An ‘unfair’ fight

A long-running and ‘vastly significant’ battle over contract terms will rumble on in the courts

By Wendy Pugh

An Auto & General instruction for policyholders to “tell us if anything changes about your home or contents” has led to a landmark Federal Court decision over whether the term is so open-ended and ambiguous that it is unfair.

Justice Ian Jackman in March ruled in favour of the company after the Australian Securities and Investments Commission took its first action against a general insurer under unfair contract terms laws since they were extended to the industry in April 2021. The regulator has appealed.

Insurers had long argued the Insurance Contracts Act provided sufficient consumer protections, but the Hayne royal commission disagreed and recommended they also be brought within unfair terms provisions in the ASIC Act.

Law firms scrutinising the Federal Court decision say the assessment of the way the two laws interact is a key outcome and, should the decision stand, sets a high bar for an unfairness finding against insurers under the ASIC Act.

“The link made by the court may not constitute new law, but its significance is vast and widespread,” Herbert Smith Freehills lawyers including partner Michael Vrisakis have written.

“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.”

The case concerns home or contents policies sold between April 5 2021 and May 4 last year. ASIC argued customers would not know what they had to do to comply with an obligation to “tell us if anything changes” and would be unaware of the Insurance Contracts Act, reducing the chances of them disputing claim decisions and putting them in a position of a relative weakness.

“Contract terms need to be proportionate, transparent and clear, so any obligations are easily understood and able to be realistically adhered to by customers,” ASIC deputy chair Sarah Court said. “They must accurately describe the actual rights and responsibilities of the parties under the contract.”

Justice Jackman from the outset rejected the “absurdity” of a literal interpretation of “anything”.

“The contents of an insured’s home change whenever groceries are brought home from an everyday shopping outing, and again when they are consumed in preparing and eating meals,” he said.

“Every time a book or an item of clothing is purchased, or received as a gift, the contents of the home again will change. No rational person would think the notification clause was intended to compel the insured to notify the defendant of such routine and everyday changes.”

“If the decision is upheld … it has some significant implications for the scope of the unfair contract terms regime and insurance contracts.”
Norton Rose Fulbright partner Ray Giblett

The best guide to identifying the meaning was to look at the whole contract, he said. In that context, he found the wording referred to changes to information the policyholder had previously told the insurer.

For a term to be unfair, it must fail in three ways: cause a significant imbalance in the parties’ rights and obligations; not be reasonably necessary to protect the legitimate interests of the side advantaged; and cause detriment to a party if it were to be applied or relied upon.

Justice Jackman determined the clause did not create a significant imbalance and was reasonably necessary as part of insurer information gathering on risks it was willing to accept. It failed only on the third criteria.

The judgment says the court must consider the overall legal environment, and Auto & General could not unfairly use the clause to its advantage given the Insurance Contracts Act’s duty of “utmost good faith” and its rules around when insurers may not refuse to pay claims.

“The requirement that insurers act with the utmost good faith means they must act consistently with commercial decency and fairness,” Justice Jackman said. “In my view, commercial decency and fairness would prevent the defendant from any opportunistic reliance on the notification clause.”

The unfair contract terms legislation also requires transparency to be considered. This issue has been at the heart of ASIC’s arguments.

Justice Jackman, who examined transparency after considering the other criteria, found the clause did lack clarity, but he noted “a lack of transparency is not an independent element of unfairness”.

The High Court, in a previous consumer law case, said the greater the imbalance inherent in the term, the greater the need for it to be expressed and presented clearly.

Justice Jackman found there was no significant imbalance from the clause, it was necessary for assessing risk and he did not regard the lack of transparency as “leading to any different conclusion”.

The regulator scored a win around transparency only on the law’s third criteria, with a finding that the lack of clarity and certainty was “in itself a relevant detriment”.

ASIC said after the decision it remains concerned that the policy term imposes an unclear obligation on policyholders and could mislead or confuse around their obligations and rights.

Auto & General has noted the corporate regulator’s appeal, which will be heard in the Full Federal Court on August 28.

Lawyers Norton Rose Fulbright Australia say that, while subject to appeal, Auto & General’s successful defence shows common policy conditions are capable of withstanding scrutiny under the unfair contract terms regime.

“If the decision is upheld and stays as it is, it has some significant implications for the scope of the unfair contract terms regime and insurance contracts, and in a way that will be quite beneficial for insurers,” partner Ray Giblett told Insurance News.