Proposals to add unfair contract terms to the Insurance Contracts Act should be tightened to ensure the Australian Securities and Investments Commission (ASIC) can investigate earlier, consumer advocates have told a Treasury consultation.

A joint submission by the Consumer Action Law Centre, the Insurance Law Service (ILS) and Legal Aid NSW says the proposed unfair contract terms additions to the Act raise serious concerns that ASIC would not be able to use its investigation and enforcement powers until a court declares a term is unfair.

ILS Principal Solicitor Katherine Lane told insuranceNEWS.com.au the restriction on ASIC might be an unintended consequence of the drafting of the bill.

The submission says ASIC should be able to investigate underwriting guidelines without a court order. But under the draft amendment bill, a term that is declared unfair must not be relied on.

The draft says an insurer can prove a term is reasonably necessary if it shows the term reflects underwriting risk.

But the consumer lawyers say underwriting risk is not defined by the draft and any insurer who has a term challenged is likely to use underwriting risk as a defence.

“This will particularly be the case in the first unfair terms cases that come before the courts, when ASIC as well as insurers will have an interest in testing the boundaries of the new provisions.”

It says underwriting risk could be construed so broadly that no contract could ever be challenged for unfair terms.

Instead, the insurer should have to prove the term reflects the underwriting risk and also that the term reflects that risk in a reasonable way.