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Allens Arthur Robinson

Focus: Impact of national consumer law on the insurance industry

6 July 2009

In brief: The Federal Government's plans to establish a uniform national consumer law have been advanced with the introduction into the Parliament of the Trade Practices Amendment (Australian Consumer Law) Bill 2009. The Bill, to be known as the Australian Consumer Law, includes a range of provisions which will impact on financial services providers including insurers. These include provisions regulating unfair contract terms, and enhancing the enforcement powers of the Australian Securities and Investments Commission. Partners, Dean Carrigan (view CV) and John Morgan (view CV) summarise the implications of the Bill for insurers.

How does it affect you?

  • The Bill will introduce a new unfair contract terms regime for financial products and services.
  • The Bill will render void any unfair or prohibited term contained in a standard form consumer contract that is a financial product, or a contract for the supply or possible supply of financial services within the meaning of the Corporations Act 2001 (Cth).
  • The Bill expands the powers of the Australian Securities and Investments Commission (ASIC) in a number of respects including new powers to seek pecuniary penalties, make disqualification orders, issue substantiation, infringement and public warning notices and to seek court orders requiring suppliers to provide redress to consumers.
  • Section 15 of the Insurance Contracts Act 1984 (the ICA) will operate to prevent the consumer relief provisions of the Bill applying to retail insurance contracts. However, the Bill could apply to consumer insurance contracts not covered by the ICA. The Bill will apply to standard form consumer contracts for the supply of financial services to consumers (eg. broker agreements with retail clients).
  • Insurers will need to consider the potential increased underwriting exposure arising from the implementation of the Australian Consumer Law and its impact on insureds.

Background

As well as amending the Trade Practices Act 1974 (the TPA), the Bill amends the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) to introduce an unfair contract terms regime for financial services. The ASIC Act amendments largely mirror proposed changes to the TPA to introduce the Australian Consumer Law as a schedule to the TPA in order to regulate contracts for the supply of goods or services other than financial services and contracts for the sale or grant of an interest in land. These amendments to the TPA and the ASIC Act may have flow-on consequences for insurers who insure entities who will be affected by these changes as the amendments increase the liability exposure of such entities. This summary focuses on the ASIC Act amendments.

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Key proposals – unfair terms

The Bill, if passed in its present form, will render void any unfair or prohibited term contained in a standard form consumer contract that is a financial product (within the meaning of chapter 7 of the Corporations Act, or a contract for the supply, or possible supply of financial services within the meaning of the Corporations Act.

A consumer contract is a contract to which at least one of the parties is an individual who acquires the supply of a product or service under the contract for wholly or predominantly personal, domestic or household use or consumption. That is, the proposals in their current form do not presently extend to commercial business-to-business contracts. However, as it is the purpose for which the product or service is acquired, rather than the character of the product or service that determines whether the contract is captured under the legislation, there may well be practical difficulties in establishing whether a contract is a consumer contract.

If a party alleges that a contract is in a standard form, there is a rebuttable presumption (with the burden of proof resting with the other party) that a contract is a standard form contract. In determining whether a contract is a standard form of contract, the court may take into account any matters it thinks relevant but must take into account certain specified matters including the relative bargaining power of the parties and whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties.

A term of a consumer contract is deemed to be unfair if it causes a significant imbalance in the parties' rights and obligations arising out of the contract and is not reasonably necessary in order to protect the legitimate interest of the party who will be advantaged by the terms. In assessing unfairness, the court may take into account any matters it thinks relevant but must take into account things including the terms of the contract as a whole, and the extent to which the term is transparent (ie expressed in reasonably plain language which is legible, presented clearly and is readily available to any party affected by the term).

The Bill sets out a number of non-exhaustive examples of unfair terms. This includes terms permitting one party to avoid or limit performance of a contract; permitting one party but not the other to renew the contract; terms which limit a party's right to sue another party, and terms that impose an evidential burden on one party in proceedings relating to the contract.

A prohibited term is a term in a consumer contract of a type prescribed by regulations.


