Clause requiring insured to notify ‘if anything changes’ not an unfair contract term

A recent Federal Court decision has provided clarity on a policy holder’s obligation to notify an insurer of changes in circumstances under a general insurance policy and, in turn, provided guidance on when such a contractual obligation will not be an unfair contract term (UCT). The decision highlights, when considering whether a term of a standard form contract is a UCT, the importance of reading it in the context of the contract as a whole. The decision also provides learnings on the relevance of statutory overlay when making that assessment.

The proceedings, commenced by the Australian Securities and Investments Commission (ASIC), concerned contracts for home and contents insurance made by Auto & General Insurance Company Limited (Auto & General), which required the insured to notify Auto & General ‘if anything change[d]’ while they were insured with Auto & General (Notification Clause). ASIC claimed that the Notification Clause and other similarly worded obligations for notification were unfair within the meaning of sections 12BF(1)(a) and 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

Ultimately, the Court held that the Notification Clause was not unfair because it did not satisfy all three criteria of unfairness.

Notification Clause

The focus of ASIC’s claim was the Notification Clause contained in the product disclosure statements (PDSs) which stated:

Tell us if anything changes while you’re insured with us.

The PDSs also stated:

One of your important obligations is to give us all the information that is needed under your contract with us. Giving us this information is called your ‘duty of disclosure’.

Supplementary PDSs were issued to replace ‘Your duty of disclosure’ with ‘Your duty not to make a misrepresentation’, consistently with amendments to the Insurance Contracts Act 1984 (Cth) (ICA). The supplementary PDSs stated:

You have a legal duty under the [ICA] to take reasonable care not to make a misrepresentation to us’ and ‘Your duty extends to telling us whether any of this information has changed.

Relevant legislative provisions

As the impugned contracts were financial products, being insurance contracts, the proceedings concerned provisions of the ASIC Act. The provisions of the Australian Consumer Law (ACL) in relation to UCTs are substantially identical to those of the ASIC Act.

UCT regime

Section 12BF(1) of the ASIC Act provides as follows:

A term of a consumer contract or small business contract is void if:

1. 1. the term is unfair; and
   2. the contract is a standard form contract; and
   3. the contract is:
      1. a financial product; or
      2. a contract for the supply, or possible supply, of services that are financial services.

There was no dispute that the Notification Clause was part of a ‘consumer contract’.

Section 12BG(1) provides that a term of a contract to which section 12BF refers is unfair if:

1. 1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; 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 (whether financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term of a contract is unfair, a court must take into account the extent to which the term is transparent and the contract as a whole. A term is transparent if the term is expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term.

ICA

Section 12(a) of the ICA provides that Part II of the Act does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than, in relation to a consumer insurance contract or proposed consumer insurance contract, the duty to take reasonable care not to make a misrepresentation. Part II operates in addition to the UCT provisions of the ASIC Act.

Section 13(1) provides that ‘there is implied in [a contract of insurance] a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith’.

Section 14 provides that, if reliance by a party to an insurance contract on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision. In deciding whether such reliance by an insurer would be to fail to act with the utmost good faith, the court must have regard to any notification of the provision that was given to the insured.

Further, section 37 provides that an insurer may not rely on a provision included in a contract of insurance of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the contract was entered into, the insurer clearly informed the insurer in writing of the effect of the provision.

Section 54(1) provides that, where the effect of an insurance contract would, but for section 54, be that the insurer may refuse to pay a claim by reason of some act of the insured that occurred after the contract was entered into, the insurer may not refuse to pay the claim by reason only of that act, but the insurer’s liability is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.

Construction of the Notification Clause

Justice Jackman stated that the ‘literal meaning of the word “anything” in the expressions “Tell us if anything changes while you’re insured with us” and “While you’re insured with us, you need to tell us if anything changes about your home or contents” should readily be rejected’, as such a literal reading would lead to absurdity. By example, his Honour noted that the contents of a person’s home change whenever groceries are brought home from an everyday shopping outing, and again when they are consumed in preparing and eating meals. His Honour stated that, ‘once one rejects the literal construction in light of the absurdity of reading the word “changes” as meaning literally “any change”, then the word “changes” must be construed as having a more limited meaning’ by ‘[looking] at the text of the contract as a whole’.

