Proposed changes

The proposed changes will apply to all insurance contracts, including general and life, where at least one party to the contract is a consumer or a small business.⁹

A consumer is an individual whose acquisition of what is supplied under the contract is wholly or predominantly for personal, domestic or household use or consumption.¹⁰

A small business is a business that employs fewer than 20 people and either the ‘upfront price payable’ under the contract does not exceed $300,000 or the contract is for a duration longer than 12 months and the upfront price payable does not exceed $1,000,000.¹¹ In calculating the persons employed by a business, a casual employee is not included unless he or she is employed by the business on a regular and systematic basis.¹²

An insurance contract will be considered to be a standard form contract, unless proven otherwise.¹³ Significantly, this will be the case even if a broker intermediated the contract,¹⁴ and there are several coverage options to choose from, such as the level of premium or excess payable,¹⁵ on the proviso there is no room to negotiate the terms and conditions underlying the insurance contract.

A court can declare that a term is unfair on application either by an insured or by ASIC.¹⁶ A term will be considered unfair if the court is satisfied that it causes a significant power imbalance between the insurer and insured, it is not reasonably necessary to protect the legitimate interest of the insurer and it would cause detriment to the insured.¹⁷ The ICA will be amended to include relief for compensatory damages, which were excluded previously.¹⁸

Moreover, the duty of utmost good faith will continue to operate and exist independently of the proposed amendments. Accordingly, a breach of the duty of utmost good faith will not automatically lead to a breach of the UCT regime and vice versa, and it is possible to get relief under both provisions.

The Bill proposes that the UCT regime is tailored to insurance contracts in the following ways: 

1. Terms that define what is being insured under a policy, that is, the main subject matter of an insurance contract will not be reviewable under the UCT regime. This acknowledges that a consumer has a choice at first instance concerning whether to enter into a contract or not for the product that is being insured.¹⁹
2. Similarly, terms that define the premium payable under an insurance contract will continue to be excluded from being reviewed under the UCT regime, as with all other standard form contracts, because the premium forms the basis for the existence of a contract.²⁰
3. Likewise, terms that specify the excess or deductible of an insurance contract will be excluded under the UCT regime provided that this is disclosed upfront and is transparent.²¹ The explanatory memorandum to the Bill explains that an excess or deductible can influence the premium payable under a contract of insurance.²² Accordingly, subjecting an excess or deductible to the UCT regime could result in unintended consequences for insureds.
4. Third party beneficiaries to an insurance contract²³ can bring an action for review to a court to declare if a term is unfair.²⁴ Presently, standard form contracts for other financial services and products do not allow third party beneficiaries to bring a claim under the UCT regime. The explanatory memorandum to the Bill explains that there are circumstances that warrant a third party beneficiary specified or referred to in an insurance contract bringing an action for review under the UCT regime, such as death benefits nominees under a life insurance policy.²⁵ However, there is a limitation to this exception. That is, an action initiated by a third party beneficiary will only succeed if the tests for unfairness and standard form contracts are met with regard to the parties that entered into the contract, not with the third party beneficiary.²⁶

Implications of the Bill

The proposed extension of the UCT regime to insurance contracts has been welcomed by consumer groups on the basis that insurance is an area where greater consumer protection is required. On the other hand, the proposal has been criticised by the Insurance Council of Australia, on the basis that the Bill will not assist consumers because it will result in higher premiums and cause certain markets to harden further.²⁷ The Insurance Council of Australia has proposed that Australia should instead follow the approach used in Europe, which enables consumers to challenge terms that unfairly prevent them from receiving protection they thought they had purchased.

The reported decisions suggest that the UCT regime has not been a source of significant litigation since it was introduced, although in most instances where the terms of a contract have been challenged by the Australian Competition and Consumer Commission, the courts have declared the impugned terms to be unfair and therefore void.

It will be interesting to see how the insurance industry responds to the regulatory challenge posed by the proposed extension of the UCT regime to insurance contracts, as well as the impact this has on consumers. Having regard to the proposed commencement date, it is likely that the full impact will not be known for some years.

.....