Key Takeaways

• Policy terms may be misleading yet not ‘unfair’ under the ASIC Act
• Courts will assess unfairness in light of the broader legal framework, including statutory protections such as s47 of the Insurance Contracts Act 1984 (Cth)
• Insurers must ensure product disclosure materials accurately reflect statutory rights, even if policies are administered consistently with those rights
• The decision affirms that legitimate underwriting objectives (e.g. anti-selection risk) can justify exclusion clauses.

Background

The case concerned pre-existing condition exclusions in life insurance policies issued by HCF Life Insurance.

Historically, such exclusions reflected s47 of the Insurance Contracts Act, which prevents insurers from denying claims for pre-existing conditions where the insured was not, and could not reasonably have been, aware of the condition at policy inception.

However, from 2019, HCF adopted a broader contractual definition excluding cover where, in the opinion of a medical practitioner, signs or symptoms existed prior to inception, regardless of the insured’s awareness.

ASIC alleged that the terms were misleading, because they did not reflect the statutory limitation imposed by s47 and the terms were unfair under the ASIC Act.

Primary Judgment (at first instance)

At trial, the Federal Court found that the exclusion terms were partially unenforceable due to s47 and presenting them as a complete statement of coverage misled consumers.

However, the Court held that the terms were not unfair, because any imbalance was mitigated by the operation of s47, the terms were reasonably necessary to protect legitimate interests, and the alleged consumer disadvantage was not established.

The Appeal

ASIC challenged only the unfairness finding.

The Full Court dismissed the appeal, confirming that the primary judge had not erred in concluding that the terms were not unfair. The terms were not unfair for the following reasons:

Statutory context matters

A central holding is that unfairness must be assessed in the real legal context, not just the contractual text. Section 47 effectively ameliorated the impact of the exclusion, limiting the insurer’s ability to rely on it. This meant there was no ‘significant imbalance’ in rights once the statute was taken into account.

Accordingly, courts will not assess policy wording in isolation and existing statutory protections will be factored in.

‘Misleading’ does not mean ‘unfair’

The Court drew a clear distinction:

• The terms were misleading, because they failed to disclose the effect of s47
• But they were not unfair, because the practical impact on rights was limited.

The Court held there was insufficient evidence that policyholders were materially deterred from making claims.

Accordingly, a clause can breach misleading conduct provisions (s12DF) without being struck down as unfair.

Transparency is not determinative

The Court confirmed a lack of transparency is relevant but not decisive in assessing unfairness. A term may be unclear or even misleading yet still not meet the statutory test of unfairness.

Accordingly, the unfair contract terms regime remains narrowly focused on substantive imbalance, not merely clarity.

Legitimate insurer interests are recognised

The Court accepted that the exclusion served legitimate commercial purposes, including enabling guaranteed acceptance products and mitigating anti-selection risk.

Even though alternative drafting existed, those alternatives would not have imposed a significantly lesser burden on consumers.

Accordingly, courts will defer to underwriting logic, provided the clause is proportionate.

What This Decision Means for Insurers

• The decision reinforces that exclusion clauses remain viable, even if broadly drafted
• Insurers can rely on the fact that statutory safeguards will be considered in assessing unfairness
• Legitimate commercial objectives (e.g. underwriting risk) are strongly protected
• Misleading conduct exposure remains significant and a failure to explain statutory rights (such as s47) can breach the ASIC Act
• Product disclosure statements must:
  • Accurately reflect actual coverage limitations, including statutory overrides; and
  • Avoid presenting exclusions as absolute where they are qualified by law.
• In practice, this decision places greater scrutiny on disclosure, not necessarily policy drafting
• Insurers should review PDS and onboarding communications to expressly acknowledge key statutory protections (e.g. s47) and to avoid overstatement of exclusion rights, Insurers should ensure alignment between contractual wording, internal claims handling practices and consumer-facing disclosures.

What This Means for Insureds

• Policyholders continue to benefit from statutory protections, even if not fully disclosed
• Consumers may still challenge insurers relying on exclusions if they were unaware of the condition and a reasonable person would not have been aware
• The threshold for establishing an unfair term remains high
• Courts require real evidence of disadvantage, not theoretical harm
• Insureds and their advisers should not assume exclusions operate strictly as written and they should consider whether statutory provisions (particularly s47) limit insurers’ reliance on exclusions.

Conclusion

This decision provides welcome clarity that:

• The unfair terms in standard form contracts regime does not operate as a backdoor to strike down commercially justified exclusions
• The key issue remains not only misleading disclosure but genuine unfairness, rather than contract invalidity.

For the insurance industry, the message is clear: you may retain robust policy terms, but you must describe them accurately.

Should you wish to discuss this decision, unfair terms in standard form contracts, and consumer law rights and obligations, please do not hesitate to contact Bill Fragos, Special Counsel, Christina Segaan, Senior Associate, or your usual contact at Moray & Agnew. We also deliver presentations and training to our clients on consumer laws and the implications of consumer law reforms.