Small business insurance contracts should be explicitly prescribed as exempt from unfair contract terms protections, the Insurance Council of Australia (ICA) says.

In a submission to a Senate inquiry into the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill, ICA notes insurance contracts are currently exempt from Australian consumer law and unfair contract terms protections applying to consumers.

The Insurance Contracts Act 1984 excludes insurance contracts from the operation of Commonwealth, state or territory acts that provide relief in the form of judicial review of unfair contracts or claims of misrepresentation.

ICA says the Australian Law Reform Commission has previously taken the view that, in light of the utmost good faith obligation imposed on insurers, it is unnecessary for insurance contracts to be subject to a facility for judicial review of unfair contract terms. This view was reflected in the Insurance Contracts Act.

Treasury says the Bill will not affect application of the exemption in the Insurance Contracts Act, and that unfair contract terms provisions will not apply to small business contracts.

But ICA argues that to remove any ambiguity about the application of the insurance contracts exemption, the Insurance Contracts Act “should be one of the laws that is specifically prescribed in the legislation”.

Another ambiguity ICA wants removed is in the definition of small business.

“We suggest there needs to be greater clarity on how businesses apply the definition of small business in practice.”

The Bill proposes a small business contract be defined as one in which at least one party is a small business with fewer than 20 employees and the “upfront” price does not exceed $100,000, or $250,000 for contracts of more than a year.

ICA argues definitions that measure business size on the basis of employee numbers are impractical, “given such information is fluid and non-transparent”.

It believes the “fewer than 20 employees” rule is difficult to verify and will “contribute substantially to compliance costs, given the vast number of small business suppliers they [insurers] contract with”.

ICA also wants greater clarity around how the two-tiered transaction value threshold is calculated for contracts incorporating a head agreement and multiple service order agreements.

It says the Bill is ambiguous as to whether the transaction value threshold is applied to the overall contract or individual service order agreements under the contract.

The Bill provides for a transition period of six months before the protections take effect. ICA believes this is inadequate.

It says an 18-month transition period would give businesses a more realistic timeframe to review existing contracts and future contracts, and implement an appropriate compliance regime.