What is the Unfair Contract Terms law?
A consumer protection right that allows a party to a contract to challenge a term in a standard form contract that is unfair. Currently these protections apply for the benefit of consumers and small businesses but do not apply to insurance policies.
Standard Form Contracts
There is no doubt that most insurance contracts, especially retail, will be ‘standard form’.
Until now, insurance contracts have been governed by the Insurance Contracts Act and there has been no specific law to promote fairer terms and conditions. The duty of utmost good faith does not go far enough to protect consumers from unfair contract terms within insurance policies.
What makes a term 'unfair'?
There are three criteria that all have to be met on the balance of probabilities:
- Whether the term causes a significant imbalance between the parties in rights and obligations, and
- Whether the term is not reasonably necessary to protect legitimate interests of the company, and
- Whether the term would cause detriment (financial or otherwise) if it were applied.
The court will take into account the contract as a whole and the extent to which the term is transparent.
What sort of policy terms could be unfair?
Possible examples include:
- Onerous claims conditions such as unreasonable or arbitrary timeframes for notifying the insurer of a claim;
- Onerous maintenance obligations for the protection of insured property, eg onerous motor vehicle servicing obligations;
- Unfair medical definitions within a life insurance policy that are not in keeping with current clinical practices, which result in an inability for most insureds to meet the conditions for a claim;
- A term that allows the insurer to make a cash settlement at cost to insurer;
- A condition that requires the insured to pay the excess before the insurer settles the claim;
- A policy condition that requires details of an uninsured at-fault driver when making a claim;
- A policy exclusion that prevents the insured from making a disability claim unless they were diagnosed before leaving work.
Terms that cannot be challenged as unfair
Not all terms of an insurance policy can be the subject of an unfair contract term challenge. Some terms are exempt, being those that:
- Define the main subject matter of the contract;
- Set the upfront price payable, i.e. premium or deductible; or
- Are required, or expressly permitted, by law,
As we will see later, the main subject matter is a controversial issue.
The insurer's 'legitimate interest' defence
It is a defence to a claim of an unfair contract term if the insurer can establish that it protects a legitimate business interest that outweighs any detriment caused to a consumer. The onus is on that party to prove that the term reasonably protects their legitimate business interests and does no more.
For example, if an insurer can demonstrate that a particular policy exclusion provides it with legitimate protection because its reinsurance program contains the same exclusion, it is likely that the exclusion would not be unfair. Likewise, if claims data supports a heightened risk for particular events or activities, it is more likely that the insurer can claim that a relevant exclusion is not unfair and protects its legitimate business interests.
The main subject matter
As noted earlier, the definition of the main subject matter of the contract is currently the most controversial issue. The government proposal (which the RC has also recommended) is that:
"The main subject matter be defined narrowly as terms that describe what is being insured, for example a house, a person or a motor vehicle."
This would leave it open for the insured to challenge unfair contract terms within the exclusions, and policy conditions. What is insured cannot be challenged but what it is insured for can be challenged - perils, exclusions and conditions.
Enforcement - consumers and regulators
UCT claims can be made in court or be the subject of a complaint to ASIC. There is no monetary penalty if a contract term is found to be unfair, but a range of other remedial options are available to the regulator and the court. While an unfair contract term is treated as void and unenforceable, the rest of the contract continues to operate without the unfair term. A court can, however, award compensation for any other losses suffered by the consumer as a result of the unfair contract term.
What does it mean for insurers?
Insurers would clearly prefer not to have to deal with another regulatory regime alongside those that already exist. The key question, though, is how do insurers prepare for this?
This could play out in a number of different ways. The optimistic view might be that there are no significant changes ahead, because:
- The ‘legitimate interests’ defence would protect peril definitions, exclusions and conditions of cover;
- While there may well be consumer advocates pushing for change, the Federal Court is likely to make balanced decisions, particularly regarding legitimate interests.
- There is a reasonable amount of case law to work from.
A more pessimistic view derives from two main concerns:
- Some of the examples that have been quoted about terms that are potentially unfair are very likely to be challenged.
- The likelihood that after the Royal Commission ASIC will be much more aggressive and litigious in pursuing consumer protection.
As actuarial and commercial advisers, it is Finity’s view that the extension of UCT to general insurance contracts is likely to be manageable if the broader UK definition of ‘main subject matter’ is adopted. Otherwise there will be an extended period of uncertainty, which will remain unresolved until there are court precedents.
The Fold Legal believes that the UCT changes are likely to be enacted within 12-18 months. The new legislation will leave it open for insureds to challenge unfair contract terms within the exclusions, and policy conditions of their insurance policies if those terms apply generically to the risk and are not relevant to the insured or where those terms are excessive in terms of protecting the insurer’s position and not precise enough to be supported by underwriting and claims data.
The courts will test the assumptions made by insurers when relying on conditions and exclusions, and this will require insurers to analyse their underwriting and claims data in the context of the policy exclusions and conditions to ensure that they accurately reflect the insurer’s actual risk exposure. Insurers who undertake this type of analysis now will better prepare themselves for a legitimate interests defence.
About the Fold
Servicing clients nationally from offices in Sydney and Brisbane, The Fold Legal offers a full range of regulatory, corporate and commercial legal services to financial services and credit businesses. As a specialist industry-focussed law firm, The Fold has extensive industry knowledge and is known for giving strategic advice that specifically addresses clients’ commercial needs. If you need advice on what the Royal Commission recommendations mean for your business, get in touch with The Fold’s team of experts.
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Charmian Holmes, The Fold
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