Law on unfair contract terms now extends to insurance
Unfair contract terms protections have been extended under new legislation to include standard insurance contracts.
The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 has amended the law relating to unfair contract terms in insurance contracts and also applies to funeral expense facilities and mortgage brokers.
The new legislation affects insurers, brokers, businesses and consumers who have entered into, renewed or varied a standard insurance contract after 5 April 2021.
Decision to include insurance in unfair contract laws
The extension of unfair contract terms protections to include insurance was recommended in the Financial Services Royal Commission, after it found many insurance contracts were unfair to consumers.
The resulting amendments to the Insurance Contracts Act 1984 enabled the Australian Securities and Investments Commission to include insurance contracts in its protection against unfair contract terms.
When is a contract term deemed to be unfair?
Before this legislation, many businesses used standard form contracts to engage with consumers, which meant very few contracts were likely to be negotiated, even if the consumer thought the terms were unfair.
In accordance with the new laws, if a term in an insurance contract is declared to be unfair, it may be void.
Under section 12BG of the Australian Securities and Investments Commission Act 2001, a term in a contract could be unfair if it 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 to a party if it were to be applied or relied on.
If there is a dispute over unfair contract terms, the parties or ASIC can seek a decision from the court.
Unfair contract terms that may be disputed
Examples of unfair insurance terms include:
- settling a claim with cash rather than paying the amount it costs the insured to make a repair
- requiring the insured to pay a large excess before considering their claim
- demanding direct debit deductions from the consumer even if they want to pay by a different method
- outdated, inaccurate or restrictive medical definitions that decide whether a claim is eligible
- a blanket mental health exclusion on travel insurance and unfeasible preconditions for obtaining cover
The unfairness element of the new law does not apply to the upfront costs of insurance contracts or the amount of excess or deductibles, as long as they are openly stated.
There is still some uncertainty for both insurers and consumers about the application of unfair contract terms as they apply to insurance. That is why it is wise to obtain expert legal advice on your current contracts, as well as before drawing up or signing a fresh contract.