A term in a product disclosure statement was not an unfair term within the meaning of ss12BF(1)(a) and 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). In reaching its conclusion, the Federal Court considered the interaction of the provisions with the Insurance Contracts Act 1984 (Cth).
In issue
- The primary issue in dispute was whether the term 'tell us if anything changes while you’re insured with us' within the notification clause (Notification Clause) of a product disclosure statement (PDS) was an unfair term within the meaning of the ASIC Act.
The background
The proceedings concerned contracts for home or contents insurance (or both) entered into by the defendant (insurer) between 5 April 2021 and 4 May 2023 which contained the Notification Clause on the part of insureds after the contracts were entered into.
The plaintiff (ASIC) claimed that the Notification Clause was unfair within the meaning of ss12BF(1)(a) and 12BG(1) of the ASIC Act.
A term is unfair under s12BG(1) if all of the following 3 limbs are satisfied:
- It would cause a significant imbalance;
- It is not reasonably necessary;
- It would cause detriment.
Broadly speaking, ASIC said the Notification Clause was unfair because it was ambiguous and broad.
The decision at trial
Proper Interpretation of the Notification Clause
The first issue facing the Court was the proper construction of the Notification Clause. The defendant insurer said that the Notification Clause required an insured to notify the insurer if, during the term of the policy, there was any change to the information about the insured’s home or contents that the insured disclosed to the insurer prior to entering into the policy.
The Court accepted that interpretation having considered the Notification Clause in the context of the policy. It also rejected ASIC’s contention, amongst others, that the defendant insurer could have provided an exhaustive list of circumstances where further disclosure was required on the basis that an exhaustive list would be 'lengthy' and 'wearisome', and unlikely to be read by an insured.
Was the Notification Clause unfair?
Turning to whether the Notification Clause was unfair, the Court proceeded on the basis that that analysis requires a consideration of the relevant term in the context of the of both 'statutory and non-statutory' law. That includes the duty imposed by s 13 of the ICA to act in utmost good faith, and operates (as a paramount provision implied in the contract of insurance), to limit what an insurer can do under the Notification Clause in response to a failure to notify of relevant changes, so that the rights referred to in the Notification Clause can only be exercised in a manner which is commercially decent and fair.
The Court rejected ASIC’s arguments that the Notification Clause was unfair because it caused a significant imbalance in the parties rights and obligations. In this respect, the Court found that the term was not unfair when referring to the contract as a whole because it showed a meaningful relationship between the notification obligation on the part of the insured and the protection of the defendant’s interests as insurer that was foreseeable at the time of contracting. In addition, the fact that the obligation to notify was a unilateral obligation by the insured, rather than a bilateral obligation owed reciprocally by both parties, was simply a reflection of the nature of the contract. Even if the view that the Notification Clause on its proper construction has the same substantive effect of s54 was wrong, then s54 itself would operate on the term to ensure that the insurer’s powers to refuse or reduce claims would not cause a significant imbalance in the rights and obligations of the parties arising under the contract.
The Court also rejected the second limb of whether the Notification Clause was unfair because it was not reasonably necessary in order to protect the legitimate interests of the defendant insurer to require notification of any change to information previously provided by the insured. The Court rejected this argument, determining that the defendant’s legitimate interests included its ability to choose which risks it will insure against, and the information-gathering process ensured that the defendant was not covering risks which it was not willing to insure against. The obligation for the insured to disclose changes to any of the information previously provided was therefore proportionate to the defendant’s legitimate interests, and reasonably necessary for their protection.
Finally, ASIC succeeded in establishing that the Notification Clause caused the required detriment to an insured (being a reduction in the defendant insurer’s liability to the insured) even if the disadvantage in the end represents a fair outcome.
The Court also addressed at length whether the Notification Clause was transparent, that being a factor in deciding whether the relevant term is unfair.
The Court accepted ASIC’s submission that the Notification Clause lacked transparency to a significant degree because of both the ambiguity in the proper construction of it as to what 'changes' were being referred to, and the lack of reference to the legal constraints on the defendant’s rights and powers by reason of ss13 and 54 of the ICA.
However, the Court pointed out that a lack of transparency is not an independent element of unfairness.
ASIC argued that the lack of transparency caused a significant imbalance in the parties rights and obligations. However, the Court, whilst recognising that the greater the imbalance, the greater the need for transparency, rejected ASIC’s argument because it had already found that there was no significant imbalance.
The Court also rejected, on the same grounds as earlier, ASIC’s argument that if a term lacks transparency, then it is unlikely to be 'reasonably necessary' to protect, in this case, the defendant insurer.
It followed that ASIC failed to establish that the Notification Clause was unfair because, although the criterion in s12BG(1)(c) was satisfied, the criteria in s12BG(1)(a) and (b) were not, and, unless all three criteria are satisfied, the term is not unfair.
The proceedings were dismissed with costs.
Implications for you
The case is important in providing some guidance on the application of the unfair contract terms regime to insurance policies. In this regard, one must first properly interpret the scope of a term and consider it in light of the legal environment, including the provisions set out in sections 13 and 54 of the ICA.
Whilst the debate on transparency did not ultimately see ASIC succeed, insurers should be well aware of the need for transparency in crafting terms and conditions, particularly those that are more onerous.
