After seven years of trying, the laws governing unfair contract terms (UCTs) will finally be extended to insurance contracts that are subject to the Insurance Contracts Act 1984 (Cth), but this change won't take effect until 5 April 2021. This is the first significant change to UCT laws since they were extended to "small business contracts" (in addition to "consumer contracts") back in November 2016. But this is not the only change that may lie ahead. The Commonwealth Treasury is currently consulting about enhancing the protections provided by UCT laws. This consultation, which is due to finish in March 2020, might result in significant changes to the UCT laws, such as introducing penalties for using an unfair term. April 2021 may seem far off, but it is important to start preparing now because more developments may be on the way. So, what do you need to know? First and foremost, you need to know what the UCT laws are.
What are the UCT laws?
Under both the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (ASIC Act), a term is unfair if:
- it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
- it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
If a term is unfair, it may be declared void by a court or tribunal. Although there are currently no penalties for using an unfair term, depending on the nature of the term and the extent of its use, the invalidation of the term may still have significant consequences. For example, money that was paid under the now-void term may need to be refunded.
The UCT laws only apply to standard form contracts which are either "consumer contracts" or "small business contracts". A consumer contract is a contract where at least one party is an individual who acquires goods or services wholly or predominantly for personal, domestic or household use. A small business contract is a contract where at least one party is a business that employs fewer than 20 people and the upfront price payable under the contract is below certain monetary thresholds: $300,000 for a contract of less than one year's duration and $1,000,000 for a contract that is one year or longer in duration. It's important not to confuse the defined term, "consumer", in the Australian Consumer Law with the defined term, "consumer contract". They are different things.
The UCT laws and their application to insurance contracts until 5 April 2021
Until 5 April 2021, insurance contracts regulated under the Insurance Contracts Act (including both general and life insurance contracts) are excluded from the UCT laws. As a result of section 15 of the Insurance Contracts Act, any insurance contract that is subject to that Act is not affected by the UCT laws. But not all insurance contracts are subject to the Insurance Contracts Act.
The following insurance contracts are not subject to the Insurance Contracts Act and hence fall within the purview of the UCT laws already, provided they are standard form consumer or small business contracts:
- certain contracts of insurance entered into by a private health insurer within the meaning of the Private Health Insurance Act 2007;
- contracts of reinsurance;
- contracts of insurance entered into by a friendly society;
- certain contracts entered into for the purposes of workers' compensation;
- contracts entered into for the purposes of a law relating to compensation for death or injury arising out of the use of a motor vehicle;
- certain contracts of insurance entered into by the Export Finance Australia;
- certain contracts relating to the Marine Insurance Act 1909; and
- contracts of insurance entered into in the course of State insurance or Northern Territory insurance.
Although these types of contract are theoretically subject to the UCT laws, it's unlikely that many of them will be affected by these laws because they are unlikely to be standard form contracts which are either a consumer contract or a small business contract. Still, private health insurance contracts are likely to fulfil these requirements as might other types of insurance contracts.
What's changing on 5 April 2021?
On 17 February 2020, the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Financial Sector Reform Act) received Royal assent. With effect from 5 April 2021, it will amend section 15 of the Insurance Contracts Act so that all contracts of insurance that are subject to that Act will be subject to the UCT laws (except for certain contracts of insurance providing medical indemnity cover). This is a significant expansion of the UCT laws. Car insurance, travel insurance, life insurance and house and contents insurance policies will become subject to the UCT laws, provided they are standard form contracts that are either consumer contracts or small business contracts. The practical effect will be that all contracts of insurance, except for particular contracts providing medical indemnity cover, will be subject to the UCT laws. Despite this significant extension to the application of the UCT laws, there will still be many contracts of insurance that are not standard form consumer contracts or small businesses and hence will not be subject to the UCT laws.
In addition to the changes made to the Insurance Contracts Act, the Financial Sector Reform Act will introduce new provisions into the ASIC Act that will specifically address contracts subject to the Insurance Contracts Act.
These provisions will achieve three things.
- They will prevent a term from being unfair if it sets the amount of the excess or deductible, provided the term is "transparent" and is disclosed at or before the contract is entered into. A term must be "expressed in reasonably plain language", among other things, to be transparent. Most people are likely to understand the meaning of excess and deductible but some may not. To address the risk of these concepts not being considered "reasonably plain language", it may be wise to include a simple description of their meaning.
- The provisions will prevent a term from being unfair to the extent that it describes the "main subject matter of the contract", but "main subject matter" is defined narrowly to only include a description of "what is being insured". This narrow definition was criticised by some during the consultation process for the drafting of the Financial Sector Reform Act. Critics said that "main subject matter" should include the risks against which the policy insurers since the subject matter which is central to the provision of insurance is the scope of cover provided for an item or person, not just the identity of the item or person.
- The provisions will allow "third party beneficiaries", as well as the parties to the contract of insurance, to challenge an allegedly unfair term. The definition of third party beneficiary in the Insurance Contracts Act will apply. During the consultation process for the drafting of the Financial Sector Reform Act, some expressed concern that third party beneficiaries for group policies purchased by their superannuation trustee or their employer may not be able to use the UCT laws because the insurance contract may not qualify as a "small business contract". It may not qualify because the trustee or employer employs more than 20 persons or the premium exceeds the monetary thresholds.
The above three provisions created by the Financial Sector Reform Act will not apply to contracts of insurance which are not governed by the Insurance Contracts Act. This will result in one version of the UCT regime that applies to some contracts of insurance and a slightly different version of the UCT regime that applies to others. The legislature may not have intended this, but it's what we've got!
A contract subject to the Insurance Contracts Act will only fall within the purview of the UCT regime if it was entered into on or after 5 April 2021 or renewed or varied after that date. If it was renewed after 5 April 2021, the UCT regime will only apply to the contract as renewed on and after the renewal date and conduct that occurs on and after the renewal date. The amendments apply to variations to pre-existing contracts in the same way that they apply to renewals (ie. the regime only applies to the varied term on and from the variation date).
Will these changes to the UCT laws affect the "duty of utmost good faith" for contracts of insurance?
If you work in the field of insurance, you'll be familiar with the "duty of utmost good faith" in Part II of the Insurance Contracts Act. From 5 April 2021, the Financial Sector Reform Act will insert a note in the Insurance Contracts Act saying that this duty operates in addition to the UCT laws. This confirms the statement in section 12 of the Insurance Contracts Act that the duty "is not limited or restricted in any way by any other law".
The explanatory memorandum for the Bill that became the Financial Sector Reform Act makes it clear that the existing duty of utmost good faith contained in section 13 of the Insurance Contracts Act will operate independently of the UCT provisions and not be affected by them.
Has Parliament given any guidance on how the UCT laws will apply to contracts of insurance?
The explanatory memorandum for the Bill that became the Financial Sector Reform Act provides some guidance concerning the amendments.
Where can I learn more about UCT laws?
As 5 April 2021 draws closer, you're likely to be reviewing your standard form consumer contracts and small business contracts to see whether they contain potentially unfair terms. This introductory guide to reviewing potentially unfair terms may assist you. The introductory guide was prepared for the extension of the UCT laws to small business contracts but many of the points will be applicable to determining whether a term in a contract of insurance might be unfair.
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