Unfair Contract Terms and Insurance Products

Unfair Contract Terms – Time to review policies and standard form contracts again!  

Product issuers including insurers went through an extensive and time-consuming review exercise prior to April 2021 when the Unfair Contract Term (UCT) legislation was first extended to standard form insurance contracts with consumers and small businesses. It’s now time to revisit policy wordings and product disclosure statements as further reforms mean more policyholders can access protection under the UCT regime and the stakes are much higher for those who do not remove unfair contract terms from their wordings and disclosure documents.

Legislation amending the UCT provisions in the Consumer and Competition Act 2010 (Cth) (CAA) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) was passed in November 2022 and these changes are due to take effect from 10 November 2023.

Our colleagues at Source Compliance have summarised what UCTs are, what has changed from a CAA perspective including what businesses should do to prepare – you can read their insights here.

Insurance products are regulated under the ASIC Act, meaning the reforms will apply to insurance contracts provided to consumers and small businesses (whether issued or renewed) on or after 10 November.

What has changed in the ASIC Act?

Expanded definition of small business

Currently, a small business contract is one where at least one party is a business that employs fewer than 20 people and the upfront price or premium does not exceed $300,000 (for an annual policy) or $1,000,000 (for a multi-year policy).

This definition has now been expanded so that a small business contract will be one where at least one party is a business that employs fewer than 100 people (or has an annual turnover during the previous financial year of less than $10 million) and the upfront price / premium does not exceed $5,000,000.

Effectively a much larger group of small business insureds will be able to access protection under the UCT regime. Insurers will need to review the policy wordings they use with these businesses to ensure they are free of any unfair contract terms.

New contravention

On and from 10 November 2023, a party who proposes, uses, applies or relies on a UCT in a consumer insurance contract will breach the ASIC Act and become subject to pecuniary penalties. This is a significant departure from the current position, where a term which is found to be unfair is simply void and unenforceable.

Each individual UCT contained in a standard form contract is a separate contravention, meaning there could be several contraventions within a single contract of insurance.

New significant financial penalties

Significant financial penalties may be awarded against both corporations and individuals for breaching the UCT provisions of the ASIC Act.

Expanded court remedies

The Courts have been given more extensive remedies, for example, they can extend their corrective orders to all existing policy wordings issued by the insurer that contain similar or substantially similar terms, or they can issue injunctive orders, preventing an insurer from using similar or substantially similar terms in the future.

Would ASIC really prosecute for a breach of the UCT laws?

Yes. In fact, under the current UCT regime ASIC recently commenced legal proceedings against an insurer, Auto & General Insurance Company Limited (Auto & General) for including an alleged unfair contract term in several of its home and contents insurance policies.

The alleged UCT in question was the obligation for an insured to notify Auto & General “if anything changes about your home or contents”. ASIC’s view is that the term is unfair because it:

• imposes an obligation on insureds to notify Auto & General if ‘anything’ changes about their home or contents – a requirement which insureds cannot practically meet;
• imposes an unclear and vague obligation on the customer regarding what they need to disclose to Auto & General;
• suggests that Auto & General has a broader right to refuse claims or reduce the amount payable under a claim, if the insured does not meet the notification obligation and this is not consistent with the insurer’s legal rights under the Insurance Contracts Act;
• could mislead or confuse the insured as to their true obligations and rights under the policy.

ASIC is seeking a declaration from the Court that the term is void and seeking injunctions and corrective orders.

This is the first time that ASIC has pursued a Court action for breach of the UCT laws by an insurer. It demonstrates ASIC’s change in attitude towards compliance with UCT regime and insurers and insurance business can expect greater scrutiny of their policy wordings and products disclosure statements, particularly once greater fines/penalties and enhanced court remedies apply later this year.

Do these changes affect brokers?

Brokers who do not draft or design policy wordings, could still suffer reputational damage if they recommend a particular insurance product to their clients and the policy wording is later found to contain one or more UCTs to the detriment to the insured. Not only will it damage the trusted relationship between broker and client but could raise concerns about whether the broker acted in their best interests when providing personal advice on or recommending the product.

It is also important for brokers, who do collaborate with insurers in the development of new products, to be aware of these changes so they can help to identify and remove UCTs from the policy wording.

As mentioned above, the UCT legislation applies to standard contract terms which includes terms of business and terms and trade so brokers with clients who are consumers and small businesses, should check their standard terms of engagement to make sure they do not contain UCTs before November 2023.

What should businesses do now?

Businesses should take the following 3 steps:

1. Identify and review the affected standard form contracts

Consumer standard form contracts should be easily identified, however the expanded definition of small business contracts means that a broader range of customers will now be ‘small businesses’ for the purposes of the UCT regime.

Review your product suite to identify which additional wordings offered to small businesses will need to be brought into the UCT review process.  Businesses currently using policies that are subject to the UCT laws will need to review them and either remove or redraft clauses that are likely to be a UCT. Invariably, it will be the policy exclusions and conditions that require the most attention.

2. Redraft and remove UCTs

Consider whether the term is reasonably necessary to protect a legitimate business interest. If so, the term can stay in, but be ready to justify this position to ASIC or a Court. Record the reasons why particular clauses are required including an explanation, such as where it reflects the reinsurance position or where it relates to increased risk/moral hazard/underwriting and pricing considerations.

For contract terms that are too expansive, it is important to assess precisely what you are trying to protect against and whether you can be more precise in the drafting of the exclusion or condition to achieve this. Unilateral rights, vague or opaque requirements, onerous obligations for the insured should be avoided in favour of clear, transparent, balanced and fair provisions.

Legal advice on UCT issues will help to build a defensible position which may help to mitigate against the risk of breaches and substantial financial penalties. Insurers and intermediaries may also face reputational damage if they are prosecuted by ASIC for breaching the UCT or other laws.

3. Brief your team, train them and update your compliance policies

Ensure your team (particularly, legal and compliance staff and those responsible for designing products) understand these new obligations including the increased risk for the business. Update any internal training and your policy and procedures for these changes.

If you need assistance reviewing your standard form contracts including term of engagement or policy wordings/product disclosure statements, contact Julie Hartley, Jaime Lumsden and Charmian Holmes.