Background
On 4 April 2023, Australian Securities and Investments Commission (ASIC) commenced proceedings against insurance company Auto & General. Their cause of action was the use of an unfair contract term, which would constitute a breach of s12BF(1) of the Australia Securities and Investments Commission Act 2001 (ASICA).
This decision comes in the wake of the amendments to the Unfair Contract Terms regime, which came into effect on 10 November 2023. These made it illegal to include an unfair term in a standard form consumer or small business contract, introducing heavy penalties for breaches, where before the term would only have been void.
Summary
On 22 of March 2024, the Federal Court found that a contract term requiring customers to disclose any changes to their properties was not unfair. This was despite the term having detriment to the customer, and lacking transparency with regards to what should be reported. This is because the term was reasonably necessary to protect the insurer’s interests and caused no significant imbalance in the relationship.
The ruling provides guidance on how Courts will interpret the new unfair contracts regime. Terms that lack transparency may not be unfair if they are reasonably necessary to protect the interests of the party that seeks to rely on the term.
The Term in Question
The term that ASIC was alleging was unfair was an obligation by the insured to disclose changes relevant to the insurance contract, when renewing the contract. This was phrased “Tell us if anything changes while you’re insured with us”. Eleven examples of what would constitute such a change were supplied, including whether the house is being rented out and whether it is in good condition. However this list was non exhaustive.
Auto & General stipulated that not complying with this term could allow them to reduce their payout of a certain claim, or cancel the contract.
ASIC's Argument
ASIC stated that the clause was unfair because:
- The requirements of what had to be reported were ambiguous.
- This ambiguity gave Auto & General inequitable power to reject or reduce claims.
- This ambiguity may also lead customers to not understand their contractual rights and duties.
The Judgement
Construction of relevant term
Justice Jackman interpreted the term in question in the following way:
- The insured must notify the insurer if there was a change to any of the information which the insured provided when entering into, or last renewing, the contract.
- If the above term is not met, the insurer has the right to reject or reduce a claim, so long as they do so consistently with the commercial standards of decency and fairness, and their duty to act in the utmost good faith (pursuant to section 13 of the Insurance Contracts Act 1984 (Cth)
Law applied
The defendant accepted that the contract was a standard form contract, and that it was for the supply of a financial service. Consequently, the plaintiff only had to establish that the term was unfair. Justice Jackman considered three criteria in determining whether the term was unfair in accordance with section 12BG(1) of the ASICA: If all these terms are met, the term is unfair:
- Did the term cause significant imbalance between the parties?
- Is the term reasonably necessary to protect a party’s interests?
- Would the term cause detriment if relied upon?
Furthermore, his Honour took into account the transparency of the term when considering these factors, as per s12BG(2).
Significant imbalance
His Honour held that this term would not cause a significant imbalance of the power of the parties. This was partially due to the fact that there was a meaningful relationship between the term and the protection of the defendant, as without the term the risk could be shifted towards the insurer due to the information imbalance. Furthermore, the court considered the fairness of the contract, when considered in the context of the other rights and duties. Whilst this obligation was unilateral, this was a result of the type of contract being entered into.
Reasonably necessary
As noted above, this term was found to be necessary to protect the interests of the insurer. Particular focus was paid to the proportionality of the obligation, which was minor, when compared to the potential loss, which could have been significant.
Causing detriment
His Honour found that this term, if relied upon would cause detriment to the other party. Though, he noted that this criterion would be satisfied so long as the term was disadvantageous to the other party in any way, regardless of whether it would be fair. However, Jackman J noted that section 13 of the Insurance Contracts Act 1984 (Cth) would prevent the defendant on relying on this term in an unfair way.
Was the term transparent?
His Honour clarified that the transparency of a term included whether it clearly informed parties of what their rights and obligations were. He stated that consequently the term lacked transparency ‘to a significant degree’. However, despite this being central to ASIC’s argument, Justice Jackman stated that this was not fatal to the defendant. The three criteria from 12BG(1) are judged in relation to the proper construction of the term in question, not how the consumer may have construed the term.
Decision
As the term was found to be necessary to protect Auto & General’s legitimate interests, and did not cause a significant imbalance in the powers of each party, the term was found not to be unfair. Consequently, the proceedings were dismissed, with the plaintiff ordered to pay the defendant’s costs.
Implications
“If a term is not transparent it does not mean that it is unfair and if a term is transparent it does not mean that it is not unfair”.
– Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272 [105]
Generally, a significant takeaway from this case is that a term which is drafted in a way which makes it difficult for consumers to understand their rights or obligations, may still be fair. So long as the court can construct the meaning of the term, the fairness of the term will be drawn from that construction and no other.
More specifically, it means that insurers are able to impose an obligation on policy holders to disclose information which is pertinent to their policy. They are able to reduce or reject claims if this obligation is not met. However, they must do so with the upmost good faith.
Appealed
On 19 April 2024 ASIC announced that it had appealed the Federal Court’s decision. In their notice of appeal, they stated their grounds of appeal were that the judge erred in:
- Constructing the term as requiring the insured to update the insurer on any changes information that they had already given, rather than any change in information relevant to the home or contents; and
- Not considering transparency as a factor interrelated with the other factors, such as whether the term would cause an imbalance in the rights and obligations arising under the contract, and whether the term is necessary to protect the insurer’s interests. But rather interpreting it as an independent factor, and investigating the other two factors based on the valid construction of the term, rather than the way in which the consumer would likely interpret the term.”
We are here to help
If you would like to discuss any of the above in further detail, please contact our Corporate & Commercial Advisory team.
If you would like to keep up to date with Russell Kennedy Alerts, Insights and upcoming events, you can subscribe to our mailing list here.