MOnitoring the Regulatory Insurance Landscape: Unfair Contract Terms in the Spotlight

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By Johann Spies, Partner, and Andrew Mulligan, Associate 

The judgment in Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272 is the first of its kind dealing with the application of the Unfair Contract Terms (UCT) to a general contract of insurance.

The judgment clarifies insurers’ obligations when issuing standard form contracts and highlights the regulator’s approach to enforcing the recent legislative and regulatory changes imposed by the UCT. The Court found that the Auto & General Insurance Company Limited (Auto & General) did not include an unfair contract term in approximately 1.3 million home and contents policies issued to consumers.

On 4 April 2023, ASIC commenced proceedings in the Federal Court against Auto & General alleging that the insurer had included a term in its home and contents insurance policies that were unfair within the meaning of sections 12BF(1) and 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). This was the first proceedings under the UCT regime and alleged that Auto & General breached its obligations in respect of its standard form home and contents insurance contracts as it required customers to notify it ‘if anything changes about your home or contents’ or if ‘anything changes while you’re insured with us’.

In essence, ASIC held the position that the terms included were unfair because it:

  • imposed an obligation on customers to notify Auto & General if ‘anything’ changes about their home or contents, which imposed an unclear obligation on the customer regarding what they need to disclose to Auto & General;
  • suggested that Auto & General has a broader right to refuse claims or reduce the amount payable under claims than is available under the Insurance Contracts Act 1984 (Cth), if the customer does not meet the notification obligation in the policy wording; and
  • could mislead or confuse the customer as to their true obligations and rights under the contract.

The term in question was included in approximately 1,377,900 contracts of insurance entered into by Auto & General between 5 April 2021 and 4 May 2023 and contained within the Product Disclosure Statements (PDSs) distributed through a number of different Auto & General brands.

On 22 March 2024, Justice Jackman handed down the judgment dismissing ASIC’s claim and ordering that the regulator pay Auto & General’s costs. In dismissing the allegations, Jackman J found that the term was not unfair under section 12BG(1) of the ASIC Act as, even though the notification requirement may cause a detriment to the insured, it did not cause a significant imbalance between the parties rights and obligations, and it was reasonably necessary in order to protect the legitimate interests of the insurer.

His Honour’s reasoning was such that the term ‘anything’ should not be interpreted literally, as to do so would yield an absurd result and be contrary to the implied duty of utmost good faith in section 13 of the Insurance Contracts Act. In this regard, Jackman J provided an illustration that to require an insured to notify of changes to ‘anything’ in respect of their home and contents would require notification “whenever groceries are brought home from an everyday shopping outing, and again when they are consumed in preparing and eating meals” or similarly “every time a book or an item of clothing is purchased, or received as a gift”. Such circumstances would naturally yield an absurd result that no rational person would think the notification clause requires of an insured. Rather, His Honour agreed with Auto & General’s submission that, on its proper construction, the notification clause requires the insured to notify Auto & General if, during the term of the policy, there is any change to the information about the insured’s home or contents that the insured disclosed to Auto & General prior to entry into the contract. such a duty to disclose was simply noted as a reflection of the type of contract which was entered into. As a basic example, if an insured has previously disclosed the number of occupants living at the premises, and that number changes during the period of insurance, such notification would likely be required or may give the insurer a right to refuse or reduce its liability in respect of a claim.

Jackman J also noted that the term was reasonably necessary for Auto & General to protect its legitimate commercial interests in requiring insureds to disclose all matters which afford it the opportunity to determine which risks it chooses to insure under the contract. Absent such a provision, the insurer may not have the necessary information-gathering tools to be able to cancel any policy it becomes aware of that contains risks it is not willing to accept. While the provision was deemed to be detrimental to the insured under section 12BG(1)(c), this alone did not satisfy the requirements to classify the term as unfair under the legislation given the other two limbs of the unfairness test have not been met, namely (1) there is no significant imbalance in the parties’ rights and obligations arising under the contract, and (2) the term was reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (i.e. the insurer in this instance).

The outcome of this case likely sets a precedent for any future regulatory action taken pursuant to the UCT regime. The insurance industry now has further clarification in respect of the test of unfairness, which has evidently been set as a high bar. Any term alleged to be unfair must be considered in its legal and contextual environment, and not in isolation or under with overly literal perspective. It is also evident that the UCT regime should be considered in light of its interaction with the provisions of the Insurance Contracts Act, particularly as it relates to the implied duty of utmost good faith.

For further information, please do not hesitate to contact us.

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