ASIC commences first court action on unfair contracts terms in insurance

Last week, ASIC commenced the first court proceedings alleging unfair contract terms in an insurance contract. The case involves standard form underwritten home and contents insurance contracts issued by Auto & General Insurance Company Limited (Auto & General).

On 5 April 2021, the unfair contract term protections in Subdivision BA of the ASIC Act were expanded to include insurance contracts. Since that time, there has been no judicial guidance on the application of the unfair contract terms regime to insurance contracts. However, unfair contract terms has been a key focus area for ASIC over the past year, and continues to be so, demonstrated through an notable increase in the volume of ASIC correspondence and notices received by insurers and other product issuers on unfair contract terms. This, together with the introduction of civil penalties in late 2022 and the upcoming expansion of the concept of small business contracts, have brought unfair contract terms issues into sharper focus for insurers (and indeed, other financial services providers and product issuers).

In the Auto & general case, ASIC alleges (among other things) that since 5 April 2021, a contract term requiring customers of Auto & General to notify it 'if anything changes about your home or contents' is unfair because the term:

• imposes an obligation on customers to notify Auto & General if ‘anything’ changes about their home or contents, which customers cannot practically meet;
• imposes an unclear obligation on the customer regarding what they need to disclose to Auto & General;
• suggests that Auto & General has a broader right to refuse claims or reduce the amount payable under claims if the customer does not meet the obligation to notify than is available under the Insurance Contracts Act (specifically, with regard to section 54 of the Insurance Contracts Act); and
• could mislead or confuse the customer as to their true obligations and rights under the contract, as it does not explain the existence or effect of section 54 of the Insurance Contracts Act.

This is the most noteworthy aspect of ASIC’s case, as the formulation of ASIC’s allegations is novel in the context of insurance. This is because ASIC alleges that a term is unfair because of a failure by the insurer to reference a limitation provision under the Insurance Contracts Act (being section 54 of the Insurance Contracts Act). Section 54 and other limitation provisions operate to limit the circumstances in which an insurer can reduce or deny a claim. Typically, such limitations are triggered and operate during the claims process undertaken by an insurer. Such limitation provisions are littered throughout the Insurance Contracts Act and so, if ASIC is successful against Auto & General, the implications for the industry are significant.

ASIC further alleges the contract term in the Auto & General policy is unfair within the meaning of section 12BG of the ASIC Act as the term:

• causes a significant imbalance in the parties’ rights and obligations under the contract;
• is not reasonably necessary to protect Auto & General’s legitimate interests; and
• would cause detriment to the policy holders if the term were relied on.

ASIC is seeking declarations that the term is void. ASIC will also seek injunctions and corrective orders.

We regularly advise on the unfair contract terms regime and have been closely following developments in the regime and regulatory landscape. If you have any questions, get in touch with one of our experts below.