By David Slatyer, Partner and Tyra Zacka, Paralegal

HCF Life Insurance (HCF) offers policies with pre-existing condition exclusions. Historically, these exclusions reflected section 47 of the Insurance Contracts Act 1984 (Cth) (IC Act), which prevents reliance on such exclusions where the insured was unaware of their pre-existing condition. In August 2019, however, HCF adopted a new definition of pre-existing condition that excluded cover where a medical practitioner is of the opinion that signs or symptoms of the insured’s relevant condition existed before commencement of the policy, however HCF did not refer to section 47 of the IC Act in the relevant product disclosure statement or communications with customers.

ASIC alleged this is misleading conduct under s 12DF Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and unfair contract terms under s 12BG ASIC Act.

Relevant sections are summarised as follows:

Section 47 of the IC Act prevents insurers from limiting or excluding liability by reference to a sickness or disability to which the insured was subject to before the policy was entered into, where the insured was not aware of, and a reasonable person in the circumstances could not be expected to be aware of, the sickness or disability.

Section 12DF of the ASIC Act prohibits misleading conduct in trade or commerce, that is liable to mislead to public as to the nature, characteristics, suitability or quantity of financial services.

Section 12BG of the ASIC Act provides that a contract term is unfair if it causes a significant imbalance, is not reasonably necessary to protect legitimate interests and would cause detriment if relied upon.

Primary Decision (FCA)

The Court was satisfied that section 47 of the IC Act rendered the Pre-Existing Conditions Term partially unenforceable, and it was ultimately found that HCF had contravened section 12DF of the ASIC Act, meaning they had engaged in misleading conduct.

In his findings, Jackman J provided two fundamental reasons that the Pre-Existing Conditions Terms were materially different from that under section 47 of the ICA.

First, that the Pre-Existing Condition Terms focus on the existence of signs and symptoms, whilst section 47 IC Act focuses on the knowledge of the condition, illness or ailment on which signs or symptoms relate. Second, Jackman J said, “a provision that is engaged upon one individual’s satisfaction of an objective fact will inevitably be broader than a provision that is engaged only upon the actual existence of that same fact.” at [98].  The policy exclusion was engaged upon a registered medical practitioner’s opinion, whereas section 47 fixes on whether “the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability”.

Jackman J held that HCF’s publication of a product disclosure containing the Pre-Existing Condition Terms, without disclosing the effect of section 47 of the IC Act was misleading under s 12DF of the ASIC Act because a reasonable person “would read and understand the Pre-Existing Condition Terms as being an accurate and complete statement of when benefits will not be payable under a policy by reason of a pre-existing condition” at [110].

However, the Court rejected ASIC’s unfair contract terms claims, finding that the exclusion of pre-existing conditions was reasonably necessary due to the products being distributed by HCF on a “guaranteed acceptance” basis, meaning the products were not underwritten.

ASIC appealed this decision on the unfairness finding.

Issues on Appeal

Main Issue: Did the primary judge err in finding the terms were not unfair under section 12BG ASIC Act?

Sub issues:

1. Should section 47 IC Act be considered when assessing unfairness? (Could ASIC withdraw its trial “concession” that it should be considered?)
2. Whether the primary judge erred in applying section 12BG(1) ASIC Act, specifically:
   • Section 12BG(1)(a) – whether the terms caused a significant imbalance;
   • Section 12BG (1)(b) – whether the terms were reasonably necessary to protect HCF’s legitimate interests.

Appeal Decision

1. Appeal dismissed.
2. ASIC ordered to pay costs.

Reasons for Judgement

Ground 1 – withdrawal of concession rejected

ASIC could not reframe its case on appeal. The “concession” that section 47 was relevant was actually central to ASIC’s case at trial. Appeals are for error correction, not re-running the case.

Ground 2(a) – No “significant imbalance”

• A “significant imbalance” must be actual, not theoretical. There was little evidence that consumers were dissuaded from making or pursuing claims because of the exclusion, so any alleged disadvantage was speculative or remote and did not amount to a real imbalance.
• The alleged “practical imbalance” rose no higher than a possibility, and lack of transparency alone does not render a term unfair

Ground 2(b) – Reasonably necessary

• The test is that the term has to protect a legitimate interest and there is an obvious, equally practicable alternative imposing significant less burden. This involves an assessment of proportionality and available alternatives.
• The pre-existing condition terms were reasonably necessary to protect HCF’s legitimate interests. Although alternatives existed, they would not result in a significantly lesser burden on consumers.

Key Takeaways

Misleading conduct under the ASIC Act does not equal unfair under section 12BG ASIC Act. Courts require evidence of real disadvantage, not theoretical and assess both significant imbalance and reasonable necessity. A lack of transparency alone is not determinative.