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Your Obligation to Tell Your Insurer About ‘Anything’ (i.e., Bringing Home Your Groceries) is Not Considered ‘Unfair’: The Decision of ASIC v Auto & General Insurance Company Limited

Unfair contract terms refer to provisions or clauses in contracts that create an imbalance of rights and obligations between the parties involved, typically to the detriment of one party, often the weaker or less informed party. These terms are considered unfair and are generally unenforceable or subject to legal challenge in many jurisdictions across Australia. The unfair contracts regime aims to protect consumers, small business and individuals from being taken advantage of in contractual agreements.

 

On 22 March 2024, the Federal Court found that the duty imposed on insured consumers under a home and or contents policy to notify Auto & General Insurance Company Limited (Auto & General Insurance) about ‘anything’ was not considered unfair within the meaning of sections 12BF(1)(a) and 12BG(a) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). This is the Federal Court’s first unfair contracts term decision for insurance contracts since the regime was expanded to consumer and small business insurance contacts.

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Key Takeaways

  • As to whether a term is considered ‘unfair’ will be assessed according to its proper construction regardless of the words actually used or its literal interpretation.

  • While a court may ultimately construe a term in a way which is correct, it does not necessarily mean that it is ‘transparent’ within the meaning of section 12BG(3) of the ASIC Act.

  • If a term lacks clarity and certainty which would confuse a consumer as to their rights and obligations, this in itself, will be a relevant detriment or a potential disadvantage.

  • It is important to consider the purpose of the contract (in other words, the ‘bargain’ being struck) as to what is considered reasonably necessary to protect legitimate interests.

  • The cumulative test set out in section 12BG of the ASIC Act (together with the obligations owed by insurers under the Insurance Contracts Act 1984 (Cth) (ICA)) means that all of the criteria must be satisfied to successfully allege a breach of the unfair contracts terms provisions.

  • The unfair contracts regime must be viewed in conjunction with any statutory regimes (i.e. the Insurance Contracts Act) and provides context when assessing unfairness under the ASIC Act.

  • Whether the Federal Court’s approach to the inclusion and application Insurance Contracts Act as a statutory regime will also be applied to other voluntary codes is yet to be seen.

Background

 

Between 5 April 2021 and 4 May 2023, Auto & General Insurance Company Limited issued over one million home and / or contents insurance policies, which contained certain notification obligations on the part of the insured consumers which operated after the contracts were entered into and during the period of cover.

 

The policies imposed the following notification obligations on each insured consumer which was the focus of ASIC’s claim:

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When applying for insurance, potential customers were asked a series of questions about their home and or contents and were also required to make certain disclosures as well as being reminded of their duty not to make a misrepresentation.

ASIC’s claim

 

In essence, ASIC alleged that the notification obligations imposed on insured consumers “to tell us if anything changes about your home and contents” was “unfair” pursuant to section 12BF of the ASIC Act because:

 

  1. it imposes an obligation on insured consumers to inform Auto & General Insurance if ‘anything’ changes;

  2. the insured consumer’s obligations to notify Auto & General Insurance were unclear, ambiguous and lacked clarity as to what needed to be disclosed;

  3. the rights of Auto & General Insurance to refuse a claim or reduce the amount payable under a claim are broader than could ever be enforced by them having regard to the ICA and was not reasonably necessary to protect Auto & General Insurance’s legitimate interests; and

  4. the insured consumer could be confused or obscured as the notification clause does not, with sufficient clarify, allow an insured consumer to know what it is that they must do to comply with their contractual obligations.

The decision of the Federal Court

 

The Federal Court rejected ASIC’s arguments that the duty to disclose ‘anything’ should be interpreted literally including, for example, whenever groceries are brought home from an everyday shopping outing. It was concluded that upon proper construction (after considering the overall context), the duty of insured consumers to notify Auto & General Insurance about ‘anything’ required them to notify where there was a change to the information about their home and or contents from what had previously been disclosed prior to entering into the contract. In other words, to correct any information that was previously provided to Auto & General Insurance in relation to their home and or contents.

 

Ultimately, the Federal Court held that the notification clause was not considered ‘unfair’ as only 2 of the 3 criterion set out in section 12BG(1) had been satisfied. As such, ASIC was unable to establish that the duty on insured consumers to notify Auto & General Insurance about ‘anything’ was unfair.

