4.3 Unfair contract terms

In 2010, unfair contract terms (UCT) laws were introduced which apply to all sectors of the economy and to all businesses operating in those sectors who use standard form contracts in their dealings with consumers.[1] Since 2016, they have applied to standard form contracts made between businesses and small businesses.[2] The UCT regime contained in the ASIC Act applies to contracts for financial products and financial services.[3] UCT provisions do not apply to insurance contracts regulated by the Insurance Contracts Act. They should.

Speaking generally, the UCT regime renders void a term in a consumer or small business contract that is ‘unfair’, in the sense that it causes a significant imbalance in the contracting parties’ rights and obligations, it is not reasonably necessary to protect the legitimate interests of the party that receives the benefit of the term, and it would cause detriment to a party if it were relied upon.[4] The regime does not apply to certain types of contractual terms, including terms that define the ‘main subject matter’ of the contract, terms that set the upfront price payable under the contract, and terms that are required or permitted by law.[5]

Despite the UCT provisions in the ASIC Act being expressed to apply to contracts for financial products and financial services, it does not now apply to contracts regulated by the Insurance Contracts Act.[6] As I have said, section 15 of the Insurance Contracts Act provides that a contract of insurance is not capable of being made the subject of relief under ‘any other Act’ on the ground that it is harsh, unconscionable, unjust, unfair or inequitable. Insurance contracts were excluded from the operation of the UCT regime on the basis that the Insurance Contracts Act included ‘its own protections for standard insurance contracts’, and because ‘insurance contracts may have special characteristics due to the nature of the risk involved which make them unsuitable for UCT protections’.[7]

In late 2017, the Government announced that it would extend the UCT regime to cover insurance contracts, and in June 2018, Treasury published a Proposals Paper outlining its proposed model.[8]

Treasury’s paper summarises the extensive consideration that has been given in recent years – in Australia and overseas – to the question of whether UCT regimes should apply to insurance contracts.[9] I need not repeat here the details of those inquiries or the experiences in comparable overseas jurisdictions. The important point is that this body of work consistently tends in favour of the application of such a regime to insurance contracts. In my view, this is unsurprising. The considerations that render a UCT regime appropriate for other contracts for financial products and services apply equally to insurance contracts. None of the matters raised against the extension of the regime suggests to me that contracts regulated by the Insurance Contracts Act should stand apart from UCT provisions. It appears that the submissions received by Treasury in response to its paper tend in a similar direction,[10] as did the submissions received by the Commission.[11]

The model proposed by Treasury would apply (with some modification) the existing UCT provisions of the ASIC Act to contracts regulated by the Insurance Contracts Act.[12] The proposal has two key elements.[13] The first is the amendment of section 15 of the Insurance Contracts Act. Treasury proposes that section 15 be amended to permit the ASIC Act UCT regime to apply to insurance contracts regulated by the Insurance Contracts Act.[14]

The second key element is tailoring the UCT provisions in the ASIC Act to contracts of insurance, to accommodate some specific features of those contracts.[15] Treasury has proposed that this tailoring should include the following:[16]

• defining the ‘main subject matter’ of an insurance contract narrowly, to encompass terms that describe what is being insured (for example, a house, a person or a car);
• clarifying that the ‘upfront price’ of the contract includes the premium and the excess payable, and that these matters will not be subject to review;
• making clear that when assessing whether a term is unfair, ‘a term will be reasonably necessary to protect the legitimate interests of an insurer if it reasonably reflects the underwriting risk accepted by the insurer in relation to the contract and it does not disproportionately or unreasonably disadvantage the insured’; and
• expanding the range of remedial options that flow from a term being found to be unfair (so that the court may make orders other than the term being void).

Treasury’s submissions in response to the Commission’s policy questions following the sixth round of hearings indicate that Treasury is continuing to consider the key features of the model.[17] Treasury identified four ‘key issues regarding policy design’ on which I consider it appropriate to express my views.[18]

The first is whether the UCT regime should be located in the ASIC Act or the Insurance Contracts Act. I support Treasury’s suggestion in its Proposals Paper that the regime should be located in the ASIC Act.[19] As Treasury notes, there is evident benefit in having all provisions governing UCT in respect of financial products and services ‘located in a single piece of legislation’.[20]

The second issue is the way in which the ‘main subject matter’ of a contract is framed.[21] The ASIC Act does not presently include a definition of the ‘main subject matter’ of a contract.[22] Most submissions to Treasury supported introducing a statutory definition, although views differed on what definition was appropriate.[23] Consumer groups appeared to favour the narrow definition proposed by Treasury, which, as noted above, would include only terms that describe what is being insured.[24] Industry groups favoured a broader definition, which would include within the ‘main subject matter of the contract’ terms that ‘clearly define or circumscribe the insured risk and the insurer’s liability’.[25] In my view, the former approach is preferable. The purpose of extending the UCT regime to insurance contracts would be undermined if the broader definition endorsed by industry were adopted.

