Unfair Terms in Insurance Contracts

As discussed in the section dealing with  consumer law, Australian consumer legal rights and obligations have been rationalised and set out in a new Act in an effort to unify  Australian consumer laws.

As part of the 2008 Productivity Commission’s review of Australia’s Consumer Law Policy Framework it was recommended that there be unification of Australian Consumer Law (ACL), and that national unfair contract terms (UCT) be implemented.  All Australian businesses have legal obligations under the new Australian Consumer Law (ACL) to improve terms and conditions in their standard form consumer contracts.

An effort to educate businesses about their new obligations led to the production of a national guide on 1 July 2010 to UCT laws by all Federal and State agencies, re-published on 20 January 2011. (see Commonwealth Guide to the Unfair Contract Terms Law)

Uniform UCT laws now apply nationally as of 1 January, 2011.  Whilst these laws are expressed as applying to all sectors and businesses which use standard form contracts in dealings with consumers. extending to most financial products and services (see Australian Securities and Investments Act 2001 (ASIC Act), at present they don’t apply to insurance contracts.

The UCT laws do not apply to standard form contracts covered by the Insurance Contracts Act 1984 (Cth). One of the reasons for this was that the Australian Law Reform Commission (ALRC) in 1982 recommended there be an exclusion for seeking judicial review of insurance contracts, partially due to the perceived difficulty in distinguishing between business and non-business insurance contracts, and the belief that the doctrine of uberrimae fidai (utmost good faith) which applies in relation to certain classes of contract should be an adequate inducement to Insurers to exercise care in not only drafting their policies but also to act fairly in relying on strict terms.  Views have differed relating to whether insurance contracts should be included under the UCT provisions of the ASIC Act.  Consumer representatives expressed the view that the UCT provisions should apply to insurance contracts to provide consumers with adequate legal protection, contrary to the views of insurance representatives.

A consultation paper has been released to address the potential for unfair terms in insurance contracts to cause injustice through disadvantage or loss to consumers through insurance contracts which contains terms that are harsh and/or unfair in their operation.

According to statistics from the Financial Ombudsman Servicerates of rejection and disputes arising out of insurance policy claims are highest in consumer credit contracts, at 12%, next to travel at 9%.  Additionally, many consumers merely choose not to challenge unfair contract provisions, and there is a lack of information about how many disputes arise out of unfair contract terms.

The Consumer Action Law Centre (CALC) contends that unfair terms exist in Australian insurance contracts and cause Australian consumers harm, whilst National Legal Aid  (NLA)  strongly believe that consumers of insurance products suffer due to harsh or unfair terms in insurance policies.

A consultation paper On Unfair Terms In Insurance Contracts has been released inviting interested parties to make submissions.

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