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Client Update: Proposed regulation of unfair terms in insurance contracts

9 September 2009

In brief: On 7 September 2009, the Senate Economics Committee handed down its report on the Trade Practices Amendment (Australian Consumer Law) Bill 2009, recommending that it be passed. According to the Committee, existing laws do not adequately protect consumers in insurance contracts. It recommended the Federal Government review insurance legislation in order to provide consumers with an equivalent level of protection, as provided by the Bill for other contracts. Partner John Morgan (view CV) and Senior Associate Mark Lindfield explain.

Background

Our Focus: Bill for Commonwealth regulation of unfair contract terms introduced provides the background to the Bill. In our Focus: Impact of national consumer law on the insurance industry, we identified how the Bill has potential application to the insurance industry.

In brief, if the Bill is passed and enacted, it will have the effect that unfair terms in consumer contracts would be void in certain cases. A term of a contract is considered to be 'unfair' when it causes a significant imbalance in the parties' rights and obligations arising under the contract and is not reasonably necessary to protect the supplier's legitimate interests.

The Insurance Contracts Act 1984 excludes the application of the Bill to insurance contracts that are subject to that Act, although, as we noted in our earlier Focus, there remains a potential for the Bill's provisions to apply in some limited cases to insurance contracts. We also noted that other insurance-related consumer contracts, such as standard form broker agreements, will be subject to the Bill's provisions.

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The Committee's review and submissions

On the day after its introduction on 24 June 2009, the Bill was referred for inquiry and report by the Senate Economics Committee. The Committee received more than 50 written submissions on the Bill and held public hearings in Sydney and Canberra.

The Committee received 'considerable evidence' opposing the exclusion of insurance contracts, particularly from consumer and legal aid groups. These groups submitted that the existing provisions of the Insurance Contracts Act, including the requirement to act in the utmost good faith, were inadequate to prevent what was described as the 'proliferation' of unfair terms in insurance contracts.

On the other hand, insurers and lawyers 'strongly supported' the exclusion of insurance contracts from the Bill on the grounds that additional regulation of unfair terms in insurance contracts would create uncertainty by unnecessarily layering regulation upon regulation.

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The Committee's recommendations

On the issue of the duty of utmost good faith, the Committee gave some consideration to, but stopped short of, recommending that the Bill import into all consumer contracts a duty of utmost good faith in terms similar to that reflected in the Insurance Contracts Act.

On the issue of the need for additional regulation of unfair terms in insurance contracts, the Committee concluded that there was no reason why insurance contracts should not be subject both to industry-specific legislation (the Insurance Contracts Act) and general consumer laws (the Bill).

The Committee did not recommend that the Bill be amended to apply expressly to insurance contracts. Instead, the Committee recommended that the Insurance Contracts Act be amended to ensure that it provides an equivalent level of protection to consumers as that provided by the Bill. For that purpose, it has recommended that the Federal Government revisit the legislation drafted by the previous government that was intended to amend the Insurance Contracts Act.

Coalition and independent senators were divided on the issue of whether the insurance exemption should remain.

For information about the Committee's key recommendations in other areas, please see our Client Update: Credit regulation and unfair contract terms.

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Comment

The review of the Insurance Contracts Act, commissioned by the previous Federal Government, was the subject of our Focus: Insurance Contracts Act 1984 reform package announced. The draft legislation was not introduced before the last federal election and has not been further reviewed, nor introduced, for the past two-and-a-half years.

Now that the Senate has recommended that the Federal Government conduct a further review of the Insurance Contracts Act, it is possible that the insurance legislation reforms proposed by the preceding Government might be given new life, or at least become the subject of a new round of consultation and review.

In their current form, the proposed amendments to the Insurance Contracts Act do not include unfair terms provisions similar to those found in the Bill. If such terms are proposed, as the Committee has recommended, insurance industry stakeholders should give careful consideration to what effect those terms will have on their business and consider making appropriate submissions to the Federal Government, if and when the opportunity to do so arises.

Notwithstanding the Committee's recommendations, it will be interesting to see whether any non-Government parties seek to amend the Bill in the Senate. The progress of the Bill through Federal Parliament needs to be closely monitored by insurance industry stakeholders.

For further information, please contact:

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