Extending unfair contract terms to life insurance contracts

19 September 2019

The Unfair Contract Terms (UCT) regime has been in place since 1 July 2010 (and was reviewed in 2015). Now, the UCT regime is proposed to extend to life insurance contracts, in response to Recommendation 4.7 of the Financial Services Royal Commission Final Report.

The concept of fairness is not new to insurers. The Financial Ombudsman Service (FOS), and now the Australian Financial Complaints Authority (AFCA), have focused on providing fair and equitable outcomes in all of the circumstances, and ensuring consumers and small business are treated fairly. However, the extension of the UCT regime to life insurance contracts means life insurance policies may now be further scrutinised for potential unfair terms.

According to the exposure draft bill released by the Federal Government, the UCT regime is intended to apply to new or renewed standard form consumer and small business life insurance contracts, following an 18 month transition period.

While the proposed changes also introduce rights for a third party beneficiary of a contract to bring an action under the UCT regime, the proposed changes are not envisaged to extend to group life insurance contracts, as those contracts are unlikely to be classed as a small business or standard form contract. The draft explanatory memorandum specifically describes superannuation trustees as being unlikely to meet the definition of small business or consumer, and that the contracts would not be standard form, given the significant bargaining power of superannuation trustees.

It is also relevant to point out that, despite the Financial Services Council (FSC) having previously identified the need for carve outs to avoid unintended consequences in a life insurance setting, the exposure draft bill does not does include carve outs for life insurance. However, given the UCT provisions will be limited to regulating unfair terms in standard form consumer and small business life insurance policies, the overall impact of these amendments would seem to apply mostly to the retail life insurance space, as opposed to life insurance policies across the board.

In light of the impending changes, life insurers should start reviewing their standard retail policies for terms which may meet the test of unfairness under the ASIC Act.

This article was written by Matthew Harding, Partner, Sylvia Quang, Special CounselĀ and Thomas Dendrinos, Solicitor.

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