 1984 (the Insurance Contracts Act). The Senate passed the Consumer Law Bill, with amendments, on 17 March 2010. The House of Representatives agreed to the amendments on the same day. 
  • Our previous Client Update: Proposed regulation of unfair terms in insurance contracts discussed the Senate Economics and Legislation Committee's (the committee) recommendation in September 2009 that the Federal Government introduce amendments to the Insurance Contracts Act to provide a similar level of protection to consumers from unfair contract terms in insurance contracts as will exist under the national consumer law. 
  • The Government has now released an Options Paper, which invites submissions from stakeholders to assist it in formulating its response to the committee's recommendation. The paper calls for stakeholder comments on the nature of the perceived problem of actual or potential consumer disadvantage arising from unfair insurance contract terms, the adequacy of existing insurance regulation and the options available to remedy the problem. 
  • The Insurance Contracts Amendment Bill 2010 (the ICA Bill), which implements a number of the recommendations made following the review of the Insurance Contracts Act that Alan Cameron AM and Nancy Milne conducted between 2003 and 2005, was also introduced into Parliament on 17 March 2010. We will comment separately on the terms of the ICA Bill. However, it is worth noting that there are measures in the ICA Bill that are intended to enhance consumer protection already available under the Insurance Contracts Act in relation to unfair or harsh contract terms – eg by extending the duty of utmost good faith in s13 to third-party beneficiaries and empowering ASIC to bring representative action for breaches of the utmost good faith provisions in s14. 

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The Options Paper

The Options Paper identifies five options that may prevent the problem of consumers suffering loss due to unfair terms in their insurance contracts (assuming there is such a problem):

  • maintain the status quo, as the issue is adequately addressed by s14 of the Insurance Contracts Act (as amended by the ICA Bill);
  • amend s15 of the Insurance Contracts Act to allow it to operate concurrently with the unfair contract terms provisions proposed for inclusion in the ASIC Act (which mirror the unfair contract terms provisions under the Australian Consumer Law, for financial services);
  • amend the Insurance Contracts Act to include protections against unfair contract terms, which are similar to those proposed for the ASIC Act but tailored for insurance contracts. Under this option, s15 of the Insurance Contracts Act would continue to exclude the operation of the unfair contract terms provisions in the ASIC Act;
  • enhance the existing remedies under the Insurance Contracts Act, beyond the changes proposed in the ICA Bill by, eg, reversing the onus of proof where a breach of s14 is alleged against an insurer; or
  • encourage industry self-regulation of unfair insurance contract terms, eg through the General Insurance Code of Practice. 

Specifically, the Government seeks stakeholder2 views on:

  • the extent to which unfair terms in insurance contracts are causing actual or potential loss or damage for consumers;
  • identification of any existing regulation of unfair insurance contract terms that is not considered in the options paper; and
  • a cost-benefit analysis of each of the five options, including the likely qualitative and quantitative (in dollar terms) cost of each option, and any hurdles to their implementation. 

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Impact

The options paper outlines significant amendment to the existing legal framework governing insurance contracts. In conjunction with the amendments to the Insurance Contracts Act that the ICA Bill proposes, the package has the potential to impact materially on the legal relationship between insurers and consumers. The options for change outlined in the options paper will each, to a greater or lesser degree, reshape the existing regime, and, if implemented, are likely to give rise to significant issues and uncertainties for the industry and consumers until clear judicial guidance on the proper interpretation and application of those new changes is available. Those affected will include insurers, intermediaries, insureds, third parties who have rights of access to insurance cover in certain circumstances, and ASIC.

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Comments

The options paper questions the effectiveness of s14 of the Insurance Contracts Act in protecting insureds from unfair terms in insurance contracts, noting, eg, that reliance by an insurer on an unfair term will not necessarily be a breach of the duty of utmost good faith. However, amendments to s14 that the ICA Bill proposes will allow ASIC to bring an action on behalf of the public where that section is not complied with, which may increase access to remedies for insureds (and increase exposure to complaints for insurers).

The options paper also acknowledges that s14 applies to all insurance contracts covered by the Insurance Contracts Act. One criticism of proposals to extend the protections contained in the ASIC Act and the recently passed Consumer Law Bill is that only 'consumer contracts' in standard form will be covered. 

Given this criticism, if the outcome of the consultation process suggests there is a need to introduce greater protection from unfair terms in insurance contracts, it seems more likely this would be achieved by amendment of the Insurance Contracts Act, either by introducing remedies relating to unfair contract terms along the lines of those proposed in the Australian Consumer Law Bill or by amending s14 to make it more 'consumer-friendly', by reversing the onus of proof.

Given that the ICA Bill does not make provision for consumer protection from unfair terms in terms similar to the Consumer Law Bill, it is possible that further amendments will be made to the ICA Bill. This will inevitably delay its passage through Parliament.

However, as the current Government has committed itself to introducing national consumer law protection, it may prefer this approach. 

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Timing

Acknowledging there is a wide range of opinions that stakeholders have regarding the exclusion of insurance contracts from the operation of the unfair contracts terms provisions of the ASIC Act, the Federal Government intends to defer further consideration of this issue, pending the outcome of public consultation on the options paper.3 

Given the potentially far-reaching implications of the options for change that the options paper canvasses, together with the amendments to the Insurance Contracts Act as proposed in the ICA Bill, stakeholders are encouraged to engage with the Government's consultative process.

In order to take part in this process, interested parties need to lodge their submissions by 30 April 2010.

We will keep you informed of developments. If you have any questions on this, or any other insurance matter, please feel free to contact any of the people below.

Footnotes
  1.  Lawyers Jaime McKenzie and Andrew Lazzaro and Law Graduates Naomi Sadler and James Ebert also assisted in the preparation of this Client Update.
  2. Identified at [20] in the options paper as parties to insurance contracts, third-party beneficiaries to insurance cover, dispute resolution facilities, including industry-based systems and courts, and the insurance regulator.
  3. Media release from the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, Press Release No. 027 of 2010.

For further information, please contact:

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