Time to review your insurance contracts: the unfair contract terms regime is on its way

New laws significantly affecting the enforceability of insurance contract terms will come into force on 5 April 2021. The laws will affect practitioners acting for clients in relation to any standard form insurance contract sold to consumers and small businesses. As a result, they are potentially far reaching and, as we will explore in this article, set to become even more pervasive as the government seeks to strengthen the protections.

Where are we now?

The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (Cth) will amend the Insurance Contracts Act 1984 (Cth) (‘ICA’) to allow the unfair contract terms regime to apply to insurance contracts. Specific amendments have also been made to the regime itself, which can be found in the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’). Insurance contracts have until now been exempt from the unfair contract terms regime despite being regulated financial products.

The legislation as passed is virtually identical to the exposure draft. Despite calls from insurers to modify the application of the law to insurance contracts, the law is relatively unchanged. Unlike other financial products, the main subject matter for insurance contracts (which is exempt from the unfair contract terms laws) is defined as only the description of what is insured. This is a very narrow definition, leaving most provisions subject to scrutiny.

Terms such as policy exclusions will generally cause detriment if applied. The approach taken by the government leaves some uncertainty for insurers and consumers alike but stakeholders can potentially minimise the effects by removing or rewriting potentially unfair terms in insurance contracts and reviewing underwriting criteria to ensure that the reasons why a clause is reasonably necessary are clearly recorded.

What is the test for whether a term is ‘unfair’?

Under s 12BF of the ASIC Act, a term of a ‘consumer contract’ or ‘small business contract’ is void if these elements are met:

1. the term is unfair;
2. the contract is a standard form contract; and
3. the contract is a financial product, or a contract for the supply, or possible supply, of financial services.

What is a ‘consumer contract’ or ‘standard form contract’?

The tests are the same as for other regulated financial products.

A ‘consumer contract’ is defined as a contract where at least one of the parties is an individual whose acquisition of what is supplied under the contract is wholly or predominantly for personal, domestic or household use or consumption (s 12BF(3)). Most retail insurance policies, e.g. travel, home and contents and comprehensive motor will fall in this category.

A ‘small business contract’ is defined under s 12BF(4) as:

1. a contract where at least one party to the contract is a business that employs fewer than 20 persons; and
2. the upfront price payable under the contract does not exceed $300,000, or $1,000,000 if the contract is for more than 12 months.

In counting the number of employees, a casual employee is not counted unless he or she is employed by the business on a regular and systematic basis.

In November 2020, the government proposed to increase the threshold to fewer than 100 employees and introduce an annual turnover threshold of less than $10,000,000. The goal of this proposal is to increase the number of entities that will be able to benefit from the unfair contract terms provisions. It is estimated that 99% of businesses will be afforded these protections if the proposal is put through. Accordingly, most, if not all, Small Business Insurance Products sold will be subject to the unfair contract terms laws. Many of these products are not negotiated and are purchased ‘off the shelf’.