The extension of the unfair contracts terms regime (UCT laws) to life insurance contracts will commence on 5 April 2021 after the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Bill 2019 received royal assent on 17 February 2020.

This extension gives effect to recommendation 4.7 of the Financial Services Royal Commission to extend the existing protections of the UCT laws under the Australian Securities and Investments Commission Act 2001 (Cth) to insurance contracts.

The UCT laws will apply to insurance contracts that are:

• new or renewed after 5 April 2021, or
• varied, but only to the terms which are varied, after 5 April 2021.

You can find a more detailed discussion on how the UCT laws apply to life insurance contracts in our December LSB link here.

Key points include:

• UCT laws will generally apply to retail life contracts and direct life contracts;
• Terms which define the “main subject matter” are exempt from UCT laws. However, the main subject matter is essentially limited to a description of what is being insured (i.e. the person insured under the policy and the sum insured) and therefore most terms within the retail and direct policies will be subject to the UCT laws;
• A non-exempt term is “unfair” if, amongst other things, the term is not “reasonably necessary to protect” an insurers legitimate interests.

Life insurers will therefore need to review a broad range of terms for compliance with the UCT laws, including terms which are directed towards the scope of cover. For example:

• general exclusions;
• opinion based TPD definitions;
• the various tests (such as hour based tests) for determining which TPD definition applies; and
• certain categories of offsets.

It is worth noting that Treasury initiated a separate consultation process in December 2019 (the consultation period closed on 27 March 2020) on some potential “Enhancements to Unfair Contract Term Protections.” The potential “enhancements” include a broader range of remedies for when UCT laws are breached including introducing penalties for breaches. We will continue to monitor these developments and how they impact insurance contracts.