The Insurance Council of Australia (ICA) is concerned the draft laws to extend unfair contract terms (UCT) provisions to insurance contracts will do more harm than good.

Treasury last week released the draft legislation for consultation after the Morrison Government committed in February to carry out the reform as proposed by the Hayne royal commission.

ICA believes the decision to have the main subject matter narrowly defined, as opposed to a broad definition, could make “almost every term in an insurance contract legally contestable”.

“This is not what is applied in other sectors,” CEO Rob Whelan said.

“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.

“Insurers will have to reassess their risk appetite in many regions of Australia, and this may result in reduced competition, products with fewer beneficial features and a reassessment of pricing.”

ICA wants to consult widely with its members and other stakeholders on the draft laws, and has called for an extension to the August 28 consultation deadline.

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.

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.

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.

Applauding the decision to have the main subject matter narrowly defined, she says this effectively “means insurers won’t be able to hide behind unfair terms in policy exclusions, benefits, condition”.

The Australian Small Business and Family Enterprise Ombudsman similarly wants UCT made illegal. It has also called for penalties to apply to breaches.