If you work in insurance in Australia, you definitely know about unfair contract terms. Just over two years since the unfair contract terms (UCT) regime came into effect for insurance contracts, a revamped regime commences on 9 November 2023.
A term that is unfair within an insurance contract is capable of challenge. If successfully challenged, it can become void. From 9 November 2023, a court can also impose civil penalties for including an unfair term in an insurance contract.
What is an unfair term?
A term is unfair if it:
- would cause a significant imbalance in the party’s 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.
A court must take into account all relevant matters, including the extent to which the term is transparent and the contract as a whole.
The Australian Securities and Investments Commission has taken two insurers to court over unfair contract terms:
- in the first case, proceedings were issued against Auto & General Insurance in relation to an obligation that required insureds to notify the insurer if ‘anything’ changed to their home and contents. ASIC’s case against Auto & General includes that the contract did not explain the effect of section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) which may assist the insured if they did not comply with their notification obligations.
- In May 2023, ASIC issued proceedings against HCF Life in relation to a ‘pre-existing condition’ contract term that was potentially inconsistent with s 47 of the ICA.
What penalties can be imposed?
The civil penalty regime is one to be taken seriously. The maximum penalty is:
- 50,000 penalty units (presently $15,650,000);
- the amount of the benefit derived and detriment avoided because of the contravention multiplied by 3; or
- 10% of the annual turnover of the body corporate for the 12 month period ending at the end of the month in which the body corporate contravened or began to contravene the civil penalty provision capped at 2.5 million penalty units (presently $782,500,000).
Does the regime apply to all insurance contracts?
The new UCT regime applies to any standard form insurance contract made or renewed on or after 9 November 2023 where one of the parties is a consumer or ‘small business’. However, under the expanded test, a small business includes any business with a turnover of less than $10M. This will capture most SMEs.
For insurance contracts that are only varied (and not made again or renewed) on or after 9 November 2023, the new regime will apply to the extent of the varied term. Medical indemnity insurance continues to be exempt from the UCT regime.
Some observations
The expanded regime certainly requires insurers to review their insurance products to ensure they are screened for unfair contract terms. While it is a defence to show that a term is required to protect a legitimate business interest, the unfair contract terms are interestingly also driving insurers to remove terms that they simply have not relied upon to create more favourable policy features to sell to insureds. At the same time, insurers have made drafting changes to create more user friendly policy wordings.
This creates some risks, particularly from an underwriting perspective where wordings are introduced that have not been tested in court. As insurance lawyers will know, cases can turn on the proper construction of a sentence, or even the placement of a comma, in an insurance policy.
Furthermore, insureds and their lawyers now potentially have an additional card to play in negotiating with insurers.
