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A case of déjà vu?
Unfair Contract Terms changes are coming to insurance contracts…again
Australia | Publication | November 2023
If you are feeling a case of déjà vu after reading this headline, you are not alone. Just over two years since the unfair contract terms (UCT) regime came into effect for insurance contracts, a revamped regime commences on 9 November 2023. Insurers are yet again reviewing insurance contracts that may now be caught by the regime.
The UCT provisions of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) commence on 9 November 2023, amending the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to expand the operation of the UCT regime.
Similar changes have been made to the Australian Consumer Law (ACL), which also come into effect on 9 November 2023. This article considers the changes to insurance contracts required under the ASIC Act. The threshold tests and maximum penalties are different between the ACL and the ASIC Act.
The main changes affecting insurance contracts are:
- expanding the application of the UCT regime to a larger number of consumer and small business standard form insurance contracts;
- introducing a civil penalty regime prohibiting the use of and reliance on UCTs in standard form contracts;
- clarifying the power of the courts in relation to UCTs; and
- providing a lifeline for certain life insurance policies.
The new UCT regime applies to any insurance contract made or renewed on or after 9 November 2023. For insurance contracts that are only varied (and not made again or renewed) on or after 9 November 2023, the new regime will apply to the extent of the varied term. Medical indemnity insurance continues to be exempt from the UCT regime.
The amendments create some uncertainty for insurers. The significantly expanded thresholds under the ‘small business’ test will increase the reach of the UCT regime. Given the difficulties with verifying whether a business falls within or outside the relevant thresholds, conservative insurers may seek to ensure that all standard form insurance contracts have been reviewed for UCTs.
What is the context?
Until 2021, insurance contracts were excluded from the UCT regime in the ASIC Act. On 5 April 2021, the UCT regime in the ASIC Act was expanded to include standard form insurance contracts issued to consumers and small businesses.
For a refresher on what might be an ‘unfair’ term, see our previous article.
In the lead up to 5 April 2021, ASIC undertook proactive regulatory activity and worked with a number of insurers to make changes to insurance policies. Examples of changes that were made included:
- removing terms that gave insurers unilateral discretion;
- removing terms that were an unnecessary barrier to an insured person lodging a claim;
- extending certain timeframes in policy conditions that may have been impractical;
- amending terms to provide greater collaboration between the insurer and the insured around decision making processes; and
- qualifying overly broad terms so that they only applied in specific situations.
What is changing on 9 November 2023 under the ASIC Act?
From 9 November 2023, the following changes will take place in relation to the UCT regime under the ASIC Act:
| The law under the ASIC Act before 9 November 2023 | Insurance contracts made, renewed or varied on or after 9 November 2023 |
|
The UCT protections apply to a small business contract if the two-limbed test is met. Firstly, the business must employ fewer than 20 persons (Employee Threshold). Secondly, the upfront price payable under the contract must not exceed $300,000 or $1,000,000 (if the contract has a duration of more than 12 months) (Upfront Price Threshold). |
The Employee Threshold has increased from 20 to 100 persons. Alternatively, the first limb of the test can be met if the turnover for the last income year was less than $10M. The upfront price payable under the contract must not exceed $5,000,000. |
| A court can declare a UCT void but cannot impose a pecuniary penalty. | A court can declare a UCT void and may impose a pecuniary penalty if a person proposes, applies, relies or purports to apply or rely on a UCT. |
| A court may determine a term in a standard form contract is unfair. Such terms are void. The court may also make orders for the whole or part of a contract to be void. Such orders can be made in relation to a class where a class of persons has suffered, or is likely to suffer, loss or damage. The order may be made by an affected party or by a regulator on behalf of either a party or a non-party. |
The court has expanded powers including in relation to future contracts. Similar to the existing regime, a court may make orders for the whole or part of a contract to be void. It may also vary the terms or refuse to enforce the contract if that is appropriate to prevent the loss or damage that is likely to be caused. The court can also make orders on the application of the regulator to prevent a term that is the same or substantially similar in effect to a term that has been declared as unfair, from being included in any future standard form small business or consumer contracts. Furthermore, the court can make orders on the application of the regulator to prevent or reduce loss or damage which is likely to be caused to any person, by a term that is the same or substantially the same in effect to a term that has been declared unfair. |
