David Bradbury (Lindsay, Australian Labor Party, Assistant Treasurer ) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

The bill amends the Insurance Contracts Act 1984 to introduce an unfair contract terms regime for general insurance contracts.

Since 1 July 2010, national unfair contract terms laws have applied to protect consumers that purchase goods or services using standard form contracts.

However, these laws have until now been excluded from applying to insurance contracts.

The bill will close this gap and for the first time ensure consumers are protected from terms in their general insurance contracts which unfairly favour the insurer.

This is consistent with the Productivity Commission’s 2008 report into Australia’s consumer policy framework which recommended that the unfair contract terms protections apply to all sectors of the economy.

The bill will give consumers the confidence to know that in those traumatic times when they seek to make a claim under their insurance contract, no longer will those claims be refused because of an unfair term.

The regime introduced in this bill is modelled on that applying in the Australian Securities and Investments Commission Act 2001 to other financial products and services, with appropriate modification for contracts of general insurance.

The bill will extend protection from unfair terms to consumers who manage their personal risks by acquiring a standard form contract of general insurance, such as for damage or loss to their family home, its contents or their motor vehicle.

When our nation’s communities suffer the devastation of flood, fire, cyclones or other natural disasters, residents can be confident of fair treatment in their insurance claims for damage to their property. Such confidence of risk cover will also be provided to consumers making a claim for loss or damage to their property through accidents, burglaries, vandalism or other mishaps.

There are commercial practicalities and efficiencies for general insurers to determine their terms and conditions upfront in a standard form contract. The bill does not seek to interfere with these industry practices. But it does seek to provide a balance by offering protection to consumers who have little or no bargaining strength and are ‘contract takers’ consumers who may unknowingly accept unfair terms hidden in the contract’s fine print.

The bill has two objectives: to prevent an unfair term forming part of a standard form contract in the first instance, and to provide a process for consumers to seek a remedy where an insurer seeks to rely on an unfair term.

The bill meets these objectives in several ways.

First, in drafting their standard form contracts, or in reviewing existing contracts for renewal, insurers will have a clear incentive not to draft terms that are unfair towards consumers.

Secondly, the Australian Securities and Investments Commission (ASIC) can guide insurers on good practice in the fair construct of their standard form contracts.

Thirdly, consumers and ASIC will both be able to ask a court to declare that a term in a standard form contract is unfair. If a court declares that a term is unfair, it can award the most appropriate remedy to the aggrieved consumer.

Fourthly, such a declaration will protect other consumers because, going forward, the insurer would be expected to change their application of the contract, or amend the unfair term in all new or renewed contracts of that type.

Under the Insurance Contracts Act, insurers already have a number of statutory obligations towards policyholders, and vice versa. These will continue to operate and are taken into account in the new regime.

A core existing obligation is a duty to act with the utmost duty of good faith towards the other party. The proposed unfair contract terms regime would make it explicit that a general insurer fails to comply with this duty in relation to a standard form consumer contract of general insurance if a court declares a term in the contract to be unfair, or the insurer relies on a term that has been declared unfair. An insurer will not be able to rely on a term that is declared unfair.

This nonreliance remedy differs from the core remedy in the existing unfair contract terms regimes which makes a term void if it is declared unfair. The remedy of voiding an unfair term affects all standard form contracts that use that term whereas the remedy of nonreliance only affects the particular standard form consumer contract of general insurance that is the subject of the declaration.

This acknowledges the financial practicalities for insurers were a term to be made void across all standard form contracts when the cost of making those claims has not been taken into account in pricing those contracts. In contrast, the remedy of nonreliance, by applying to a particular contract, will not have a large-scale retrospective effect and will allow insurers to adjust their contracts on a prospective basis.

The bill defines a term to be unfair where there is significant imbalance in the parties’ rights and obligations, the term is not reasonably necessary to protect the legitimate interests of the advantaged party, and it would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied on.

The onus of proving that a term is reasonably necessary to protect a legitimate interest will be on the advantaged party, and an insurer will be taken to have established this if they prove that the term reasonably reflects their underwriting risk in relation to the particular contract under review.

Consistent with the current unfair contract terms regime applying to other products, a term in a standard form contract will be unaffected to the extent it defines the main subject matter of the contract, the upfront price payable or where a term is expressly permitted by Commonwealth, state or territory law.

ASIC will be able to use the supervisory powers it has in relation to the unfair contract terms regime under the ASIC Act. Certain supervisory powers in the Insurance Contracts Act will not be available in administering the new regime. This will prevent any duplication or conflicts between ASIC's enforcement of the unfair contract terms regime for general insurance and other financial products.

A transition period of twelve months is provided from the day the act receives royal assent. The new regime will apply to standard form contracts of general insurance that are renewed or varied after that commencement day, or to terms varied after that day.

The bill follows the regulatory path laid down in mid 2010 to give consumers and regulators the right to take action for unfair terms in other standard form contracts. Since then, Australia's consumer agencies have provided guidance about industries’ obligations under the national unfair contract terms laws and worked with them to improve terms and conditions in standard form consumer contracts. For example, the Australian Competition and Consumer Commission has recently conducted reviews of standard form contracts in the telecommunications and vehicle rental industries and engaged with key traders to facilitate amendments to unfair contract terms.

The bill will provide more confidence to consumers that they will be treated fairly when making an insurance claim under a standard form consumer contract of general insurance. This increased consumer protection comes from the incentive for insurers to improve the fairness of the terms and conditions in standard form consumer contracts. It is backed by the possibility of a court remedy where a term is declared unfair.

In preparing the bill, there has been considerable engagement with stakeholders. In March 2010, my predecessor, the Hon. Chris Bowen MP, released an options paper on unfair terms in insurance contracts. Since late 2010, I have held a number of meetings with stakeholders on the options available, convened a roundtable discussion of key stakeholders and there has been public consultation on a draft regulation impact statement. The bill has been through an exposure draft process which resulted in changes being made in finalising the bill.

I take the opportunity to thank all stakeholders for their active and constructive engagement in this policy and legislative development process.

I can also inform the House that the Council of Australian Governments’ Legislative and Governance Forum on Corporations has been consulted on the bill.

Full details of the measures in this bill are contained in the explanatory memorandum.

Debate adjourned and the resumption of the debate made an order of the day for the next sitting.