The Federal Government has released draft legislation to add unfair contract terms to the Insurance Contracts Act.

The Insurance Contracts Amendment (Unfair Terms) Bill introduces rules that are standard for most financial products.

The insurance industry has previously argued unfair contract terms can be excluded from its legislation, because consumers are well protected by existing laws.

Under the new bill, a term is considered unfair if it would cause a significant imbalance in the parties’ rights and obligations, cause detriment to a party if relied on and is not “reasonably necessary” to protect the legitimate interests of the advantaged party.

It says a term will be “reasonably necessary” if it reflects the underwriting risk accepted by the insurer.

Insurers are likely to incur extra costs reviewing contracts or responding to actions by consumers and the Australian Securities and Investments Commission (ASIC), but these are difficult to quantify, Federal Treasury says.

Consumers or ASIC can seek court orders relating to unfair terms, and the regulator can investigate if it suspects a breach.

Any insurer found by a court to have an unfair term will be in breach of the duty of utmost good faith and unable to rely on the term, according to Assistant Treasurer David Bradbury.

“Australia’s recent flood and fire disasters and extreme weather events highlight the need for consumers to have confidence that their insurance policy will not unfairly favour the insurer should a claim be made,” he said.

The Insurance Council of Australia will provide input on the draft consultation, a spokesman told insuranceNEWS.com.au.

The closing date for submissions to Treasury is May 31.