Long-awaited amendments to the Insurance Contracts Act have been indefinitely delayed due to the debate over whether insurers should be subject to new unfair contract terms legislation.

Peter Mann, a partner with Clayton Utz’s insurance and risk group, told the Insurance Council of Australia’s 2011 Regulatory Update seminar last week that “your guess is as good as mine” as to when the amendments to the Act could be passed.

“There is a question as to whether or not a compromise can be reached [in relation to unfair contract terms] so as to allow the passage of the Insurance Contracts Act bill,” Mr Mann said.

The review of the Insurance Contracts Act began in 2003, and the bill with amendments to the Act was passed by the House of Representatives last year – but it didn’t pass the Senate before the federal election was announced and Parliament dissolved.

Mr Mann says the bill has now lapsed and its reconsideration has coincided with the introduction of new unfair contracts terms legislation, which was enshrined in the ASIC Act in January. Under that legislation, unfair terms in contracts are considered void.

Unfair contract terms legislation is currently not applicable to insurers due to section 15 of the Insurance Contracts Act, which states an insurance contract cannot be judicially reviewed on the basis that it is unfair.

However, its inclusion is being pushed for by consumer groups, meaning amendments to the Insurance Contracts Act cannot proceed until the matter is resolved.

“It seems to me that… from a consumer point of view it may have been preferable to proceed with the Insurance Contracts Act changes and then have separately the debate on unfair contract terms,” Mr Mann said.

“Isn’t it remarkable that such a vast bulk of consumer reforms can be held up for another consumer reform?”

The situation was debated at a roundtable discussion with Parliamentary Secretary to the Treasurer, David Bradbury on March 7, and will now be canvassed with a wider group of stakeholders.

However, Mr Mann says that both retaining the status quo – section 15 of the Insurance Contracts Act blocking unfair contract terms – and complete application of the unfair contract terms legislation to insurance are unlikely outcomes, and a compromise between these extremes is being sought.

As it stands currently, the unfair contract terms legislation “could result in being a contractual weapon of mass destruction”, because “if a term is void in one contract of insurance then it is going to be void in every contract it appears in”.

“It’s that multiplication effect that is probably one of the worst things about this legislation because it could result in class actions,” Mr Mann said.

He believes a “mid-ground” can be reached providing the unfair contract terms legislation allows for a more bespoke, case-by-case application and cannot be used to mount class actions.

“I could see that that would be compatible with what we were already going to get under the Insurance Contracts Act amendments.”