The Federal Government will add unfair contract terms to the Insurance Contracts Act, removing insurers’ exclusion from provisions that are standard in consumer protection laws.

Customers or the Australian Securities and Investments Commission (ASIC) will be able to challenge a term in the courts under the changes, which are a victory for consumer advocates.

The industry had previously argued successfully that unfair contract terms can be excluded from insurance legislation on the grounds consumers are already well protected by existing laws.

But Assistant Treasurer David Bradbury says if a contract term is found to be unfair, the insurer will not be able to rely on it and a court may order remedies to help customers.

The definition of an unfair term is one that would cause a significant imbalance in the parties’ rights and obligations, would cause detriment to a party if relied on and is not reasonably necessary to protect the legitimate interests of the party advantaged by the term.

The insurer will have the burden of proof that a term is reasonably necessary to protect its legitimate interests.

Insurance Council of Australia CEO Rob Whelan says current unfair contract terms provisions in the ASIC Act will be adapted to the Insurance Contracts Act, which is a better outcome for insurers and consumers.

Draft legislation will be released this year. The change will not apply to life insurance contracts.