Following its adoption by insurers in April this year, unfair contract terms laws are set for another revamp. The Treasury has just released draft legislation which will make unfair contract terms unlawful. These laws have been foreshadowed for some time (see our previous update). Currently no pecuniary penalties apply once a contract term is declared void but this is set to change. It will be even more important for insurers to ensure new and existing policy wordings are compliant, especially since ASIC has successfully prosecuted a number of companies in the banking sector for unfair contract terms.
The proposed laws will apply to standard form contracts entered into by a consumer or small business. However, in this article we will focus on its implications for insurance contracts.
A brief refresher on what is an unfair contract term
An unfair contract term is a term that:
• causes a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• would cause detriment (financial or otherwise) to a party if that term were to be applied or relied on.
For insurance contracts, these include but are not limited to terms that:
• allow the insurer to, instead of making a repair, elect to settle a claim with a cash payment calculated according to the cost of the repair to the insurer, rather than how much it would cost the customer to make the repair; and
• require the insured to pay an excess before the insurer pays the claim;
• contain unexpected payment arrangements;
• are outdated, inaccurate and restrictive medical definitions; and
• significantly reduce cover where compliance with the conditions which trigger cover are unfeasible.
What do the changes mean?
Insurers will have a greater incentive to ensure all affected in-force policy wordings are comprehensively reviewed and have in place procedures to ensure new wordings are reviewed to avoid copping a hefty penalty and implementing large scale remediation.
Under the proposed laws:
• a larger number of contracts will be subject to unfair contract terms provisions. Currently, a contract is not a small business contract if the business has 20 or more employees. However, this cap is proposed to be lifted to 100 employees or a turnover of less than $10 million;
• it will be a penalty to propose, apply, rely on or purport to apply or rely on an unfair contract term; and
• while a court can presently declare a contract (or part of a contract) void or unenforceable, a court will also be given the power to make orders appropriate to prevent or reduce loss or damage that has or may be caused by the unfair term.
The new test of a ‘small business’, incorporating an alternative turnover test, is likely to capture an estimated 99% of businesses. While the Insurance Council of Australia had called for the test of ‘small business’ to be aligned to those contracts deemed to be retail insurance products, this submission has not been accepted.
The new laws also apply to standard form contracts not the subject of the proceeding but which have the same or similar unfair terms. In those circumstances:
• a regulator can seek a court order to apply the orders to a group of affected contracts that contain the same or similar unfair term;
• a court may grant an injunction to prevent a person from entering into any new contracts that contain the same or similar unfair term;
• there will be a rebuttable presumption of unfairness for the same or similar term if the same party proposed the term or the contract is in the same industry as the contract in the other proceeding.
These additional laws, if passed, will have significant repercussions for large volume insurance business. Furthermore, the rebuttable presumption of unfairness applies to the industry and does not appear to be limited to product type. Given the nature of insurance contracts and underwriting conditions, it is possible that a term found to be unfair in one product type is not unfair in another product type. It now appears that in such a situation an insurer would have to rebut the presumption.
Another point of significance to insurers is the existing exemption from unfair contract terms laws where the contract is not a ‘standard form contract’. A large segment of the insurance market is intermediated and insurance brokers have a large role to play in placing insurance.
The laws propose to clarify that a court will not consider the following factors when determining whether one party was required to accept or reject a contract:
• whether a party had an opportunity to negotiate minor or insubstantial changes to the terms of the contract;
• whether the party had an opportunity to select a term from a range of options determined by the other party; and
• the extent to which a party was given an ‘effective opportunity’ to negotiate the terms of the contract.
The proposal calls into question what is a ‘minor’ or ‘insubstantial’ change to a contract and the impact of the proposals on insurance products which have various cover options available. Cover options can enable a consumer to obtain insurance for a lower price by agreeing to particular terms, and are a key feature in retail insurance business.
Furthermore, by reducing the scope of the exemption, a greater number of contracts may be subject to the regime even where an insurance broker (or online broker) is involved.
Consultation is open until 20 September 2021. Submissions can be made on Treasury’s website.