A bill to include unfair contract terms in the Insurance Contracts Act has been introduced to the House of Representatives.

The legislation will protect consumers from terms that unfairly favour insurers, Assistant Treasurer David Bradbury told Parliament last week.

It will take effect a year after being signed into law by the Governor-General, but the bill is considered unlikely to pass before the election.

If a term is declared unfair, its use will be void across all standard-form consumer contracts that use it, Mr Bradbury says.

An insurer will not be allowed to rely on a term that is declared unfair, but reliance will only affect that particular contract, to avoid a “large-scale retrospective effect”.

This differentiation acknowledges the practicalities for insurers if a term is made void across all contracts when the cost of potential claims has not been accounted for in pricing them.

The Insurance Council of Australia (ICA) says it is unable to support the bill because it has significant flaws that could create uncertainty for consumers and insurers.

“ICA believes a number of key issues need to be addressed, including clarifying terms and definitions within the legislation and determining a clear threshold for breaches,” a spokesman told insuranceNEWS.com.au.

“Thorough consultation is necessary to achieve workable legislation that serves the interests of all stakeholders.”

But customer advocates have hailed the bill’s introduction. Consumer Action Law Centre CEO Gerard Brody says exclusions in contract terms too often mean claims are rejected.

“We’ve seen terms that place unreasonable burdens on those involved in motor vehicle accidents to identify other parties at fault, especially when those parties are uninsured.

“This can be very difficult in some circumstances, particularly if an at-fault driver doesn’t co-operate, and can mean drivers not at fault miss out on insurance claims.”

Treasury received five submissions on the bill, with the National Insurance Brokers Association questioning whether the changes are justified and if benefits will outweigh costs.

In a joint submission, the Mental Health Council and charity Beyondblue say many people with mental illness struggle to get insurance and to enforce their legal rights.

“Currently, insurance decisions as they relate to people with mental illness are not sufficiently transparent and we regularly hear stories from individuals who have been refused cover or have had claims denied for reasons that are not clear.”