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New Unfair terms legislation to be introduced

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Federal Assistant Treasurer David Bradbury has announced that the Gillard Government will legislate to protect consumers from unfair terms in general insurance contracts. Further consideration will be given to the application of unfair contract terms laws to life insurance contracts in the future.
The new laws will:
• be introduced into the Insurance Contracts Act 1984.
• be based on the unfair contracts provisions in the Australian Securities and Investments Commission Act 2001, but will take account of the unique features of insurance contracts.
• allow consumers, or the Australian Securities and Investments Commission (ASIC) as the regulator, to challenge a term in the courts.
• give ASIC a range of enforcement powers to administer these new laws and if a term is found to be unfair, the insurer cannot rely on that term and the court may also order other remedies to help consumers.
• provide for an adequate transition period, and will apply to all new and renewed insurance contracts entered into after commencement.
• be released in draft for consultation in 2013.

Principles for extending Unfair Contract Terms laws to general insurance contracts
The announcement set out the following principles behind the changes:
Unfair contract terms (UCT) laws for insurance will be introduced into the Insurance Contracts Act 1984 (IC Act), based on the UCT regime that applies under the Australian Securities and Investments Commission Act 2001 (ASIC Act) and with the following elements which includes some tailoring for insurance:
• the regime will apply to consumer contracts that are standard form insurance contracts;
• it will be included as part of the duty of utmost good faith;
o that is, if a term is found to be unfair, the insurer will be in breach of the duty of utmost good faith;
• the remedy available where a term is found to be unfair will be that the party may not rely on the term;
• in addition to the above remedy, a court may consider whether there is another more appropriate remedy;
• ASIC and consumers will both have the right to take action under UCT laws;
• ASIC will have the range of enforcement powers that are currently available to it to administer the UCT laws in the ASIC Act replicated in the IC Act for the purposes of enforcing the UCT laws in the IC Act;
• the UCT regime will not apply to a term to the extent it:
• defines the main subject matter of the contract;
• sets the upfront price payable under the contract; or
• is a term required, or expressly permitted by a law of the Commonwealth or a State or Territory.
• would cause a significant imbalance in the parties rights and obligations under the contract;
• would cause detriment to a party if relied on;
• is not reasonably necessary to protect the legitimate interests of the party advantaged by the term. For the purposes of determining whether a term in an insurance contract is reasonably necessary to protect a legitimate interest, a term will be reasonably necessary if it reflects the underwriting risk accepted by the insurer.
• the definition of an unfair term is that the term:
• the insurer will have the onus of proof that a term is reasonably necessary to protect their legitimate interests; and
• the UCT regime will not apply to life insurance contracts at this stage.
As always, the devil will be in the detail. A major issue for insurers will be the extent to which a clause found to be an “unfair term” in one policy will result in all other contracts with similar clauses being affected.
In principle, the reforms should be good news for insurance brokers and their insured clients who will be better protected once the legislation takes effect.
 

Last changed: Dec 20 2012 at 8:11 PM

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