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Clause out: last scrap looms over contract terms

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The war over the extension of unfair contract term laws to insurance may have reached its final battle, with the release of Treasury proposals that insurers say will have far-reaching repercussions.

After previous reprieves, the matter is back with a vengeance for insurers, who have maintained stiff opposition to any proposal that imposes the laws on them.

The industry says there is no need for the industry to be included because it is well covered by its own arrangements, including the duty of utmost good faith in the Insurance Contracts Act.

The Insurance Council of Australia (ICA) says the Treasury discussion paper goes beyond past proposals and has “profound implications” for the scope of cover offered and premium pricing.

“It will mean every insurance contract in Australia will have to be rewritten from the ground up,” ICA spokesman Campbell Fuller told insuranceNEWS.com.au. “The insurers will have to reassess every single risk they are either including or excluding from a policy.”

Alarms have sounded over terms covering property rebuilds or repairs, and choices around whether an insurer oversees work or a cash settlement is made.

Consumer groups argue individuals, who may not be able to organise repairs as cheaply as an insurer, are often disadvantaged by a cash settlement.

Insurers point out in response that the current approach has served the community well, with faster recovery and reduced costs. Policyholders accepting a cash settlement are advised of the risks. In some cases cash is paid because insufficient cover means a rebuild for the sum insured is impossible.

“The insurer has a responsibility to keep costs down because any increase in costs ends up leading to higher premiums across the board,” Mr Fuller said.

The discussion paper’s comparisons with the UK’s unfair contract regime and other overseas arrangements have also been questioned.

Unfair contract term laws were introduced in 2010 and extended to small business from 2016, but insurance – which has similar provisions in the Insurance Contracts Act – remained exempt. A proposed amendment to include the sector lapsed in 2013 when Parliament was dissolved for a federal election.

Norton Rose Fulbright lawyers David Frew and Ray Giblett say the Treasury paper may lead to the most significant insurance contract regulation changes since the Act was introduced.

In a blog post they also question whether exposing insurance to unfair contract term provisions could “effectively render centuries of jurisprudence regarding the duty of utmost good faith nugatory”.

National Insurance Brokers Association CEO Dallas Booth says insurance’s “utmost good faith” basis sets it apart from other financial services areas, where “buyer beware” is a fundamental principal.

“We have a different starting point, we have a different body of law and attempts to blend the two really worry me,” he said.

Nevertheless, the issue has not gone away. An Australian Consumer Law Review report last year recommended change, noting Insurance Contracts Act requirements “have not been shown to provide equal or greater consumer protection”.

It says the insurance exclusion is at odds with the intention for Australian Consumer Law to operate as a generic, economy-wide law that minimises exemptions where possible.

A recent Senate committee inquiry into the industry also recommended insurance come under unfair contract term provisions, paving the way for the matter to be referred to Treasury.

Financial Services Minister Kelly O’Dwyer warned insurers at their annual forum in March that the Government was pressing ahead on the issue.

“I know many of you… have consistently advocated that there is no need to extend the unfair contract term provisions to insurance contracts,” she said. “Yet many outside the industry disagree.”

Financial Rights Legal Centre Policy and Advocacy Officer Drew MacRae says the Treasury proposal paper is a positive result and insurers’ protests are unconvincing.

“Every other industry in Australia had to deal with this when the unfair contract term regime came in,” he told insuranceNEWS.com.au. “They survived and the insurance industry will survive.

“We have been arguing for years for unfair contract terms to be introduced into insurance and have never understood why insurers have had an exclusion.”

The Hayne royal commission, which will examine insurance in September, provides a different backdrop for the current review and potentially adds to pressure on the industry.

“I don’t think there is any chance in this political climate that these proposed changes are not going to go through in some form,” Barry.Nilsson Lawyers Principal Robert Samut says.

The proposals could place more responsibility on underwriters to clearly explain and justify the need for particular contract terms, while regulators would need to keep in mind that insurance has unique characteristics.

“The regulator has to be careful not to strike something out as unfair just because it is unusual,” Mr Samut says. “Insurance is a completely different product to others in the market because it is the sale of a promise. It is a special type of contract."

ICA CEO Rob Whelan says no compelling evidence has been presented in various inquiries and reviews that unfair contract term protections will benefit general insurance consumers.

“ICA will respond to the proposals paper and will continue to work with stakeholders on seeking mutually acceptable outcomes,” he said.