Federal Court of Australia clears Auto & General of unfair contract term

In Brief: On 22 March 2024, the Federal Court of Australia handed down judgment in Australian Securities & Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272 finding that insurance contracts issued by Auto & General did not contain an unfair contract term. 

Background 

Australian Securities & Investments Commission (ASIC) commenced an action against Auto & General Insurance Company Limited (Auto & General) claiming that a term of a contract of insurance requiring policy holders to notify Auto & General of any changes to their home and contents was an unfair contract term.

Between 5 April 2021 and 21 March 2023, Auto & General entered into approximately 1,377,900 contracts of insurance which included the relevant term. Each of the contracts of insurance included a product disclosure statement (PDS) dated 1 March 2021. 

The PDS was issued under a number of Auto & General brands providing home and contents insurance cover, including Budget Direct, Australia Post, ING, Catch Insurance and Qantas. 

The PDS contained terms which required a policy holder to advise Auto & General if "anything" had changed between policy inception and renewal.  

What was the relevant term?

At the time of applying for a policy of insurance, a policy holder was asked questions in respect of the type of home and contents being insured. 

These questions related to the address, the property type, whether it was part of a strata title complex or body corporate, the year it was built, whether it was heritage listed, the construction materials of the walls and roof, the nature of the occupancy, the type of cover sought, an estimate of the value of the home and its contents, and policy holder's date of birth and claims history. 

If, after an initial period of insurance, a policy holder wished to renew the policy, they were advised before the renewal to confirm any changes or corrections to the insurance details already provided in accordance with their duty of disclosure and their obligation to take reasonable care not to make a misrepresentation. 

The PDS stated:

"Tell us if anything changes while you're insured with us. While you're insured with us, you need to tell us if anything changes about your home or contents. If you don't tell us about changes we may refuse to pay a claim, reduce the amount we pay, cancel your contract, not offer to renew your contract". 

There were 11 examples of changes that were required to be notified to the insurer, including "your home is no longer in good condition", "you are moving out and rent your home to tenants", "you find out the building materials contain asbestos". 

His Honour concluded that the proper construction of the notification clause in the contract of insurance contained a term that:

1. The insured must 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 had disclosed to the defendant prior to entering into the contract; and

2. If the insured failed to notify the insurer of such changes, the insurer had the right to refuse to pay a claim, reduce the amount it paid, or cancel the contract or not offer to renew the contract if and to the extent that it would be consistent with commercial standards of decency and fairness for the defendant to do so, and this was in line with the insurer's duty to act in of utmost good faith under section 13 of the Insurance Contracts Act 1984 (ICA). 

Was the term unfair?

Section 12BF of the Australia Securities and Investments Commission Act 2001 (ASICA) states that:

(1)    A term of consumer contract or small business contract is void if:

(a)    the term is unfair; and

(b)    the contract is a standard form contract; and 

(c)    the contract is:

(i)    a financial product; or 

(ii)    a contract for the supply, or possible supply, of services that are financial services. 

ASIC alleged that the term was unfair under section 12BG of ASICA because it:

1. Imposes an unclear obligation on the policy holder to notify Auto & General if "anything" changes;

2. Indicates that Auto & General has a broader right to refuse claims or to reduce the amount payable if the policy holder does not comply with its obligation to notify than what is provided under the ICA;

3. May mislead the policy holder as to their true rights and obligations under the contract.

His Honour considered three criteria which must be satisfied in determining whether the term was unfair in accordance with section 12BG(1) of the ASICA: 

1.  It would cause "significant imbalance"; and

2. It is "reasonably necessary"; and 

3. It "would cause detriment". 

His Honour held the clause did not create a significant imbalance between the parties and that the unilateral duty to disclose the changes were a reflection of the type of contract entered into. 

His Honour further held that the term was reasonably necessary to protect the insurer's legitimate interests for it to have powers under the contract to put itself in the position it would have been in, had the insured disclosed information revealing the risk, and the insurer had declined to grant cover or limited the cover for that reason. 

In respect of whether the term would cause any detriment, His Honour further held that any reduction in the insurer's liability to indemnify the insured consumer is disadvantageous to the consumer and therefore constitutes a detriment, noting that even if that disadvantage represents a fair outcome, it is nevertheless a disadvantage. 

When considering whether the term was transparent pursuant to section 12BG(3) of the ASIC Act, His Honour accepted that the term lacked transparency to a significant degree however ultimately found that the lack of transparency with the term did not yield any different result as the clause was reasonably necessary to protect the insurer's interests. 

Outcome 

His Honour held that two of the three criteria in section 12BG(1) could not be established and therefore the term was not unfair. The proceedings were dismissed with costs. 

Implications 

This decision is of significant importance to both insurers and policyholders as it clarifies the ongoing obligation of policyholders to disclose relevant information to insurers to avoid claims being declined, or cover being withdrawn.

Policyholders must provide up to date information to insurers regarding information that was disclosed at policy inception, and in turn, give insurers the opportunity to determine whether to cover those risks. 

However, in circumstances where policyholders have failed to comply with their disclosure obligations, insurers have the right to refuse to pay a claim or cancel an insurance contract if to do so would be consistent with the commercial standards of decency and fairness. As such, whilst insurers have the discretion to impose such consequences in instances of non-disclosure, the response must still be reasonable, which is consistent with the duty to act in of the upmost good faith under section 13 of ICA.