In April, for the first time, the Australian Securities and Investments Commission (ASIC) launched proceedings against an insurance company for alleged unfair contract terms. The regulator’s move against Auto & General Insurance Company (Auto & General) was followed last week, by a second, similar action against HCF Life Insurance Company (HCF Life). HCF Life, part of health fund HCF, is strongly contesting the case.
“It will contest this case to the fullest extent and believes this to be a test case for the wider industry,” said an HCF spokesperson.
So how significant are these two ASIC cases and what exactly does the regulator need to prove?
“What we are currently seeing is the regulator simply following through on their very public commitment to turn their attention to what they deem to be the poor design, or inclusion of unfair terms, in insurance contracts,” said Susannah Fricke (pictured above), partner with the general insurance team at Hicksons law firm.
ASIC published its enforcement priorities for 2023 earlier this year. Those enforcement priorities, said Sydney-based Fricke, specifically listed, as two top priorities: “enforcement action targeting the poor design, pricing and distribution of financial products, including in relation to insurance” and “unfair contract terms, including in insurance products.”
She said the case against concerns an allegedly unclear policy term requiring customers to notify A&G “if anything changes about your home or contents.”
ASIC contends that this is unfair, she said, because it imposes an unclear obligation on the customer, or imposes an obligation that the customer cannot practically meet. This concerns, Fricke said, the very broad requirement to notify the insurer about “anything” relating to the home or contents insured.
“In the HCF Life matter,” she said. “The allegations relate to an exclusion purporting to apply where customers failed to disclose medical conditions which existed prior to entering into the contract with HCF Life, albeit in situations where that condition had not yet been diagnosed.”
ASIC is claiming, she said, that those exclusion clauses are inconsistent with section 47 of the Insurance Contract Act 1984 (Cth). This section prevents insurers limiting or excluding their liability for claims relating to a pre-existing condition where ‘the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability’ at the time the contract was entered into.’
Fricke said it is too early to speculate what approach the Federal Court may take, assessing what is ‘unfair’ in the context of insurance contracts.
“The unfair contracts regime in the ASIC Act has only applied to insurers since 2021 and these are the first two cases actually brought under those provisions against insurers,” she said.
However, Fricke said the criteria for assessing ‘unfairness’ “is quite clearly set out in section 12BG of the Australian Securities and Investments Commission Act 2001 (Cth).”
The regulator will need to satisfy all three criteria in this section to complete a successful prosecution. Fricke said some key issues could be whether the terms in question are considered to have caused a ‘significant imbalance’ as to the rights of the insurer and the obligations of the insured under the contract.
“Also, whether the insurer had a legitimate interest it was protecting in including these contract terms, which will factor in issues regarding whether the insurer has in fact mispresented or overstated its rights pursuant to the Insurance Contracts Act,” she said.
Fricke suggested that the HCF Life and Auto & General contract terms that are in question are not uncommon.
“We have noticed examples of similarly worded terms utilised, particularly in the context of home and contents insurance policies, within policy documents that remain applicable and available to the market,” she said.
Fricke also said it would be a mistake for other insurers to assume that because their terms are not the same, that their policy wordings will escape scrutiny.
“Both of these cases demonstrate that contract provisions that the insurers may have previously deemed innocuous are anything but,” she said. “It will also be interesting to see how the Court responds to allegations by ASIC that the insurers have not specifically drawn the insured’s attention to their specific rights under the Insurance Contracts Act, as there are many policies that may fall under that category.”
The Hickson’s insurance law expert said prompt attention and review of policy wordings is key “if insurers are to mitigate the risk of falling foul of ASIC’s regulatory powers in future.”
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