The third issue is said to be some uncertainty about how the UCT regime is to interact with the duty of utmost good faith contained in section 13 of the Insurance Contracts Act.[26] I endorse Treasury’s suggestion that the two obligations should operate independently of each other.[27]

The fourth and final issue is whether a 12 month transition period is adequate.[28] I offer no concluded view beyond saying that it is desirable not to delay their introduction or their coming into effect beyond what is reasonable.

When these reforms are implemented, I expect that they may have a material impact on some standard form insurance contracts. Taking just one example from the AAI case study relating to AAMI’s Complete Replacement Cover home insurance policy, I expect attention to be given to the application of the provisions to contractual terms like the second term in AAMI’s Supplementary Product Disclosure Statement, which provided:[29]

If we decide to pay you what it would cost us to rebuild or repair … we will pay you … the amount that we determine to be the reasonable cost of repairing or rebuilding. The amount that we determine to be the reasonable cost will be the lesser amount of any quotes obtained by us and/or by you for the rebuild or repair. Discounts may be available to us if we were to rebuild or repair.

As Treasury indicated, ‘terms that permit an insurer to pay a claim based on the cost of repair or replacement that may be achieved by the insurer, but could not be reasonably achieved by the policyholder’, are terms that may be unfair.[30]

[1]Treasury, UCT Proposals Paper, June 2018, 1.

[2] Treasury, UCT Proposals Paper, June 2018, 1.

[3] ASIC Act s 12BF(1).

[4] ASIC Act s 12BG; Treasury, UCT Proposals Paper, June 2018, 3.

[5] ASIC Act s 12BI(1); Treasury, UCT Proposals Paper, June 2018, 3.

[6] Treasury, UCT Proposals Paper, June 2018, 1, 4.

[7] Treasury, UCT Proposals Paper, June 2018, 4.

[8] Treasury, UCT Proposals Paper, June 2018, 1.

[9] Treasury, UCT Proposals Paper, June 2018, 7–10.

[10] Treasury, Module 6 Policy Submission, 7 [33].

[11] See, eg, Professors Allan Fels AO and David Cousins AM, Module 6 Policy Submission, 3, 9–10; AMP, Module 6 Policy Submission, 19 [92]–[93]; ANZ, Module 6 Policy Submission, 17–18 [76]–[79]; APRA, Module 6 Policy Submission, 6–7 [20]–[21]; ASIC, Module 6 Policy Submission, 36–7 [152]–[156]; CHOICE, Module 6 Policy Submission, 12; CALC, Module 6 Policy Submission, 31–2 [117]–[120]; FRLC, Module 6 Policy Submission, 29–30; FSC, Module 6 Policy Submission, 24–5; ICA, Module 6 Policy Submission, 21–4; Legal Aid NSW, Module 6 Policy Submission, 9–10; PIAC, Module 6 Policy Submission, 10; Westpac, Module 6 Policy Submission, 32–4 [106]–[108]. See also ACCC, Northern Australia Insurance Inquiry: First Interim Report, November 2018, x (Recommendation 6), 151.

[12] Treasury, UCT Proposals Paper, June 2018, 2.

[13] Treasury, UCT Proposals Paper, June 2018, 1.

[14] Treasury, UCT Proposals Paper, June 2018, 1–2.

[15] Treasury, UCT Proposals Paper, June 2018, 2.

[16] Treasury, UCT Proposals Paper, June 2018, 2.

[17] Treasury, Module 6 Policy Submission, 7 [34]–[35].

[18] Treasury, Module 6 Policy Submission, 7 [34]. See also Treasury, UCT Proposals Paper, June 2018, 12.

[19] Treasury, UCT Proposals Paper, June 2018, 11–12.

[20] Treasury, Module 6 Policy Submission, 7 [34].

[21] Treasury, Module 6 Policy Submission, 7 [34].

[22] Treasury, UCT Proposals Paper, June 2018, 14.

[23] Treasury, Module 6 Policy Submission, 7 [34].

[24] Treasury, Module 6 Policy Submission, 7 [34]; Treasury, UCT Proposals Paper, June 2018, 2.

[25] Treasury, Module 6 Policy Submission, 7 [34].

[26] Treasury, Module 6 Policy Submission, 7 [34].

[27] Treasury, Module 6 Policy Submission, 7 [34].

[28] Treasury, Module 6 Policy Submission, 7 [34].

[29] Exhibit 6.369, Witness statement of Gary Dransfield, 24 June 2018, Exhibit GCD-4 (Tab 2) [SUN.0760.0200.0033] (emphasis added).

[30] Treasury, UCT Proposals Paper, June 2018, 2.