Regulatory Rumbles: Interaction between UCT & the Insurance Contracts Act – the "Flotation Devices”

The Lead Up

The recent case of ASIC v Auto & General Insurance Company Limited [2024] FCA 272 raises an extremely important issue (and resolution) for all insurers in relation to contracts of insurance issued by them.

The factual centrepoint of the case was the inclusion, in the relevant product disclosure statement, of a term which required an insured person to “tell us if anything changes while you’re insured with us”. The insurer could refuse to pay a claim, reduce the amount paid, cancel the contract or not offer to renew the contract if the insured did not comply with this obligation. ASIC’s contention was that the inclusion of this provision infringed the unfair contract terms regime in the ASIC Act. However, the Court found in favour of the insurer, finding that the term was not unfair.

We explore the facts of the case and the relevant findings of the Court in our separate article. For present purposes, this article focuses rather on a major take-out of the case, which as often is the case, far transcends its application to the specific circumstances of the case.

The Flotation Devices

This key point is captured in our title – namely, how do the relevant unfair contract terms criteria – which would or could otherwise render a contractual provision void – interact with sections 13 and 54 of the Insurance Contracts Act?

ASIC had submitted that section 54 effectively should not be taken into account in considering the application by the relevant unfair contract terms criteria (contained in section 12BG of the ASIC Act). ASIC made an alternative submission that even if section 54 should be taken into account in relation to the operation of section 12BF of the ASIC Act, “then the Notification Clause is nevertheless productive of significant imbalance in the party’s rights and obligations, because in ASIC’s submission, the Notification Clause makes no reference to, and gives no explanation of, the effect of ss 54 and 55 of the ICA” (at [79]).

The real gem conveyed in the Court’s judgment is that “when assessing the three criteria of unfairness in s 12BG(1), the Court must take into account the context of the overall legal environment (including statutory provisions like s 13) in which the terms of the contract operate” (at [88]).

The Court held that the effect of the Notification Clause must “take into account the implied provision under s 13 of the ICA, relevantly requiring the insurer to act towards the insured in respect of any matter arising under or in relation to the contract of insurance with the utmost good faith” (at [57]).

The next link in the chain of significance for insurance contracts more generally is that the requirement to act with the utmost good faith does not import a standard of reasonableness but rather, a standard to act consistently with common decency and fairness (at [81]). Significantly, the Court held that, when the requirement to act with common decency and fairness was taken into account, the Notification Clause has the same substantive effect as section 54 (at [82]).

However, the Court also held that even the conclusion that the Notification Clause has the same substantive effect as section 54 is wrong, section 54 would itself intervene to ensure the defendant’s powers to refuse or reduce claims would not cause a significant imbalance in the rights and obligations of the parties arising under the contract” (at [85]).

This means ultimately that the terms of an insurance contract that might otherwise be treated as unfair have inbuilt statutory life rafts in the form of the application of sections 13 and 54 of the Insurance Contracts Act. In other words, terms that might otherwise sink under the weight of the unfair contracts term regime are rendered buoyant or are floated from the uplift conferred by sections 13 and 54.

This means, very significantly, that the relevant term and the right of an insurer can be protected from otherwise being unfair by one of these statutory flotation devices.

As the Court commented upon: “Commercial decency and fairness require that the defendant not exercise its rights in a way which is opportunistic, such as by seizing upon a breach by the insured which has not caused the defendant any loss, or by refusing to pay a claim or reducing the cost of a claim beyond the extent to which a defendant would be prejudiced by the breach” (at [81]).

And further: “The ability of an insurer to rely upon a breach of warranty to refuse an insured’s claim even if the breach did not cause or contribute to the relevant loss or prejudice the interests of the insurer in some other way (such as increasing the risk) is what led to the recommendation and enactment of ss 54 and 55 of the ICA (see the Australian Law Reform Commission’s Report No. 20 (1982) on Insurance Contracts at [219]-[220]" (also at [81]).

And further yet: “It would be contrary to commercial standards of decency and fairness for the defendant to exercise the rights referred to in the Notification Clause 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 defendant’s interests” (at [82]).

The Significance

The link made by the Court may not constitute new law, but its significance is vast and widespread. It means that a variety of terms of insurance contracts that potentially could on their face be considered unfair will be rescued by the fairness criteria built into sections 13 and 54 of the Insurance Contracts Act, with these provisions effectively operating as savings provisions. This means that the conduct focus shifts to the manner in which the term is administered.

For more assistance, discussion, thoughts and input on this significance point, please feel free to contact one of our Insurance team members below. Such input can include a training session for any interested insurer.