Explosion in the next trench!

06 April 2023

ASIC’s first proceedings alleging unfair contract terms in an insurance contract

In April 2021, the unfair contract protections under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) were expanded to apply to insurance policies with consumers and small businesses. Wind the clock forward 2 years: yesterday ASIC announced that it has commenced the first proceedings alleging unfair contract terms in an insurance contract. You can read the ASIC media release here.

Like an explosion in the next trench, the player outside you getting hit in a big tackle or you politely declining the salmon mousse at your sister’s party which poisoned everyone else – there was a collective exhaling of breath across the insurance industry yesterday from those NOT being pursued. At least for now. The insurance industry and its individual members are applying unprecedented focus and resource to all elements of compliance. A raft of laws from the Insurance Contracts Act 1984 (Cth) (ICA), the Corporations Act 2001 (Cth) to the ASIC Act operate to set obligations and standards.

New civil penalties from November 2023

From mid-November 2023, the unfair contracts laws will be amended to include a substantial civil penalty regime for insurers who “make” a standard form consumer or small business policy which includes an unfair term or who “appl[y] or rel[y] on” such a term in such a policy.  The penalties are cumulative and will apply “in respect of each term that is unfair“.  Similar obligations and penalties will apply to insured parties in their dealings with their customers (so watch out management liability underwriters) and brokers in their dealings with their clients1.

What is unfair

What is “unfair”, is determined by whether the term causes a significant imbalance in the parties’ rights and obligations; goes beyond what is reasonably necessary to protect the legitimate interests of the insurer; and would cause financial or other detriment to the insured if relied upon. ASIC and the ACCC have made it clear that a key consideration in determining fairness (or unfairness) is transparency: plain language drafting, ease of understanding and identification of effect. (See ASIC Information Sheet 210, for example). The concept of an ‘unusual term’ in s37 of the ICA is also likely relevant in the insurance context.

Until now, save for the power to injunct and apply corrective orders, the ‘big stick’ in the unfair contracts laws was the power to void the offending term. In seven months’ time, however, that stick will become considerably bigger – with the potential for multi-million dollar civil penalty orders against offending insurers and individuals ‘knowing involved’.

Carve out for a term which “defines the main subject matter of the contract”

After overcoming the dread at the size of the incoming civil penalty regime, one interesting element noted by the insurance industry is the ‘carve out’ in s12BI of the ASIC Act in regards to a term which “defines the main subject matter of the contract“. This is similar to the ‘carve out’ in the Consumer Rights Act 2015 (UK).

ASIC has given some high level guidance in Information Sheet 210 on what it regards as the limit of this carveout, indicating that ASIC regards the carve out as of quite limited scope. In the UK case of Bankers Insurance v South & Anor QBD 7 Mar 2003, the High Court of England, per Buckley J, took what seems to me at least to be a more expansive view of the carve out (see particularly paragraph [24] of the judgment). Time and possibly a future enforcement action will no doubt settle the question.

What now?

Reviewing contracts for ‘unfairness’, reviewing for compliance with the ICA and industry codes are all consistent with the general licencing obligation to act ‘honestly, fairly and efficiently’. That obligation is not new, nor is it hard to understand. It infuses what underwriters, claims colleagues, legal, compliance and management do every day. With new civil penalties, active enforcement agencies and now ‘an explosion in the next trench’ there is a strong onus on all insurance industry participants to understand the applicable laws and work together to ensure compliance.

This article was written by Andrew Gray, Partner.

1The penalties for contravention by insurers under the ASIC Act are slightly different to those for non-financial services businesses under the Australian Consumer Law – but contravention of either will carry substantial penalties.

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