EXTENDING UNFAIR CONTRACTS TERMS TO INSURANCE CONTRACTS

The Federal Government has released exposure draft legislation that extends the unfair contract term (UCT) regime to insurance contracts.

Treasurer Josh Frydenberg said, “Removing the exemption for insurance contracts from the UCT regime will ensure consumers and small businesses have the same protections regardless of which financial service or product they are purchasing.”

National Insurance Brokers Association (NIBA) CEO Dallas Booth has confirmed that the peak body has provided comments on these proposals to the Federal Government in the past, and is reviewing the draft Bill to understand how it will impact on insurance brokers. He said, “We will provide a submission to the Government if warranted.”

Recommendation 4.7 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended extending the application of the unfair contract terms regime to insurance contracts. In the Government’s response to the Royal Commission it agreed to implement this recommendation.

The Insurance Council of Australia (ICA) has expressed concerns the draft Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 2019, if enacted, will create too much legal uncertainty and lead to poor consumer outcomes.

ICA CEO Rob Whelan said: “The general insurance industry has broadly supported allowing consumers to challenge insurance contracts for unfairness, so long as this does not undermine the commercial certainty necessary for the stable and sustainable long-term performance of the general insurance industry.

“However these laws, if introduced to Parliament and passed in their current form, will harm rather than improve consumer outcomes. They will create far more uncertainty and operate more severely than the UCT regime applying to other sectors.

“These draft laws demonstrate that despite numerous inquiries, not enough weight has been given to industry insights that show how applying broad-brush UCT protections would detrimentally affect insurance customers. In particular, the proposed narrow definition of the main subject matter makes almost every term in an insurance contract legally contestable. This is not what is applied in other sectors.

“Our concerns, as expressed at the Royal Commission hearings, are that if insurers cannot rely on the legitimate terms of their contracts, they will have to price in the additional risk. This will be passed onto consumers. Insurers will have to reassess their risk appetite in many regions of Australia, and this may result in reduced competition, products with fewer beneficial features and a reassessment of pricing.

“The Insurance Council of Australia will need to consult widely on this draft, including with members, regulators, consumer groups and the Australian Financial Complaints Authority. We urge Treasurer Josh Frydenberg to extend the timeframe for consultation on this bill. The government should be open to redrafting this bill to ensure UCT protections genuinely assist customers without undermining our competitive risk-based insurance market”

Consumer law currently protects consumers against unfair contract terms that:
• would cause a significant imbalance in their rights and obligations under a contract
• are not reasonably necessary to protect the business, and
• would cause detriment (financial or otherwise) to a consumer.

In his Final Report, Commissioner Hayne observed the considerations that render a UCT regime appropriate for other contracts of financial products and services apply equally to insurance contracts, and there was no reason for the current exemption for insurance contracts to continue. Frydenberg has indicated that the Government is taking action on all 76 recommendations contained in the Final Report of the Royal Commission and will continue to take the necessary steps to restore trust in Australia’s financial system.