When the unfair contract terms (UCT) regime was introduced into the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) in 2010, it applied to a wide range of contracts for financial products and financial services, but not to contracts of insurance. This has now changed, and the UCT laws apply to all standard form insurance contracts that are either 'consumer contracts' or 'small business contracts' and have been taken out or renewed since 5 April 2021. Under s12BG of the ASIC Act, a term is considered 'unfair' if it:
would cause a significant imbalance in the parties' rights and obligations arising under the contract;
is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
While a few terms are excluded — such as the definition of the main subject matter (ie what is being insured) and the upfront price or premium — almost all other policy terms will be covered by the UCT regime. If a term is deemed unfair, it is rendered void and cannot be relied upon by the insurer.
It is clear, both from recent media statements and enforcement action, that ASIC is actively monitoring compliance with the UCT laws. Since 2010, ASIC has reported results from nine investigations, two of which have resulted in court proceedings, and in another two, enforceable undertakings. ASIC has also specifically noted it is 'monitoring insurance contracts for unfair terms' and will 'consider the range of our regulatory powers where we are concerned about non-compliance and consumer harm'.
Examples of Unfair Contract Terms in Financial Services
Examples of the general kinds of terms that may be unfair are set out in s12BH of the ASIC Act. However, more specific examples of UCTs in the insurance context are given in the Explanatory Memorandum to the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill and include:
terms that are an unnecessary barrier to an insured lodging a legitimate claim (eg requiring payment of a large excess or requiring the insured to lodge a claim within an unreasonably short timeframe); and
terms that significantly reduce the cover offered where compliance is unfeasible (eg a term in a travel insurance policy that only covers loss of luggage when it has been personally attended by the insured at all times).
Insurance providers should consider all of the terms in their standard form policies, whether they are as clear and concise as they could be, and whether their operation and scope is broader than what is truly necessary to protect their legitimate interests.
The UCT regime is under review. On 6 November 2020, federal and state ministers agreed to extend the UCT laws, and in recent weeks, the Treasury has released exposure draft legislation. As can be seen from the draft Treasury Laws Amendment Bill, a number of key reforms are proposed, including:
making UCTs unlawful – both at the stage of entry into a contract (in circumstances where you proposed a UCT) or subsequently, in circumstances where a party seeks to rely on a UCT;
giving courts the power to impose significant pecuniary penalties (of $10 million, three times the benefit of the conduct or 10% of a company's turnover);
the introduction of a rebuttable presumption that a term is unfair if a substantially similar term has been found to be unfair in previous court proceedings;
allowing courts to award more flexible remedies, including to vary, or refuse to enforce, part or all of a contract, where appropriate to prevent or reduce loss or damage; and
changing the eligibility requirements for the UCT regime by expanding the definition of 'small business' (to apply to all contracts where at least one party employs fewer than 100 persons and/or has annual turnover of less than $10 million).
Consultation on the draft bill has now closed and you can read more about the proposed reforms here. However, in our view, some of these amendments would appear heavy-handed, especially in circumstances where there may be limited practical guidance around whether a term is unfair (the assessment of which will often depend on the particular context). Insurers are advised to check the terms of any standard form policies carefully and monitor court decisions involving unfair terms in the insurance sector.
If these reforms are introduced, we expect that the introduction of civil penalties, in particular, is likely to have material impact on insurers' overall risk profile and exposure. In circumstances where contraventions of the UCT prohibitions can arise multiple times for a single clause or policy — once that policy has been rolled out across the market, it is not hard to imagine how insurers' overall liabilities could become significant indeed.