Unfair contract terms reforms that insurers say create too much legal uncertainty and may be detrimental to consumers have been introduced to Federal Parliament.

The bill, part of the Government’s response to the Hayne royal commission, extends bans on unfair terms to standard insurance contracts from April 2021, when new design and distribution obligations are also due to take full effect.

“Ensuring consumers and small businesses can purchase or renew their insurance policies with confidence is important,” Treasurer Josh Frydenberg said on Thursday.

Insurers say the new bill would make almost every term in an insurance contract legally contestable, which is not how the regime applies in other sectors, and will require underwriters to price in additional risk.

“The Insurance Council of Australia (ICA) is aware that the unfair contract terms legislation has been introduced into Parliament,” spokesman Campbell Fuller told insuranceNEWS.com.au.

“[We] will continue to advocate to reduce the negative impact of this legislation on Australian consumers.”

The unfair contracts regime, introduced in 2010 and extended to small businesses in 2016, has exempted policies covered by obligations to act with “utmost good faith” under the Insurance Contracts Act.

But consumer groups argue the exclusion has allowed insurers to profit by using “confusing, tricky and unfair” clauses to evade or reduce claims.

The Consumer Action Law Centre and Choice teamed up last week to lodge a petition with more than 20,400 signatures calling for the bill to be introduced in the current Parliamentary session, the final one for the year.

Disputes over the legislation centre on the scope of “main subject matter” contract elements, which are exempt from challenge, with consumer groups pressing for a narrow area of exclusion.

In the explanatory memorandum, “a four-bedroom, brick veneer, freestanding house” at a given address is provided as an example main subject that couldn’t be contested in a home policy, leaving other areas largely subject to the new law.

The size of an excess is also excluded, provided it’s transparent, while there will be provision for third-party beneficiaries of contracts to bring actions against insurers under the regime.