Commonwealth, state and territory ministers responsible for fair trading and consumer protection have agreed to implement enhancements to unfair contract term protections. The government has been working on the unfair contract term enhancement package for some time but the agreed proposals are only now being revealed for the first time.
The announcement comes during a time where the insurance industry is preparing for the extension of unfair contract terms provisions to insurance contracts. On 5 April 2021, the unfair contract terms laws under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) will apply to insurance. This article focuses on the potential ramifications for insurance.
At the moment, courts have the ability to declare that a term in a standard form contract is unfair and therefore void. However, a court does not have the power to impose a civil penalty if it has found a term to be unfair. Some groups have raised concerns that the voiding of terms results in a remedy that is not necessarily in the consumer’s best interests, because it results in an unworkable contract.
Read more about the test for unfairness and the exemptions in our recent article.
What new remedies are proposed?
Under the agreement reached by the Ministers, it is proposed more flexible remedies will be available to a court when it declares that a contract term is unfair. These remedies are proposed to apply to unfair contract terms provisions in both the ASIC Act and the Australian Consumer Law.
These include:
- giving courts the power to impose a civil penalty;
- giving courts the power to determine an appropriate remedy rather than the term being automatically void;
- clarifying the remedies available for ‘non-party consumers’ also applied to ‘non-party small business’; and
- creating a rebuttable presumption of unfairness for unfair contract terms used in similar circumstances.
While standard form contracts in other contexts have been subject to unfair contract terms laws for many years, the insurance industry is only starting to understand how to best deal with these issues. As insurance terms have the potential to directly affect the underwriting process, and therefore pricing, we query whether these proposals are in the best interests of both insurers and consumers during the early stages of implementation. Pricing may also be affected by insurers’ approach to risk, which together with uncertainty as to how certain terms may be viewed, may be more conservative now that penalties are on the horizon.
The small business test may not be so small
To be protected by the unfair contract term laws, a person must be a consumer or small business. Under section 12BF of the ASIC Act, a small business is currently one that has fewer than 20 employees. The proposal is to increase the threshold to fewer than 100 employees and introduce an annual turnover threshold of less than $10,000,000 as an alternative threshold for determining eligibility.
The goal of this proposal is to increase the number of entities that will be able to benefit from the unfair contract terms provisions. It is estimated that 99% of businesses will be afforded these protections if the proposal is put through.[1] Accordingly, most, if not all, Small Business Insurance Products sold will be subject to the unfair contract terms laws. Most of these products are not negotiated and are purchased ‘off the shelf’.
In relation to insurance contracts, the change to the small business test provides some alignment with AFCA’s jurisdiction, where a small business complainant can be a business that has fewer than 100 employees.
What guidance is there for insurance contracts?
ASIC recently updated its guidance to include examples of unfair contract terms that would apply to insurance contracts. The updated information sheets are INFO 210 and INFO 211.
In a media release announcing the updated information sheets, ASIC noted that it has been working with insurers in the lead up to implementation. ASIC has given some examples of unfair contract terms in insurance contracts, including:
- terms that allow an insurer to cash settle a claim based on the cost of repair to the insurer;
- terms that are an unnecessary barrier to a consumer lodging a claim;
- terms that reduce the cover offered where compliance with the pre-conditions is unfeasible; and
- terms that use an outdated and therefore inaccurate or restricted medical definition.
However, there are many other terms in insurance contracts that might need to be revised in the lead up to the commencement of the unfair contract terms laws to insurance
Finding a path forward
With unfair contract terms provisions applying to insurance contracts from 5 April 2021, insurers, brokers, underwriting agencies and coverholders should be reviewing all affected products to ensure that there are no unfair contract terms. While there is no definitive timeframe as to when civil penalties will commence, with Treasury now tasked to develop the draft legislation it would be prudent to undertake a comprehensive legal review of affected insurance policies with the potential risk of a penalty in mind.
ASIC has a track record of taking action in relation to unfair contract terms, having pursued banks and lenders in recent years.
[1] Australian Small Business and Family Enterprise Ombudsman, ‘Crackdown on Unfair Contract Terms to protect small businesses’ (10 November 2020) <https://www.asbfeo.gov.au/news/news-articles/crackdown-unfair-contract-terms-protect-small-businesses>.