An unfair contract term will be void, but the contract will continue if it is capable of operating without the unfair term. A prohibited term will also be void and the inclusion of a prohibited term in a standard form contract, or reliance on such a term, will contravene the legislation. ASIC will be able to seek a declaration that a term is unfair.

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Application to insurance contracts

Section 15 of the ICA operates to prevent contracts of insurance subject to the ICA from being made the subject of relief under any other Commonwealth or State Act. Relief in the context of s15 means relief in the form of the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable, but does not include relief in the form of compensatory damages. Although broad in its scope, s15 does not apply to all forms of relief and as the ICA does not apply to all types of insurance contracts, there is a potential for the provisions of the Bill to apply in some limited cases to insurance contracts.

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Other contracts

Also, the terms of other insurance-related consumer contracts that are not insurance contracts to which s15 ICA applies, such as standard form broker agreements, and other agreements for the supply of insurance-related financial services will be subject to the provisions of the Bill.

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Indirect impacts

A potential indirect impact on insurers arising from the proposed amendments to the ASIC Act and the TPA is the potential for insureds to suffer loss and damage as a result of the unfair contract terms provisions being invoked against them. For example, multiple claims may be made against insureds as a consequence of the striking out of terms in standard contracts giving rise to loss and raising issues around aggregation of claims. Insurers will need to consider whether they wish to provide cover for such exposures. In addition, if an insured's loss is covered and able to be recovered from the insurer even where a particular unfair term is struck out, this may give rise to issues as to recoverability under applicable reinsurance policies put in place by the primary insurer.

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Expanded ASIC powers

The Bill also expands the powers of ASIC in a number of respects:

  • Civil pecuniary penalties will be available for conduct that does not warrant a criminal penalty and will now include the unconscionable conduct provisions and the unfair contract terms provisions of the ASIC Act. These penalties vary. The maximum penalties are consistent with the those presently available for breaches of certain consumer protection provisions of the TPA ($1.1 million for corporations and $220,000 for individuals).
  • Disqualification orders are also available for breaches of certain provisions of the ASIC Act (including those relating to unconscionable conduct and the use of prescribed unfair contract terms). These prohibit individuals from managing corporations or engaging in particular activities in connection with the management of corporations.
  • ASIC will have the power to issue substantiation notices requiring a supplier to provide information or documents capable of substantiating a representation made by the supplier in relation to the supply, or possible supply of financial services.
  • ASIC may issue infringement notices for breaches of certain parts of the ASIC Act, including the unfair contract terms provisions, with penalties of up to $6,600. These are designed to supplement more serious penalties by facilitating relatively small financial penalties for minor contraventions without requiring court proceedings.
  • Public warning notices may be issued by ASIC to inform the public of potentially harmful conduct without the need for a court order.
  • ASIC will also be able to seek court orders requiring a supplier to provide redress to consumers who are not parties to a particular enforcement proceeding. This power is designed to be used where a large number of consumers suffer similar identifiable damage. The redress can take a number of forms, including refunds, the variation of a contract or orders to honour representations.

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Timing and transitional provisions

The Federal Government has previously said that the unfair contract term provisions will commence on 1 January 2010. The provisions will apply to standard form consumer contracts entered into on or after the commencement date. A contract entered into prior to that date will not be subject to the new provisions unless:

  • it is varied after that date, in which case the provisions will apply to the contract as varied on and from the day the variation takes effect, in relation to conduct that occurs on or after the variation date; or
  • it is renewed after that date, in which case the provisions will apply to the contract as renewed from the time of renewal in relation to conduct that occurs on or after the renewal day.

The consequences of a variation are not the same as those provided for in the consultation draft, which provided that only the changed term would become subject to the regime. This change may have significant practical implications.

In the Second Reading speech on 24 June the Minister said he is 'mindful of the need for businesses to comply with the law and that they may need more time'. Accordingly there is provision in the Bill for a commencement later than 1 January 2010.

If you have any questions on this or any other insurance matter please contact us.

Published 6 July 2009

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