Further unfair contract term reforms - what does this mean for insurance contracts?

Area

Proposed reform

Implications for insurers

Making UCTs unlawful and giving courts the power to impose civil penalties.

Currently, there is no penalty for contravening the ASIC Act by relying on a term that has been declared by a court to be unfair.

While there are other reasons (including exposure to licence breaches and reputational concerns) why an insurer would not want to rely on a term that has been declared unfair, this reform would increase insurers’ exposure if they fail to take appropriate action to ensure that unfair terms are not relied on.

Relevantly, for the purposes of the ASIC Act, a person relies on an unfair term if they:

• attempt to enforce the term;
• attempt to exercise the right conferred, or purportedly conferred, by the term; or
• assert the existence of a right conferred, or purportedly conferred, by the term.[3]

So, for example, failing to promptly remove an unfair term (as declared by a court) from an insurance policy, even if there is no intention to rely on it in practice, could invite a civil penalty (as the existence of that term in policy documents could be seen as asserting the existence of the right conferred by the term).

Provide more flexible remedies to a court when it declares a contract term unfair by:

•  giving courts the power to determine an appropriate remedy, rather than the term being automatically void;
• clarifying that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses’; and
• creating a rebuttable presumption provision for UCTs used in similar circumstances. The proposed rebuttable resumption is that a term is unfair if, in a separate case, the same or a substantially similar term has been used by the same entity, or, in the same industry sector, and declared by a court to be unfair.[4]

A broader power for courts to determine an appropriate remedy for an unfair term may see insurers directed to vary a term in a certain way, rather than it being declared void. This could result in less certainty for an insurer around the risk of including a term that is potentially unfair in an insurance policy (as an insurer would not be able to know how a court may choose to vary the term, if this was tested).

The extension of the remedies in the ASIC Act for non-party consumers to include non-party small businesses would mean that insurers would need to be aware that if a small business that is not a party to the insurance contract suffers loss or damage because of the unfair term (for example, because they are a beneficiary under a group policy), then the insurer may be directed to take steps to redress, or prevent or reduce, the loss or damage suffered by the non-party small business.

Finally, the introduction of a rebuttable presumption would mean that insurers would need to be across the types of terms that have been declared by a court to be unfair, particularly in other insurance contracts. If a term has been declared unfair and an insurer continues to rely on it, it would be presumed to be unfair and the insurer would need to produce evidence to demonstrate why it was not unfair in the relevant circumstances.

Increase the eligibility threshold for the protections from less than 20 employees to less than 100 employees, and introduce an annual turnover threshold of less than $10 million as an alternative threshold for determining eligibility.

This would potentially increase the scope of insurance contracts that are subject to the UCT regime.

Remove the requirement for the upfront price payable under a contract to be below a certain threshold in order for the contract to be covered by the UCT protections.

Currently, a contract is a small business contract if the upfront price payable under the contract does not exceed $300,000 (or $1 million if the contract has a duration of more than 12 months).[5]

Similarly to the above reform, removing this eligibility threshold would theoretically increase the scope of insurance contracts that are subject to the UCT regime. However, the threshold is very high when tested against an annual insurance policy, so most ‘small business’ contracts are likely already under this threshold.

Standard form contracts

Improve clarity around the definition of standard-form contract, by providing further certainty on factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract.

While repeat usage of a contract template is likely already considered by insurers when deciding whether a policy is a standard form contract, the implementation of this reform would mean that insurers would need to give further consideration to whether a small business has been given an opportunity to negotiate based on any factors described in the legislation (once it is released).

The Decision Regulation Impact Statement suggests that types of actions that would not constitute an ‘effective opportunity to negotiate’ include: 

• opportunities for a small business to negotiate minor amendments to a contract, which are amendments that would not alter the intent and essence of the original term;
• opportunities for a small business to select, from a pre-existing list of possible terms, which term they would prefer, rather than an opportunity to actually negotiate the substance of the term; and
• claims by the contract-issuing party that there was an effective opportunity to negotiate across all standard form contracts with all its customers, when it only gave an opportunity to negotiate to a small subset of customers.

This, again, could potentially increase the scope of insurance contracts caught by the UCT regime.

Enable certain clauses that include ‘minimum standards’ or other industry-specific requirements contained in relevant Commonwealth, state or territory legislation to be exempt from the protections.

Depending on how this reform is framed in the legislation, this may potentially give more certainty to insurers that terms consistent with laws (including, for example, the Insurance Contracts Act 1984) do not contravene the UCT regime, even if the law does not go as far as to expressly permit those terms.