By: Cain Jackson, Edward O’Brien and Samantha Younane

Introduction

Almost 3 years after the unfair contract terms (UCT) regime1 was expanded to “consumer”2 and “small business”3 insurance contracts, the decision of Australian Securities and Investments Commission v Auto & General Insurance Company Limited4 provides some guidance and clarity as to how the UCT provisions operate in an insurance context.

Facts

Between 5 April 2021 and 4 May 2023, Auto General and Home Insurance (the Insurer) issued over one million home and contents insurance contracts under several household name brands. The contracts comprised of standard terms, which were contained in the PDS and supplementary PDS documents (Policies). The Policies contained the following term (referred to as Term for the balance of this article):

As part of the proposal process, customers were asked a series of questions relating to specific matters concerning their home and contents, including the “examples” outlined in the Term. Customers were also reminded of their duty of disclosure and their duty to take care to not make a misrepresentation.

What was ASIC’s issue?

In broad terms, ASIC alleged the Term was unfair within the meaning of section 12BF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) because it:

  • imposes an obligation on customers to notify the Insurer if ‘anything’ changes about their home or contents
  • alternatively (if the Term is not to be construed literally), imposes an ambiguous and unclear obligation on the consumer as to what the consumer needs to disclose
  • suggests that the Insurer has a broader right to refuse claims or reduce the amount payable under claims if the customer does not meet the notification obligation that is available under the Insurance Contracts Act 1984 (Cth) (ICA), and
  • could mislead or confuse the customer as to their true obligations and rights under the contract.

Was the Term “unfair”?

The ASIC Act provisions

Section 12BF(1) of the ASIC Act provides that a term of certain kinds of insurance contracts will be void if the term is “unfair”. Section 12BG then provides for when a term is “unfair”, together with other matters which inform the unfairness assessment:

Meaning of unfair

(1) A term of a contract referred to in section 12BF is unfair if:

(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

(2) In determining whether a term of a contract is unfair under subsection (1), a court may take into account such matters as it thinks relevant, but must take into account the following:

(b) the extent to which the term is transparent;

(c) the contract as a whole.

(3) A term is transparent if the term is:

(a) expressed in reasonably plain language; and

(b) legible; and

(c) presented clearly; and

(d) readily available to any party affected by the term.

(4) For the purposes of paragraph (1)(b), a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.

The Court’s approach

The Court made some observations about how it should approach the exercise of assessing whether a contract term is unfair.

The first issue concerned the proper construction of the Term, because s12BG “is concerned principally with the meaning of those words on their proper construction. The term in question is not merely the words actually used, nor is it those words taken in isolation from the contract as a whole.” After considering the competing arguments, the Court said – with substantial conviction5 – that the proper construction of the Term is as follows:

(a) the insured must notify the defendant if, during the term of the policy, there was any change to the information about the insured’s home or contents that the insured had disclosed to the defendant prior to entry into the contract, and

(b) if the insured failed to notify the defendant of such changes, the defendant had the right to refuse to pay a claim, reduce the amount it paid, cancel the contract or not offer to renew the contract if and to the extent that it would be consistent with commercial standards of decency and fairness for the defendant to do so.

The Court also said that the assessment of the Term must occur in the context of the legal environment in which it operates – which necessarily includes the ICA.

Application of s12BG

We set out each of the elements below and the Court’s observations in respect of each:

Element of s12BG Finding Observations by the Court
(a) It would cause a significant imbalance in the parties’ rights and obligations arising under the contract, and Not satisfied – the Insurer’s rights for “breach” of that provision are qualified by the duties owed under s13.
  • Section 13 is implied into the contract, and the contract has to be assessed when determining unfairness (see s12BG(2)(c)).
  • The section 13 duty requires the Insurer to act with commercial standards of decency, which includes exercising its rights in a way which is not opportunistic.
  • It would be contrary to that duty for the Insurer to exercise the rights referred to in the Term to the prejudice of an insured unless and to the extent that the insured’s failure to notify a change in information had prejudiced the Insurer’s interests.
  • Any assessment of that prejudice would have the substantive effect of s54 of the ICA.
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term,6 and Not satisfied – term is reasonably necessary to protect the Insurers’ interest – the obligation to notify is proportionate to that interest [but see transparency discussion below].
  • The Insurers’ legitimate interests includes its ability to choose which risks it will insure against.
  • The Insurer has a legitimate interest in not having to pay claims where the loss giving rise to those claims has been caused by a risk that the defendant would not have been prepared to insure against.
  • While terms dealing with exclusions provide one way for the Insurer to manage risks which it is not prepared to insure against, information provided pursuant to the Term may be relevant to whether a customer has become uninsured, and that information would assist the Insurer in managing its portfolio of risk.
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. Satisfied – Court agreed with ASIC that any reliance upon the clause by the Insurer will necessarily be detrimental to the consumer, irrespective of whether ss 54 and 55 of the ICA apply to limit the defendant’s rights.

