The Full Court of the Federal Court dismissed an appeal in favour of Auto & General in a recent ‘unfair contracts’ dispute brought by ASIC. The case considered whether it was fair for an insurance company to require customers to tell them about any changes to their home or contents. The Court decided that this rule was not unfair, as long as it was clear and only asked for important changes that could affect the insurance.

Key Takeaways

1. Clarity has been provided as to how parties should interpret insurance policy terms in the context of unfair terms and unfairness
2. Policy terms should be considered from the perspective of what a reasonable consumer would understand the term to mean, not what a reasonable businessperson would understand it to mean
3. Notification terms in insurance policies should be clear and transparent, limited to material changes relevant to the insured risk. Terms requiring an insured to inform the insurer about any changes about an insured’s home and contents require only material changes affecting the insured risk to be notified and not all changes
4. Similarly, in any standard form contract, parties should be careful when drafting termination and exclusion clauses, for example termination of an agreement, limitation of liability or exclusion of consequential loss based on a lack of notification of information to the other party.

Background

Since 2021, insurance contracts have been subject to laws relating to unfair terms in standard form contracts.

Auto & General’s policy terms regarding an insurance contract with a consumer contained a notification term: ‘While you are insured with us, you need to tell us if anything changes about your home and contents’. It warned of the consequences of a failure to notify and gave examples of the types of changes that needed to be notified.

In April 2023, ASIC commenced proceedings against Auto & General, alleging that the notification term was unfair within the meaning of section 12BG(1) of the ASIC Act.

In March 2024, the Federal Court ruled in favour of Auto & General finding that the notification term was not unfair.

ASIC appealed to the Full Court of the Federal Court.

Issues

The issues for consideration and determination on appeal were as follows:

1. The proper construction of the notification term
2. Whether the notification term caused a significant imbalance in the parties’ rights and obligations
3. Whether the notification term was reasonably necessary to protect the insurer’s legitimate interests
4. Whether the notification term was transparent
5. Whether the notification term would cause detriment if relied upon.

The appeal was dismissed by the Full Court of the Federal Court. The Court ruled in favour of Auto & General. In particular, the Court found that notification term did not cause a significant imbalance in the parties’ rights and obligations, and the notification term was reasonably necessary to protect the insurer’s legitimate interests.

The Court also found that the notification term did not lack transparency to the extent required to be considered unfair, and the notification term was not overall unfair when considering the lack of imbalance and the reasonable necessity of the notification term.

Summary

Policies and insurance contracts containing notification clauses should be transparent, reasonably necessary and not cause a significant imbalance in the parties’ rights and obligations. In order to be transparent, an insurer should be clear in the types of information it expects should be notified to it by the insured, ensuring that those matters are likely to affect the insured risk.

Whilst this case was about a notification term in an insurance policy, similarly, in any standard form contract, parties should be careful when drafting termination and exclusion clauses. For example, standard form contracts may grant the party in the stronger bargaining position (usually the party that prepared the standard terms) rights to do the following if the other party to contract did not communicate unspecified events/information:

• Terminate an agreement
• Limit liability
• Exclude consequential loss.

Consideration should be given to amending standard form contracts that contain notification terms to ensure that they are not unfair.

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 us. We also deliver presentations and training to our clients on consumer laws and the implications of consumer law reforms.

Further information / assistance regarding the issues raised in this article is available from the author, Bill Fragos, Special Counsel, Christina Segaan, Senior Associate, or your usual contact at Moray & Agnew.