The Morrison Government today released for consultation its draft legislation to apply unfair contract terms laws to insurance contracts, fulfilling the promise it made in February to carry out the reforms as proposed by the Hayne royal commission.

Some aspects of the changes, in particular the decision to have the main subject matter narrowly defined, have the Insurance Council of Australia (ICA) concerned the move could make “every term in an insurance contract legally contestable”.

Treasury estimates the overhaul will see insurers incur a one-off administrative expense of about $3.5 million, mostly from the legal costs of reviewing standard form contracts and updating them.

Amendments to the Insurance Contracts Act and the Australian Securities and Investments Commission (ASIC) Act are the two key components in the Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill.

The changes include extending unfair contract term laws to insurance contracts with a narrow definition of the main subject matter, which is the Government’s preferred choice over that of one with a broad definition.

“This will result in an increased number of terms being subject to the fairness test under the law, thereby increasing the benefit to consumers and small businesses and also the likely impact on insurers,” Treasury says in a draft regulation impact statement.

But ICA argues the measure would lead to worse outcomes.

“These draft laws demonstrate that despite numerous inquiries, not enough weight has been given to industry insights that show how applying broad-brush unfair contract terms protections would detrimentally affect insurance customers,” CEO Rob Whelan said.

“In particular, the proposed narrow definition of the main subject matter makes almost every term in an insurance contract legally contestable. This is not what is applied in other sectors.

“Our concerns… are that if insurers cannot rely on the legitimate terms of their contracts, they will have to price in the additional risk. This will be passed on to consumers.”

Suncorp Insurance CEO Gary Dransfield says the unfair contract terms overhaul should not be considered in isolation, given other proposed regulatory changes would also have an impact on claims-handling.

He also believes it is important to have the reform agenda resolved.

“It has clearly been very significant for a range of consumer advocates for the industry to deal with this, so it is a chance to get a regime that consumer advocates and regulators feel works for consumers and that still enables us to provide good quality, reasonably priced products,” he told insuranceNEWS.com.au.

Consumer Action Law Centre Senior Policy Officer Cat Newton calls the bill the “first step in the right direction” but argues it is not enough.

“We need unfair terms banned outright, and for civil penalties to apply, to ensure insurers take this reform seriously,” she told insuranceNEWS.com.au.

The closing date for submissions is August 28.

For more information, click here.