| A court can make an injunction to restrain a party from applying, relying on or purporting to apply or rely on a term of a contract that has been declared unfair. |
In addition to the existing injunction powers, a court can make an injunction to restrain a person from:
|
| A court can take into account a number of matters in determining whether a contract is a standard form contract. | A court must also take into account whether one of the parties has used the same or a similar contract before. |
| In determining whether a contract is a standard form contract, a court may take into account a number of matters including whether one party was required to reject or accept the terms of a contract in the form they were presented and whether they were given an effective opportunity to negotiate the terms of the contract. |
A contract may be a standard form contract, even if there is an opportunity for:
|
Civil penalties
From 9 November 2023, a contravention of the UCT prohibitions under the ASIC Act can attract significant civil penalties. This is a new feature of the UCT regime. Presently, a court can declare a term is void but cannot order civil penalties. The maximum penalty for a body corporate will be the greater of:
- 50,000 penalty units (presently $15,650,000);
- the amount of the benefit derived and detriment avoided because of the contravention multiplied by 3; or
- 10% of the annual turnover of the body corporate for the 12 month period ending at the end of the month in which the body corporate contravened or began to contravene the civil penalty provision capped at 2.5 million penalty units (presently $782,500,000).
The civil penalty regime creates a significant incentive for insurers to ensure their contracts do not have UCTs, and where terms may be subject to challenge, they can justify the term by showing they are protecting a legitimate interest.
A lifeline for life insurance policies
Under the new section 12BLA of the ASIC Act which comes into effect on 9 November 2023, there are special provisions applicable to life policies within the meaning of the Life Insurance Act 1995 (Cth). The UCT amendments mentioned above do not apply to a life insurance policy that was entered before 5 April 2021 that following 5 April 2021 has been replaced by another policy for the following reasons:
- the replacement policy reinstates the previous policy and is issued at the request of the owner of the previous policy after the previous policy lapses;
- the replacement policy is a reissue of the previous policy to correct an administrative error in the previous policy;
- the replacement policy is issued at the request of the owner of the previous policy for one or more of the following reasons:
- to change the ownership of the policy;
- to extend or vary the cover provided under the policy in accordance with a term of the previous policy;
- to change the terms relating to premiums paid under the policy; or
- to link or unlink certain existing policies.
Linking and unlinking policies refers to a situation where the policyholder seeks to change the structure of the policy by connecting it with or separating it from another policy. An example of unlinking is where a consumer decides to separate a combined TPD and death cover into two separate policies where a claim under one policy does not affect the sum insured under the other. Conversely, an example of linking is the conversion of two standalone policies (for example TPD and death policies) into one combined policy.
The introduction of civil penalties to the UCT regime may result in insurers refusing to respond to consumer initiated requests relating to life products, because it could trigger UCT risk for the replacement policy. The exemptions aid to avoid these potentially negative outcomes for customers. Interestingly, the exemptions do not apply to variations of existing policies and only ‘replacements’.
What is on the horizon?
We expect to see ASIC undertake more enforcement action in relation to UCTs given its expanded regulatory toolkit.
If they have not already, insurers should review all affected insurance policies since the scope of the regime has broadened and there is now risk of civil penalty action for including UCTs in policy wordings. ASIC has already launched two proceedings against insurers under the current regime, regarding potentially unfair contract terms in insurance policies:
- In April 2023, ASIC issued proceedings against Auto & General Insurance in relation to an obligation that required insureds to notify the insurer if ‘anything’ changed to their home and contents. ASIC’s case against Auto & General includes that the contract did not explain the effect of section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) which may assist the insured if they did not comply with their notification obligations.
- In May 2023, ASIC issued proceedings against HCF Life in relation to a ‘pre-existing condition’ contract term that was potentially inconsistent with s 47 of the ICA.
For policyholders, the expanded regime (especially the changed threshold for small businesses) may mean that insurance contract terms are now capable of challenge under the new UCT regime, when previously they were not within scope of the regime.
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