The Insurance Council of Australia (ICA) has urged caution in proposed changes to Australia’s bankruptcy and insolvency laws. 

In its response to Federal Treasury’s paper, “Improving bankruptcy and insolvency laws”, which forms part of the Federal Government’s National Innovation and Science Agenda, ICA argues that any changes to bankruptcy and insolvency laws “should be supported by a clear and sufficient rationale for change and strike an appropriate balance between encouraging entrepreneurship and protecting creditors”.  

The paper proposes to constrain the operation of “ipso facto clauses” which allow termination of contracts solely due to insolvency, and considers whether this approach should be extended to include other types of clauses that vary contract terms.

ICA notes that general insurance contracts typically do not include clauses that stipulate insolvency as a termination right; however, general insurance contracts may include clauses that specify insolvency as an exclusion in the contract. 

It argues that there is a “clear distinction” between a termination right in a contract and an exclusion under a contract.

“Any proposed changes should carefully take this distinction into account and not detrimentally affect an insurer’s ability to exclude an insolvency event as a head of cover, particularly because the insolvency event itself may have caused the loss,” ICA says. 

“Insurers should not be placed in the position of being forced to be the insurer of an insolvency event simply because they cannot exclude this head of liability.”

ICA “strongly submits” that a “specific carve out” for exclusion clauses in general insurance contracts is required.

“While we are supportive of the proposal for a safeguard provision that would provide any affected counterparties with an appeal right to vary contract terms, we consider that a specific carve out for exclusion clauses in insurance contracts would be more appropriate,” it states.