Draft legislation to add unfair contract terms to insurance law is “seriously flawed” and could damage the industry, according to the Insurance Council of Australia (ICA).

A regulatory impact statement assessing the changes is also inadequate and consultation is being rushed, it says in a submission.

“The damage likely to be done to the established regulatory fabric of the general insurance industry could well exceed the anecdotal estimates in the regulatory impact statement of consumer detriment that would be addressed.”

The draft is not tailored to the current insurance regulatory regime and carries unknown implications, the council says.

The threshold for a breach of utmost good faith would be much lower than in the Insurance Contracts Act, creating unacceptable uncertainty, according to ICA.

The draft also fails to acknowledge that the application of insurance contract terms can vary according to the circumstances of a claim, it says.

This raises the risk that one successful challenge to a term would cause it to be considered unfair in all contracts.

ICA says it will work with Treasury on improving the draft, but it cannot support the bill’s introduction in its current form.

The submission also calls for a 30-month transition period, for insurers to prepare for changes.