Key points

• An application brought by ASIC to void the continuous disclosure obligation to an insurance contract clause has been dismissed.
• The Federal Court held that continuous disclosure clauses do not fall under the Unfair Contract Terms regime as it pertains to the Insurance Contracts Act.
• Insurance contracts are construed by a delicate balance between the Unfair Contract Terms regime, the implied obligation of insurers to act in good faith, and the notions of commercial fairness and decency.

The Unfair Contract Terms Regime

The Unfair Contract Term (UCT) regime seeks to protect small businesses and consumers against the use of unfair terms in standard form contracts. In 2021, these protections were extended to capture insurance contracts¹ covered by the Insurance Contracts Act 1984 (Cth) (ICA); specifically, those subject to relief relating to the effect of unfair terms pursuant to s12BF of the Australian Securities Investments Commission Act 2001 (Cth) (ASIC Act).

Importantly, the regime applies a presumption that if a term in an applicable contract is deemed unnecessary to safeguard the legitimate interests of the benefiting party, the burden falls on the party enforcing the term to demonstrate its fairness in the circumstances. This presumption aims to fortify a customer’s bargaining power and protect their legal and commercial standing.

An “unfair” term is one that causes significant imbalance to the parties’ rights and obligations; is not reasonably necessary to protect the legitimate interests of the party who the term would benefit; and would cause detriment to a party if it were applied or relied upon.² A Court must consider the extent to which the term is transparent, and the contract as a whole.³ Relevantly, a “transparent” term is one that is expressed in plain language; legible; presented clearly; and readily available to any party affected by the term.⁴

The Case

In March 2024, proceedings were commenced by the Australian Securities and Investments Commission (ASIC) against Auto & General Insurance Company Ltd (AGI) to dispute the fairness of a term in a product disclosure statement (PDS) related to notification obligations of the insureds to a contract for home and contents insurance.

The PDS contained a Notification Clause which obliged the insured to notify AGI “if anything changes” with regard to the information about the insured’s home or contents disclosed to AGI prior to entering into the contract. Failure to notify AGI of such changes gave the insurer grounds to refuse to pay a claim, reduce the amount paid, cancel the contract, or refuse to renew the contract.  ASIC argued that the Notification Clause was unfair within the meaning of sections 12BF(1)(a) and 12BG(1) of the ASIC Act. ASIC contended that the lack of transparency of the term should be considered in causing a significant imbalance in the parties’ rights and obligations.

Conversely, AGI submitted that the term was clear and necessary for the proper functioning of the insurance contract, and emphasised the importance of the duty of disclosure on the part of the insured to ensure the accuracy of information relevant to a policy in question. 

ASIC claimed the Notification Clause was unfair because it was ambiguous about what needed to be disclosed and, due to the unclear nature of the pronoun “anything”, imposed an obligation on customers that could not be met. Further, ASIC maintained that the term had the potential to mislead customers about their rights with respect to the limited circumstances in which an insurer can refuse or reduce a claim pursuant to s54 of the ICA, the basis upon which was allegedly broadened by the Notification Clause’s operation.

The Decision

Justice Jackman held the Notification Clause not to be unfair, and the proceedings were dismissed with costs. This was notwithstanding the potential for AGI to cause detriment to the insured if the clause was applied or relied upon.⁵ His Honour went on to state that the duty to disclose was “simply a reflection of the nature of the contract”.⁶

Nevertheless, His Honour placed particular weight on the implied obligations of insurers to act towards the insured with utmost good faith, and that if reliance on a provision would constitute a failure to act with utmost good faith,⁷ a party may not rely on that provision.⁸ Thus, commercial decency and fairness ⁹ would have prevented AGI from exercising its rights under the Notification Clause to the prejudice of the insured, but only to the extent that the insured’s failure to notify a change in information had prejudiced the AGI’s interests.¹⁰

ASIC has appealed the judgment, and a notice of appeal is set to be heard by the Full Federal Court at a yet to be determined date.

The Takeaways

In the insurance sector, the obligation to disclose by the insured is of paramount importance – there is a duty to tell the insurer what an insured can reasonably be expected to know as it will impact the insurer’s decision to insure and the terms of that insurance. This has always been assumed to be an ongoing obligation. The terms of insurance reflect that obligation. It is concerning that the regulator is now attempting to derail that obligation as an unfair contract term. It goes against the industry expectation and what has operated as a fair and reasonable obligation. If it is upheld it is expected that it will have an adverse impact on the calculation and imposition of premiums. Let’s hope common sense prevails!

1. Under Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth), and pursuant to s326A of the ASIC Act.
2. ASIC Act, s 12BG(1)
3. ASIC Act, s 12BG(2)
4. ASIC Act, s 12BG(3)
5. ASIC v AGI, [113]
6. ASIC v AGI, [76]
7. ICA, s 13
8. ICA, s 14(1)
9. ASIC v AGI, [81]
10. ASIC v AGI, [81]