 

Justice Jackman also stated that where the insured consumer failed to comply with the duty to notify about ‘anything’, Auto & General Insurance rights were exercisable only to the extent that it would be “consistent with commercial standards of decency and fairness” as required by the duty to act in the utmost good faith and in compliance with the obligations under the ICA (section 13).

 

ASIC has since filed an appeal of this decision.

Whether the obligation to notify about “anything” “unfair”?

 

Section 12BF(1) of the ASIC Act provides that that a term of a consumer contract (which includes certain kinds of insurance contracts) is void if the term is “unfair”.

The meaning of “unfair” is dealt with in section 12BG of the ASIC Act.

1. A term of a contract referred to in section 12BF is unfair if:

(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

 

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

2. In determining whether a term of a contract is unfair under subsection (1), a court may take into account such matters as it thinks relevant, but must take into account the following:

(b) the extent to which the term is transparent; and

(c) the contract as a whole.

3. A term is transparent if the term is:

(a) expressed in reasonably plain language; and

(b) legible; and

(c) presented clearly; and

(d) readily available to any party affected by the term.

4. For the purposes of paragraph (1)(b), a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.

It was held that reference to a “term of contract” in the opening words of section 12BG(1) of the ASIC Act means, in general, the term on its proper construction.

 

In considering whether the duty to notify Auto & General Insurance about ‘anything’ was unfair, the Federal Court assessed each of the elements of section 12BF(1) of the ASIC Act and its findings were as follows:

Would cause a significant balance?

 

The Federal Court held that the duty to notify about ‘anything’, on its proper construction, did not create an imbalance in the parties’ rights and obligations. It was held that the insurance contract was entered into on the basis of the information provided by the insured consumer and that as part of this Auto & General Insurance requires the insured consumer to disclose any changes to that information in order to preserve the balance of risk.

 

Reasonably necessary to protect legitimate interests?

 

It was held that the duty to notify about ‘anything’, on its proper construction, was reasonably necessary to protect Auto & General Insurance’s interests. Justice Jackman stated that Auto & General Insurance’s legitimate interests include its ability to choose which risks it will insure against, and the information-gathering process ensures that Auto & General Insurance is not covering risks which it is not willing to insure against.

 

Cause detriment to the insured consumer?

 

The Court found that the duty to notify about ‘anything’ would cause detriment (and therefore the criterion of detriment in section 12BG(1)(c) as satisfied), in the sense of some disadvantage to the consumer which need not necessarily be significant. The Court stated that even if that disadvantage represents a fair outcome, it is nevertheless a disadvantage. This is because the duty to notify imposed an obligation on the insured consumer, and Auto & General Insurance’s liability to the insured consumer could be reduced or cancelled if the disclosures were not made thereby causing a detriment.

 

Transparency

 

Lastly, Justice Jackman held that the concept of transparency which is defined in section 12BG(3) of the ASIC Act, includes clarity of meaning and any ambiguity will point towards a lack of clarity from the perspective of insured consumers. His Honour went further to state that whether a term is expressed in a manner which allows consumers to readily know and understand their rights and obligations is an aspect of the concept of “transparent”.

 

It was accepted that the duty to notify Auto & General Insurance lacked transparency to a “significant degree” and that few insured consumers would have considered the impact of those provisions and the impact of their rights and obligations under their insurance contracts.

 

However, ultimately, as Justice Jackman concluded that only 2 of the 3 criterion set out in section 12BG(1) had been satisfied and not all of the criteria, ASIC was unable to establish that the duty on insured consumers to notify Auto & General Insurance about ‘anything’ was unfair.

Breaches of unfair contracts term

 

It is important that contracts are fair and comply with the Australian Consumer Law. Breaches of the unfair contracts regime have been prosecuted by the ACCC and can be costly and involve penalties.

Need help with unfair contracts terms

 

If you have any questions in relation to this overview of the unfair contracts regime more broadly, please contact us.

 

Arida Lawyers can assist you with your transaction or conduct a contract review to assess which contracts are deemed standard form contracts and which terms would likely be considered as unfair.

 

We are well equipped to prosecute or defend our clients, in the event of court proceedings, and will work closely with you to help you achieve the best possible outcome.

 

We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.

This article provides general information relevant to our expert services. It is not legal advice and should not be relied upon as such. If you are seeking legal advice, you should contact us for a free initial consultation.

Liability limited by a scheme approved under Professional Standards Legislation.

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