If you happen to work in insurance coverage in Australia, you positively learn about unfair contract phrases. Simply over two years for the reason that unfair contract phrases (UCT) regime got here into impact for insurance coverage contracts, a revamped regime commences on 9 November 2023.

A time period that’s unfair inside an insurance coverage contract is able to problem. If efficiently challenged, it may possibly develop into void. From 9 November 2023, a court docket can even impose civil penalties for together with an unfair time period in an insurance coverage contract.

What’s an unfair time period?

A time period is unfair if it:

• would trigger a big imbalance within the occasion’s rights and obligations arising below the contract;
• shouldn’t be fairly crucial as a way to defend the legit pursuits of the occasion who could be advantaged by the time period; and
• would trigger detriment (whether or not monetary or in any other case) to a celebration if it have been to be utilized or relied on.

A court docket should bear in mind all related issues, together with the extent to which the time period is clear and the contract as an entire.

The Australian Securities and Investments Fee has taken two insurers to court docket over unfair contract phrases:

• within the first case, proceedings have been issued towards Auto & Common Insurance coverage in relation to an obligation that required insureds to inform the insurer if ‘something’ modified to their dwelling and contents. ASIC’s case towards Auto & Common consists of that the contract didn’t clarify the impact of part 54 of the Insurance coverage Contracts Act 1984 (Cth) (ICA) which can help the insured if they didn’t adjust to their notification obligations.
• In Could 2023, ASIC issued proceedings towards HCF Life in relation to a ‘pre-existing situation’ contract time period that was doubtlessly inconsistent with s 47 of the ICA.

What penalties may be imposed?

The civil penalty regime is one to be taken significantly. The utmost penalty is:

1. 50,000 penalty items (presently $15,650,000);
2. the quantity of the profit derived and detriment prevented due to the contravention multiplied by 3; or
3. 10% of the annual turnover of the physique company for the 12 month interval ending on the finish of the month during which the physique company contravened or started to contravene the civil penalty provision capped at 2.5 million penalty items (presently $782,500,000).

Does the regime apply to all insurance coverage contracts?

The brand new UCT regime applies to any commonplace kind insurance coverage contract made or renewed on or after 9 November 2023 the place one of many events is a shopper or ‘small enterprise’. Nevertheless, below the expanded check, a small enterprise consists of any enterprise with a turnover of lower than $10M. This can seize most SMEs.

For insurance coverage contracts which are solely assorted (and never made once more or renewed) on or after 9 November 2023, the brand new regime will apply to the extent of the numerous time period. Medical indemnity insurance coverage continues to be exempt from the UCT regime.

Some observations

The expanded regime actually requires insurers to evaluation their insurance coverage merchandise to make sure they’re screened for unfair contract phrases. Whereas it’s a defence to point out {that a} time period is required to guard a legit enterprise curiosity, the unfair contract phrases are curiously additionally driving insurers to take away phrases that they merely haven’t relied upon to create extra beneficial coverage options to promote to insureds. On the identical time, insurers have made drafting modifications to create extra consumer pleasant coverage wordings.

This creates some dangers, significantly from an underwriting perspective the place wordings are launched that haven’t been examined in court docket. As insurance coverage attorneys will know, instances can activate the correct development of a sentence, and even the location of a comma, in an insurance coverage coverage.

Moreover, insureds and their attorneys now doubtlessly have a further card to play in negotiating with insurers.