Two Out of Three Ain’t Bad: ASIC v Auto & General Insurance Company Limited [2024] FCA 272

ASIC v Auto & General Insurance Company Limited [2024] FCA 272

Headlines

• First judicial consideration of the unfair contract terms regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) in relation to an insurance contract, following amendments to that Act in April 2021 to broaden the regime to cover insurance contracts.

• The impugned clause met only one of the three limbs of the test for unfair contract terms under section 12BG of the ASIC Act, and accordingly ASIC’s claim failed.

• ASIC has appealed the decision.

The facts

The Federal Court decision of Justice Jackman in Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272 concerned notification clauses in contracts for home insurance and contents insurance offered by Auto & General Insurance Company Limited (AGI) under various brands, including Budget Direct, ING, and Virgin Insurance.

The Product Disclosure Statement issued as part of the insurance contracts contained a section headed ‘Tell us if anything changes while you’re insured with us’ (the Notification Clause), which stated ‘While you’re insured with us, you need to tell us if anything changes about your home or contents.’

The Notification Clause went on to say that if customers did not tell AGI about changes, AGI may:

• refuse to pay a claim;
• reduce the amount paid;
• cancel the contract; or
• not offer to renew the contract.

The Notification Clause contained 11 examples of changes about which AGI wanted to be told, including:

• an insured finding out their home is heritage listed or has a heritage overlay;
• paying guests staying in an insured’s home;
• an insured moving out and renting their home to tenants; and
• an insured starting to earn an income at their insured address.

The issue

The issue for determination by the Federal Court was whether the Notification Clause was unfair within the meaning of ss 12BF(1)(a) and 12BG(1) of the ASIC Act, as ASIC claimed.

The statutory framework

Section 12BF(1)(a) of the ASIC Act provides that a term of a consumer contract or small business contract is void if the term is unfair.

Section 12BG(1) provides that a term is unfair if:

1. it would cause a significant imbalance in the parties’ rights and obligations; and
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment to a party if it were to be applied or relied on.

A term will only be unfair if each of the three limbs of s 12BG(1) are met.

Section 12BG(2) provides that a court, in determining whether a contract is unfair, must take into account the extent to which the term is transparent, and must consider the contract as a whole, and s 12BG(3) sets out the indicia of transparency.

The decision

Construction of the Notification Clause

In construing the Notification Clause, his Honour had to consider two issues:

1. what did an insured need to tell AGI to comply with the Notification Clause; and
2. what could AGI do if an insured breached the Notification Clause: [40].

His Honour construed the Notification Clause as:

• requiring an insured to notify AGI 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 AGI prior to entry into the contract; and
• if an insured failed to notify AGI of such changes, AGI had the right to:
  • refuse to pay a claim;
  • reduce the amount it paid;
  • 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 AGI to do so.

While his Honour found the construction of the Notification Clause to be straightforward and did not regard the question of construction as finely balanced, his Honour did find that consumers generally would not have reached that conclusion, and not with the level of conviction his Honour did: [63], [103]. This was relevant to his Honour’s determination that the Notification Clause was not transparent, discussed below.

Unfair term test under s 12BG(1)

Applying the test for an unfair contract term set out in s 12BG(1), his Honour found that the Notification Clause did not contravene limbs one and two, but did contravene limb three, in that it:

1. did not cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
2. was reasonably necessary to protect the legitimate interests of AGI; but
3. would cause detriment to the insured if it were to be applied or relied on.

In finding that ASIC’s claim satisfied the third limb of s 12BG(1), his Honour determined that the Notification Clause lacked transparency, by lacking clarity and certainty, and the Notification Clause would cause detriment to an insured if it were applied or relied on.

The takeaways

Effect of the Insurance Contracts Act 1984 (Cth) – AGI’s rights under the Notification Clause were also subject to the Insurance Contracts Act, and in particular the implied provision of utmost good faith under s 13, and the limitation on refusal of claims under s 54: [57], [82], [85].

Transparency of terms and fairness – His Honour reiterated that if a term is not transparent, it does not necessarily mean that it is unfair. Conversely, even though a term is transparent, it may still be unfair: [105], citing Edelman J in ACCC v Chrisco Hampers Australia Pty Ltd (2015) 239 FCR 33. Both the substance and the form of a term is relevant in determining whether a term is unfair.

Appeal

ASIC has appealed on the grounds that his Honour erred in:

1. the construction of the Notification Clause; and
2. finding the Notification Clause did not contravene s 12BG(1)(a) and (b) of the ASIC Act.

More information on ASIC’s appeal, including the Notice of Appeal, can be found here.