Extending the Unfair Contract Terms Regime to Standard Form Insurance Contracts

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By Daren Curry, Partner

The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth) (Reform Act) is one of the most recent changes brought about – in part – by the Financial Services Royal Commission.[1]

As of 5 April 2021, the Reform Act extends the unfair contract terms regime (UCT regime) under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to apply to contracts under the Insurance Contracts Act 1984 (Cth). This sees ‘small business contracts’ and ‘consumer contracts’ which are also ‘standard form contracts’ be captured under the UCT regime.

Practically speaking, a standard form contract relates to standardised policy wordings without the terms being negotiated before being entered into by each consumer. They are offered by insurance companies to consumers on a ‘take it or leave it’ basis.

Only one party to the insurance contract needs to be a consumer or small business in order for the new provisions to apply. If one of the parties to the contract is a business which employs fewer than 20 persons, and either ‘the upfront price payable under the contract does not exceed $300,000’ or ‘the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000’, the provisions will apply (s 12BF(4) of the ASIC Act).

The current UCT regime excludes terms defining the main subject matter of a contract, and these recent amendments limit the main subject matter to the description of what is being insured.  Terms defining the quantum or the existence of the deductible or excess in an insurance contract subject to the new regime will still be excluded, on the condition they are transparent and disclosed upfront. However, if a deductible was contingent upon the occurrence or non-occurrence of a specific event, this could mean the regime would apply. This is in contrast to a contract which clearly discloses the excess on the quote and renewal notice.

Collectively, these additional protections aim to address the multitude of standard form contracts which are offered on a ‘take it or leave it’ basis which leaves consumers little opportunity to negotiate unfair terms. While this article focuses on the unfair contract terms regime, the Reform Act also addresses the prevalence of vulnerable consumers being exploited by unfair funeral expense policies, as well as targeting mortgage brokers and intermediaries. It will be interesting to see over the coming months how insurance providers respond to the new legislative landscape, as it affects those contracts which have been entered into, renewed or varied from 5 April 2021 onwards. While the effect of the law in its current form is to render unfair terms void, Mills Oakley will be following development, including whether legislators introduce further remedies.

[1] See recommendation 4.7. These reforms were initially put forward in the Insurance Contracts Amendment (Unfair Terms) Bill 2013.

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