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Thursday, December 20, 2012

Are insurance contracts unfair? What the Australians are doing.

The link here leads to an Australian legal website Lexology.com which in February this year published an article Are insurance contracts unfair? The article discusses whether or not insurance contracts are unfair, and if they should come under Australia’s Unfair Contracts legislation.

Since it was written there have been developments with insurance contracts now to be covered by a similar approach, but using existing insurance legislation (albeit in a dilute form from what was initially proposed). However it is a good backgrounder on what is happening in Australia. The Insurance Council of Australia’s perspective is here.

The Australian developments are important for us, as there is an on-going alignment of legislation between Australia and New Zealand (i.e. we end up doing what Australia has decided upon). In the context of unfair contracts, New Zealand law firm Buddle Findlay recently published an article Aligning trans-Tasman consumer law: New Zealand developments (here), and discusses the prohibition of unfair contract terms.

The effect of such legislation?

The prohibition will mean that a court may declare a term of a standard form consumer contract to be "unfair" if the term:

  • Would cause a significant imbalance in the parties’ rights and obligations under the contract
  • Is not reasonably necessary to protect the legitimate interests of the advantaged party and
  • Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

What sort of specific situations might the legislation apply to? The writers provide the following on the Australian situation (general contracts, not insurance contracts):

Since the enactment of similar provisions in Australia, the ACCC’s focus appears to have been on providing guidance and education to businesses (rather than taking enforcement action), and undertaking proactive compliance reviews of contracts in particular industries.  In its recently released annual report, the ACCC notes that, during the compliance review process, businesses have deleted, amended, and made structural changes to contract terms in response to the ACCC’s concerns.

Examples of types of terms that the ACCC has identified as possibly unfair include terms that:

  • Exclude or limit liability for errors and inaccuracies on a business’s website
  • Deem a consumer to have "understood" the contract
  • Attempt to limit a business’s liability for what its employees say and do
  • Enable the business to unilaterally vary the terms.

The Australian experience suggests that the existence of legislation prohibiting unfair terms could have a significant impact on modifying behaviour in relation to standard form contracts, even if enforcement action is rare. It also provides insight as to the likely areas of focus of the Commerce Commission if and when the provisions are enacted in New Zealand.

It is early days yet, however I am sure the wealth of recent relevant insurance experience in Canterbury will provide our law makers with a great deal of information on the need for a very much improved level of fairness in insurance contracts.

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