Unfair contract terms: Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272 – Insurance Laws and Products

Summary

The case of Australian Securities and Investment Commission
(ASIC) v Auto & General Insurance Company Ltd [2024] FCA 272
holds significant importance as it marks the first instance of the
Federal Court applying the new unfair contract terms in the
Australian Securities and Investments Commission Act 2001 (ASIC
Act) to insurance contracts. The case revolves around an alleged
unfair contract term found in a Product Disclosure Statement (PDS)
issued by Auto & General Insurance Company for a standard form
underwritten home and contents insurance policy (which was marketed
through various insurers including Budget Direct, ING, Virgin and
Qantas).

The case shows that the provisions in the ASIC Act, which now
relate to insurance contracts, are to be read in conjunction with
the protections set out in the Insurance Contracts Act 1984 (ICA)
limiting the exercise of rights and powers provided by the
contract.

Background to the case

In April 2021, the ASIC introduced new protections against
unfair contract terms into the ASIC Act. These protections, a
direct outcome of a recommendation by the Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services
Industry, aim to ensure that consumers and small businesses are
afforded the same protection from unfair terms in insurance
contracts as they are in other financial services. Additionally,
they encourage insurers to enhance their transparency and eliminate
potentially unfair terms.

The amendments resulted in contracts of insurance governed by
the ICA being subject to subdivision BA of the ASIC Act, which,
amongst other things, states that contracts are void if a term is
“unfair”. Unfair is defined in s12BG as a term that:

• Causes a significant imbalance in the parties’ rights and
  obligations.




• Is not reasonably necessary to protect the legitimate interests
  of the party who the term would benefit.




• Would cause detriment to a party if it were to be applied or
  relied on.

The PDS, published in March 2021, had a significant reach, with
approximately 1.3 million customers entering into insurance
contracts based on its terms. One of these terms was a
“Notification Clause”, which obliged customers to inform
the insurer “if anything changes” about their home and
contents. ASIC alleged this term was unfair under S12BG of the ASIC
Act, citing the following reasons:

• It is ambiguous about what needs to be disclosed.




• It imposes an obligation on customers that they cannot meet,
  given the definition of “anything” is unclear.




• It allows Auto & General Insurance a broader basis to
  refuse or reduce claims if consumers fail to meet the notification
  requirement.




• It could mislead customers about their rights and obligations
  because it fails to explain the existence or effect of s54 of the
  ICA (which operates to limit the circumstances in which an insurer
  can reduce or deny a claim).

Much of the case argument centred around the nature of insurance
contracts, insurers’ duty to act with utmost good faith, and
the insurer’s failure to reference s54 of the ICA in the PDS so
customers know the insurance contract is subject to this limitation
provision.

The Judgement

The Judge found that the Notification Clause in the PDS was not
unfair and that the duty to disclose required under the contract
was “simply a reflection of the nature of the contract”.
The Judge held that the information to be provided by customers was
reasonably necessary to protect the insurer’s interests. The
Judge took a practical approach to the obligations in the
Notification Clause, noting that the information was necessary for
the insurer to gather information and choose which risks to insure
against.

Auto & General Insurance Company called evidence from
underwriters and claims managers as to its claim and risk
management procedures, how risks are identified and the basis upon
which premiums are set and decisions around underwriting policies
and guidelines are made. The Judge noted that it is consistent with
the purpose of an insurance contract that an insurer would require
an insured to disclose any changes to the information disclosed to
preserve the balance of risk and reward inherent in the bargain.
The Judge noted it was up to the insurer, not the insured, to
assess the risk which is the basis for the Notification Clause.

ASIC submitted that the words “any changes“
were ambiguous and broad, but the Judge dismissed this suggestion,
noting that the idea the words meant “any change” (such
as the comings and goings in a household, the purchasing of
groceries etc) was absurd. The Judge referred to the contract as a
whole to identify what was intended by the word “changes”
as it related to the insured risk.

In respect of how the unfair contract terms in the ASIC Act
affect a customer’s rights and obligations under s54 of the
ICA, ASIC submitted that if s54 of the ICA is not taken into
account when considering the application of the unfair terms of the
ASIC Act, then insurers can refuse claims and cancel policies even
in circumstances where a failure to notify has not caused prejudice
to the insurer. It was submitted that the Notification Clause would
trigger the imbalance that s54 of the ICA seeks to redress. ASIC
submitted that a term may be unfair under S12BG of the ASIC Act
notwithstanding the ameliorative operation of the ICA and that the
unfair contract terms regime in the ASIC Act should operate
independently of the duty of good faith under the ICA.

The Judge rejected this argument. The Judge held that the ICA
governs contracts of insurance and that the obligations under the
ICA operate in addition to the unfair contract provisions in the
ASIC Act. The Judge noted that the insurer’s rights, which
arise upon a breach of the Notification Clause, are therefore
qualified by the obligations under Part II of the ICA that insurers
must act with utmost good faith and consistently with commercial
decency and fairness. Therefore, when assessing the fairness
criteria in s12BG of the ASIC Act, courts must look at the implied
provisions of utmost good faith contained in the ICA to determine
if a clause in an insurance contract is unfair and, therefore,
void. In doing so, the Judge held that commercial decency and
fairness would prevent the insurer from exercising the rights set
out in the Notification Clause to the prejudice of a customer
unless the changes notified by the customer had prejudiced the
insurer’s interests.

Conclusion

The judgment is an excellent summary of how clauses in insurance
contracts are to be read in the context of the overall legal
environment in which the contract operates. The court’s
assessment of the interaction between the unfair contract terms
provisions in the ASIC Act and the ICA shows that when deciding
whether a term is “unfair” pursuant to s12BG of the ASIC
Act, the effects of s54 of the ICA must be considered. The case
shows that the provisions in the ASIC Act, which now relate to
insurance contracts, are to be read in conjunction with the
protections set out in the ICA limiting the exercise of rights and
powers provided by the contract.

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