The Insurance Council of Australia (ICA) says a proposed model for extending unfair contract terms to the sector would have a major impact on premiums and the scope of cover offered.

CEO Rob Whelan says the Treasury proposals would cause insurers to fundamentally review their contracts and reassess pricing.

“The model under discussion would change the nature of the industry and the risks that insurers are prepared to underwrite,” he said.

“This is not consistent with the Government’s announcement that it would apply unfair contract terms protections to insurance contracts in line with other sectors of the economy.”

ICA has long argued there are sufficient protections in place for insurance, while also working to make improvements for consumers, such as in product disclosure.

But Revenue and Financial Services Minister Kelly O’Dwyer told the ICA Forum in March that many outside the industry disagree with its position.

A proposals paper released last week suggests the unfair contract term provision in the Australian Securities and Investments Commission Act should be included in legislation covering insurance, with tailoring for the industry’s specific features.

It says the main subject matter of an insurance contract should be defined narrowly and, where a term is unfair, a court could make orders as an alternative to it being declared void.

Examples of unfair terms may include paying a claim based on the cost of repair or replacement that may be achieved by the insurer, but which could not be reasonably achieved by a policyholder, it says.

ICA GM Risk Karl Sullivan says “profound unintended consequences” need to be raised in an industry response to the proposals.

“One of the most significant may be the premium impacts through inflation of claims costs by making it unfair to cash settle using an insurer’s valuation,” he says on his LinkedIn page.

“The use of large project building companies by insurers to carry out work came at the behest of government, circa 2003 – a measure that has served the community well with faster recovery and compression of claims costs.”

Norton Rose Fulbright lawyers David Frew and Ray Giblett say in an online post that the proposals paper sets the scene for potentially the most significant insurance contract regulation changes since the introduction of the Insurance Contracts Act and raises questions over the role of utmost good faith.

Submissions on the proposals can be lodged by July 27.