Further unfair contract term reforms - what does this mean for insurance contracts?
Earlier this month, Treasury announced that Commonwealth and state and territory consumer affairs ministers had agreed on reforms to strengthen the existing unfair contract term (UCT) protections and that Treasury would develop legislation to implement these reforms.
There are seven key areas of reform. The reforms will impact the UCT laws in both the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (ASIC Act). The UCT laws in the ASIC Act will extend to insurance contracts from 5 April 2021.
Insurers have already been busy preparing for the extension of the UCT regime to insurance contracts, including by identifying impacted contracts and taking steps to address potentially unfair terms. However, with further reforms on the horizon, the road to UCT compliance may not yet be over. In this update, we explore the proposed reforms and the likely implications for insurance contracts.
The proposed amendments to the UCT regime
At a high level, the UCT laws regulate the terms and conditions of any ‘standard form contract’ that is a ‘consumer contract’ or a ‘small business contract’, and makes void any term that is ‘unfair’.
Following public consultation in December 2019 to March 2020, consumer affairs ministers have agreed on seven key reforms which they consider will improve the UCT framework (and the Decision Regulation Impact Statement released by Treasury gives further insight into these reforms).
The proposed reforms, and what they will mean for insurers, are set out in the below table.
Implications for insurers
|Legality and penalties
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:
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:
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.
|Small business contracts
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.
|Removal of minimum upfront price payable
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).
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:
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.
While the insurance industry is still in the process of preparing for the extension of the UCT regime to insurance contracts from 5 April 2021, further work may still be needed after that date in light of the proposed reforms. This may include further review of contracts, given the introduction of penalties and potential widening of scope of small business contracts caught by the regime.
Although there is no set date for the release of draft legislation, Treasury has recommended that consideration should be made for what transitional arrangements need to be put in place. This will allow businesses to consider the proposed reforms, and review and think about what modifications they may need to make to their standard form contracts. A transitional period will also give regulators time to prepare additional information that will be required by the industry, such as guidance documents and education materials.
The Government will consult publicly with stakeholders before finalising any legislation to implement the proposed UCT reforms and so this is certainly an area that is worth insurers keeping a close eye on. If you would like to further understand the likely impact for your business, please contact our team.
 Australian Treasury, ‘Enhancements to Unfair Contract Term Protections – Regulation Impact Statement for Decision’ (9 November 2020) <https://treasury.gov.au/publication/p2020-125938> (‘Decision RIS’).
 ASIC Act, section 12BA
 Decision RIS 56.
 ASIC Act, section 12BF(4)
 Decision RIS 78.