Unfair contract terms protection extended to general insurance contracts

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16 May 2013

The unfair contracts terms regime is being extended to all general insurance contracts (other than contracts for life insurance). Companies should commence implementing amendments to contracts and updating compliance materials, to ensure compliance with the regime. All relevant front line personnel should be across the unfair contracts terms regime, and other consumer law principles, so that they have regard to them in their interactions with consumers.

As foreshadowed in December 2012, the Government has released draft legislation to extend the unfair contract terms regime to general insurance contracts. 

Until now, by virtue of a carve out in section 15 of the Insurance Contracts Act 1984  (Insurance Contracts Act), general insurance contracts have been excluded from the protections against unfair contract terms.  

Estimates in the 2012 Regulation Impact Statement, based on data, suggest that unfair contract terms contained in insurance contracts cost consumers between AU$5 million and AU$10 million per year.  

The Productivity Commission, in its 2008 Review of Australia’s Consumer Policy Framework, first recommended that a national consumer law, which included  unfair contract terms laws, should apply to all sectors of the economy.  However, at the time of adoption of the national consumer law, general insurance contracts were excluded from the application of the unfair contract terms regime.  These changes in the field of insurance were originally flagged in March 2010, when the then Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, released an options paper seeking comments on options to address unfair contracts terms included in insurance contracts.  The Government committed to drafting legislation to enact these changes on 20 December 2012.

The proposed amendments seek to provide a level of protection for consumers who purchase insurance products commensurate with the current protections provided in the unfair contract terms regime in the Australian Securities and Investments Commission Act 2001, which presently applies to other financial products and services (and consumer contracts generally, under the Australian Consumer Law)Whilst the provisions will be based on these regimes, the Government intends to modify the insurance contracts unfair contract terms regime to take into account the “unique features of insurance contracts”. 

Under the proposed unfair contract terms regime, a term in an insurance contract will be considered unfair if it:

  • would cause a significant imbalance in the parties rights and obligations under the contract;
  • would cause detriment to a party if relied on; and
  • is not reasonably necessary to protect the legitimate interests of the party advantaged by the term.  For the purposes of determining whether a term in an insurance contract is reasonably necessary to protect a legitimate interest, a term will be reasonably necessary if it reflects the underwriting risk accepted by the insurer.  The insurer will have the onus of proving that a term is reasonably necessary to protect their legitimate interests.

Other key elements of the draft legislation include that:

  • consumers and the Australian Securities and Investments Commission (ASIC) will be able to take action for unfair terms in a standard form consumer contract of general insurance, such as seeking a court declaration that a term is unfair;
  • courts will have access to a range of remedies in such circumstances;
  • an insurer found by a court to have an unfair term will be in breach of the duty of utmost good faith and will not be able to rely on the term; and
  • ASIC will be given powers to enforce unfair contract terms for general insurance contracts by reference to the enforcement and investigation powers it has in the ASIC Act.

The amendments will apply to:

  • standard form consumer contracts of general insurance entered into, or renewed, on or after the commencement day; and
  • to terms of existing general insurance contracts varied on or after the commencement day.

The unfair contract terms regime will not apply to a term of a contract to the extent that it:

  • defines the main subject matter of the contract;
  • sets the upfront price payable under the contract; or
  • is a term required, or expressly permitted by a law of the Commonwealth or a State or Territory.

The proposed commencement day will be 12 months after Royal Assent, providing general insurers a transition period to review standard form consumer contracts for unfair terms.   

The Government has indicated that life insurance contracts will not be considered as part of this tranche of changes, however they have been flagged for consideration under the unfair contract terms laws in the future.

Unfair contract terms is an extremely topical issue, with the ACCC releasing the findings of its review into unfair contract terms in standard form contracts in the airline, telecommunications, fitness, travel and vehicle rental industries, and with the first proceedings brought under the unfair contract regime against Bytecard Pty Ltd. 

Companies should:

  • consider and make appropriate changes to all contracts in preparation for the introduction of the legislation; and
  • train staff, to ensure that staff have regard to these and other consumer law provisions in their interactions with consumers.

The exposure draft legislation and explanatory material can be found here.  Submissions on the draft legislation are due by 31 May 2013.


The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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Eddie Scuderi

Partner. Brisbane
+61 7 3228 9319

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Mark McCowan

Partner. Melbourne
+61 3 9672 3335

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