RELIEF FOR INSUREDS: CHANGES TO THE INSURANCE CONTRACTS ACT MEAN THAT INSURERS WILL BE UNABLE TO RELY ON UNFAIR TERMS

On 20 December 2012, the Government announced that it proposes to amend the Insurance Contracts Act 1984 (the "Act") to include provisions relating to unfair contracts.  Insurance contracts are currently excluded from the existing unfair contracts laws.

The proposed changes will apply to consumer contracts that are standard form general insurance contracts.

An unfair term is a term that:

  1. would cause a significant imbalance in the parties' rights and obligations arising under the contract;
  2. would cause a detriment to a party if it were to be applied or relied on; and
  3. is not reasonably necessary to protect the legitimate interests of the party who is advantaged by the term. 

While generally the onus of proof is on the consumer, it is up to the insurer to prove that the term in question is reasonable to protect its interests. 

If an insurance contract is found to contain an unfair term, the insurer will have breached its duty of utmost good faith.  The general rule is that if a term is deemed to be unfair, the parties will be unable to rely on that term.  The Court may apply a different remedy if appropriate in the circumstances.  Both consumers and ASIC may take action under the proposed laws.

The proposed unfair contract provisions will not apply to terms that:

  1. define the main subject matter of the insurance policy;
  2. specify the upfront price payable under the contract; or
  3. are allowed or required under an Australian law.

The proposed unfair contracts rules will not apply to life insurance contracts.