 

The Term is also not transparent (see s12BG(3)), and the lack of transparency is in itself a detriment.
  • The test is whether the term would cause detriment in the sense of some disadvantage to consumer, which doesn’t necessarily have to be significant.
  • Even if the disadvantage creates a fair outcome, it is nevertheless a disadvantage.

As to transparency:

  • whether a term is expressed in a manner which allows consumers readily to know and understand the parties’ rights and obligations is an aspect of transparency.
  • In this sense, the Term as it appears in the PDS material lacks transparency to a significant degree.
  • Consumers generally would not have reached the same construction as the Court.
  • Few consumers would be aware of ss 13 and 54 of the ICA and their impact on the Term.

The transparency issue

A key element of the decision is how the issue of “transparency” was applied by the Court. Section 12BG(2) requires the Court, when assessing all three limbs of s12BG(1), to consider the extent to which the Term is “transparent”. Section 12BG(3) then says that a term is transparent if the term is: (a) expressed in reasonably plain language; (b) legible; (c) presented clearly; and (d) readily available to any party affected by the term.

Drawing on other cases which considered the ACL equivalent of the UCT provisions, the Court accepted ASIC’s submission that the words “expressed in reasonably plain language” includes clarity of meaning and that this is consistent with other cases which have considered transparency in the ACL context.7

With the Court finding that the Term was not transparent, it then had to determine which limb(s) of s12BG(1) the lack of transparency related to. As seen in the above table, the Court formed the view – in this case – that the transparency issue related to limb (c) (detriment) only. As s12BG(1) is a cumulative provision (all limbs need to be satisfied), it wasn’t enough to reach a finding that the Term was unfair.

Takeaways from the decision

The following key points emerge from this decision:

  • The UCT regime cannot be viewed as distinct and separate from the duties owed by insurers under the ICA.
  • The ICA provides important context when assessing unfairness under the ASIC Act.
  • A term must be assessed according to its proper construction, rather than on the basis of the words actually used.
  • The extent to which a term is transparent (which informs “unfairness”) represents the biggest area of risk for insurers because:
    • while certain provisions may be limited or remedied by the operation of the ICA, the issue of transparency does not, and
    • the issue of transparency is to be applied to all criteria in s12BG(1), which means that consideration of transparency can, depending on the facts of the case, significantly impact the Court’s assessment as to whether a term is unfair.
  • Ultimately, the cumulative test in s12BG (together with the obligations owed by insurers under the ICA) means that there remains a high bar for ASIC (and any other party) to successfully allege a breach of the UCT provisions.

If you have any questions in relation to this overview or the unfair contract terms regime more broadly, don’t hesitate to get in touch.

ASIC has since appealed this decision. ASIC’s media release regarding the appeal can be accessed here.

[1] s12BF–12BM of the Australian Securities and Investments Commission Act 2001 (Cth)

[2] A contract where at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption (s12BF(3)).

[3] A contract where:
               (a)  the upfront price payable under the contract does not exceed $5,000,000, and
               (b)  at least one party to the contract satisfies either or both of the following conditions:
                              (i)  the party makes the contract in the course of carrying on a business and at a time when the party employs fewer than 100 persons, and/or
                              (ii)  the party’s turnover… for the party’s last income year (within the meaning of the Income Tax Assessment Act 1997) that ended at or before the time when the contract is made, is less than $10,000,000.

[4] [2024] FCA 272

[5] Jackman J said that the construction he adopted is not “finely balanced” and he considers “the proper construction by a very substantial and comfortable margin.” [at 60].

[6] Section 12BG(4) provides that a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.

[7] For example, the Court referred to the case of ACCC v Servcorp Ltd [2018] FCA 1044, in which the Court found that a term which did not disclose the nature and extent of the obligations or how they would be applied lacked transparency.