Unfair contract terms in insurance contracts

Treasury has released for consultation a Proposals Paper on a model to extend the unfair contract term provisions to insurance contracts.

Currently, the unfair contract terms laws in the ASIC Act apply to most financial products and services, but they do not apply to insurance contracts covered by the Insurance Contracts Act. This is because section 15 of the IC Act precludes the ASIC Act’s UCT laws from applying to insurance contracts.

However, insurance contracts not covered by the IC Act are not excluded from the UCT laws. For example, private health insurance contracts and state and Commonwealth government insurance contracts are subject to the UCT laws.

The proposed model seeks to ensure that consumers and small businesses that purchase insurance have the same access to protection from unfair terms in insurance contracts as they do for other contracts for financial products and services while ensuring the laws are appropriate in light of the specific features of insurance contracts.

This proposed model involves:
• amending section 15 of the Insurance Contracts Act to allow the UCT laws in the Australian Securities and Investments Commission Act 2001 (ASIC Act) to apply to insurance contracts regulated by the IC Act, which includes both general and life insurance contracts; and
• tailoring the UCT laws in the ASIC Act to accommodate specific features of insurance contracts, in particular:
– the ‘main subject matter’ of an insurance contract will be defined narrowly as terms that describe what is being insured, for example, a house, a person or a motor vehicle;
– clarification will be provided that the ‘upfront price’ will include the premium and the excess payable and that these will not be subject to review;
– a contract will be considered as standard form even if the consumer or small business can choose from various options of policy coverage;
– when determining whether a term is unfair, a term will be reasonably necessary to protect the legitimate interests of an insurer if it reasonably reflects the underwriting risk accepted by the insurer in relation to the contract and it does not disproportionately or unreasonably disadvantage the insured;
– examples specific to insurance will be added to the list of examples of kinds of terms that may be unfair, which could include terms that permit the insurer to pay a claim based on the cost of repair or replacement that may be achieved by the insurer, but could not be reasonably achieved by the policyholder;
– where a term is found to be unfair, as an alternative to the term being declared void, a court will be able to make other orders if it deems that more appropriate;
– the definition of ‘consumer contract’ and ‘small business contract’ will include contracts that are expressed to be for the benefit of an individual or small business, but who is not a party to the contract;
– for life policies, as defined by the Life Insurance Act 1995, which are guaranteed renewable, it will be made clear that a term which provides a life insurer with the ability to unilaterally increase premiums will not be considered unfair in circumstances in which the premium increase is within the limits and under the circumstances specified in the policy.

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