The Federal Government should extend unfair contract rules to insurance and introduce an individual suitability test for consumers buying cover, according to the Consumer Action Law Centre.

In a submission to the Financial System Inquiry, it argues that if unfair terms protections are to be extended to protect small business, as proposed by the Government and recommended in the inquiry’s final report, then insurance consumers should also gain this protection.

Section 12BF of the Australian Securities and Investments Commission Act says a consumer contract for financial services is void if it is “unfair”, but this excludes insurance.

“It has always been our view that there is no sound reason to carve out the insurance industry from these otherwise economy-wide provisions,” the submission says.

The submission says there is also a strong case for an individual suitability test for consumer insurance products at point of sale, achieved by amending standard cover requirements under the Insurance Contracts Act.

“There is now a weight of evidence indicating that, because of structural problems in insurance, consumers frequently end up with insurance that is not suitable for their needs.”

Underinsurance results when consumers cannot assess the correct sum-insured value for homes and contents, or understand exclusions such as flood in insurance contracts.

“This is a problem that tends to come to light after natural disasters, but in reality it affects a much larger group of consumers who are not aware they are underinsured until it is too late.”

The organisation says all home building policies offering sum-insured cover should be modified to offer full replacement in the event of total loss, as recommended by the Natural Disaster Insurance Review.

Insurance products should be made less complex, more comparable and safer.

Penalties for contravening financial services consumer protection laws should be increased and a “last-chance” compensation scheme set up to cover consumers who suffer losses from misconduct by operators that shut down or have no professional indemnity cover, the submission says.

The general insurance industry should continue to improve product disclosure, as recommended by the inquiry’s final report.

The organisation says product fees and costs should be better communicated to consumers, because costs are “frequently opaque” due to premiums being bundled with repayments on the headline product.

“Cases handled by our legal practice include one consumer paying more than $5500 in add-on insurance alongside a $25,000 car without knowing she had bought the insurance, and another paying almost $3000 for insurance on a $17,000 loan.”