Alert

Who does this affect?

Insurers conducting consumer insurance business in Australia and persons effecting consumer insurance contracts.

What do you need to do?

Insurers should look out for proposed amendments to the Insurance Contracts Act 1984 (Cth) (“ICA”) or the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (“Bill”) which may apply the Bill’s unfair terms provisions to insurance contracts. Meanwhile, insurers should undertake a review of all other standard form contracts in readiness for commencement of the Bill to ensure compliance with the unfair terms provisions.

Author
Julie Walsh  
Solicitor

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Philip Ward  
Partner
T +61 2 9296 2213

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Peter Stockdale  
Partner
T +61 2 9296 2330

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Sydney
Michelle Levy  
Ann Newbrun  

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The Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Bill) was referred to the Senate Economics Legislation Committee (Committee) on 25 June 2009 for inquiry. The Committee received numerous submissions from various organisations and held two public hearings. The Committee released the report on its inquiry into the Bill on 7 September 2009.

General information on the Bill is included in our alerts from 24 June 2009, 30 June 2009 and 1 July 2009.

One issue considered by the Committee was the arguments for and against the exclusion of insurance contracts within the ambit of the Insurance Contracts Act 1984 (Cth) (ICA) from the provisions of the Bill. The Explanatory Memorandum to the Bill states that the effect of section 15 of the ICA is that the unfair terms provisions do not apply to contracts of insurance covered by the ICA to the extent that the ICA applies.

Section 15 of the ICA provides that a contract of insurance is not capable of being made the subject of ‘relief’- except for compensatory damages- under any Commonwealth or State Act in the form of:

• Judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable; or

• Relief for insureds from the consequences in law for making a misrepresentation.

For a summary of section 15 of the ICA go to our article ‘Australian consumer law reforms: Will insurance contracts be affected?’

Support for the exemption of insurance contracts

Numerous organisations argued that insurance contracts should be excluded from the unfair terms provision. The reasoning behind these arguments included:

• Insurance contracts are already regulated by the ICA, the Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth) (ASIC Act) which all guard against unfair or unconscionable conduct. The application of the unfair terms provisions to insurance contracts would result in unwarranted layering of regulation of insurers leading to operating inefficiencies and uncertainty in the application of insurance terms to claims which would be likely to lead to further disputes.

• It was intended by parliament that the current regulation in place for insurance contracts be a comprehensive set of rights and obligations.

Opposition to the exemption of insurance contracts

The Committee received considerable evidence criticising the carve-out of insurance contracts from the unfair terms provisions of the Bill. Criticisms included:

• The ICA does not address the issue of unfair terms in insurance contracts;

• The duty of utmost good faith in section 13 of the ICA does not prevent the use of unfair terms in insurance policies and the ICA does not provide consumers who have been affected by an unfair term with a remedy; and

• There is no reason why insurance contracts should not be subject to industry specific legislation as well as general consumer protection laws. Many industries are subjected to both industry specific regulation as well as general consumer laws and these other industries are not excluded from the unfair terms provisions.

Submissions from various organisations opposing the exemption of insurance contracts recommended that:

• The ICA be amended to expressly provide for the unfair terms provisions of the Bill to apply to insurance contracts despite anything to the contrary in section 15 of the ICA; or

• Section 15 of the ICA be amended to provide that it does not exclude insurance contracts from the unfair terms provisions of the Bill.

Prohibited terms

In its current form, the Bill makes provision for the Minister to prohibit certain contract terms. The Bill proposes that a new section be inserted into the ASIC Act, which provides for a term of a consumer contract to be void if:

• The term is prohibited;

• The contract is a standard form contract; and

• The contract is a financial product or a contract for the supply or possible supply of financial services.

The contract will continue to bind the parties if it is capable of operating without the prohibited term. The Bill states that a prohibited term of a consumer contract is a term of a kind prescribed by the Regulations (new section 12BF).

The Explanatory Memorandum to the Bill states that no regulations are proposed to be made at the present time and so there are currently no prohibited terms.

If in the future a term should be prohibited by Regulation and such prohibition may extend to terms that may be found in insurance contracts, the unfair terms provisions could apply to insurance contracts on the basis that section 15 of the ICA may not in such circumstances be triggered. This is because:

• In describing the class of relief under Commonwealth or State law incapable of being made the subject of ‘relief’, section 15 does not use the term “prohibited” only “harsh, oppressive, unconscionable, unjust, unfair or inequitable”; and

• A consumer may be able to claim compensatory damages in relation to a provision of an insurance contract that is void for unfairness under s 12BF.

The Committee’s report does not explore the issue as to whether insurance contracts may fall within the scope of the unfair terms regime by virtue of the prohibited terms provisions of the Bill.

The Committee’s recommendations

The Committee referred to the 2004 review of the ICA which stated that while the exclusion provided by s15 of the ICA was valid, if a nationally consistent model for review of consumer unfair contracts developed, the balance of consideration may shift and the issue should be revisited. Accordingly, the Committee states that it believes ‘it is important that section 15 of the ICA is now addressed in light of this legislation to introduce national unfair contract law provisions. This is in line with recommendations of the 2004 review of the ICA’.

The Committee’s final view is that consumers are not provided with adequate protection under existing law for unfair terms in relation to insurance contracts. The Committee recommended that:

• Government address insurance contract legislation to ensure that the ICA provides an equivalent level of protection for consumers to that provided by the Bill; and

• The Government consider the 2004 review of the ICA to determine whether this will be achieved by amending the ICA to achieve harmonisation with the amendments proposed in the Bill, or by amending the Bill to apply to insurance contracts.

Further comments

The Coalition Senators broadly support the Bill however they are divided on the question as to whether the Bill should cover unfair terms in insurance contracts or whether the ICA should be reviewed to achieve this same result.

The upshot is that the Committee’s report has reignited the debate as to whether insurance contracts will be “in” or “out” of the Bill. Insurers should be watchful for the Government’s response to recommendations made by the Committee regarding the inclusion of insurance contracts in the Bill.