Auto & General submitted, and it was accepted, that the Notification Clause, on its proper construction, required the insured to notify Auto & General 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 Auto & General prior to entry into the contract. In reaching this conclusion, support was drawn from the text of the PDS and other contractual documents as a whole, the consistent use of language across the documents (including in the cover letter and declarations which formed part of the contract), and the purpose and object of the contract.

Under the Notification Clause, Auto & General had a discretionary right to refuse to pay a claim, reduce the amount it paid or cancel the contract if the insured failed to notify Auto & General of relevant changes. Justice Jackman held that the effect of the Notification Clause, in this respect, must take into account the implied provision under section 13 of the ICA, which requires insurers to act with the utmost good faith. His Honour held that ‘[i]t follows that the duty of utmost good faith operates, as a paramount provision implied in the contract of insurance, to limit what [Auto & General] can do under the Notification Clause’. The duty has been interpreted as a duty that must be performed ‘consistently with commercial standards of decency and fairness’ (rather than a duty to act only in the interests of the insured).

Ultimately, his Honour construed the Notification Clause as:

1. requiring the insured to notify Auto & General 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 Auto & General prior to entry into the contract;
2. if the insured failed to notify Auto & General of such changes, Auto & General 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 Auto & General to do so.

Was the Notification Clause ‘unfair’?

In determining whether the Notification Clause was unfair, Justice Jackman took each of the three elements in section 12BG(1) in turn, and then dealt with the issue of transparency.

Significant imbalance in rights and obligations

Justice Jackman found that the Notification Clause was aimed at furnishing Auto & General with relevant information about the risks that it was covering, and there was a meaningful relationship between the notification obligation on the part of the insured and the protection of Auto & General’s interests as insurer. While the contract did not contain any corresponding rights relating to the notification obligation in favour of the insured (ie, the notification obligation was a unilateral obligation), the Notification Clause did confer reciprocal rights on the insured in the context of the contract as a whole, because the insured’s obligation to notify Auto & General of changes was a promise that the insured made in exchange for Auto & General’s ongoing provision of cover.

Justice Jackman held that Auto & General’s rights arising upon a breach of the Notification Clause were qualified by the implied requirement under section 13 of the ICA that Auto & General must exercise its rights and powers with the utmost good faith, and ‘the Court must take into account the context of the overall legal environment … in which the terms of the contract operate’. His Honour held that ‘[i]t is therefore necessary to consider the effect of [section] 13 of the ICA when determining whether a clause has created a significant imbalance for the purposes of [section] 12BG(1)’.

In that regard, his Honour held that it would be contrary to commercial standards of decency and fairness for Auto & General to exercise its rights under the Notification Clause to the prejudice of an insured unless, and to the extent that, the insured’s failure to notify of a change prejudiced Auto & General’s interests. In carrying out an assessment of such prejudice, regard must be had to section 54 of the ICA, however the effect of section 54 was found to be consistent with the Notification Clause on its proper construction, and His Honour found that Auto & General’s powers to refuse or reduce claims would not cause a significant imbalance in rights and obligations.

Further, his Honour held that, even if his conclusion as to the effect of section 13 is wrong, the Court must, in assessing the criteria of a UCT, take into account the overall legal environment. In which case, the effect of section 54 must be taken into account when assessing whether a term covered by the ICA would cause a significant imbalance, and not after assessing the three elements. On that basis also, the Notification Clause would not cause a significant imbalance in the rights and obligations of the parties.

Reasonably necessary to protect legitimate interests

Justice Jackman considered that the second question was whether it was reasonably necessary in order to protect the legitimate interests of Auto & General for the Notification Clause to require notification of any change to the information previously provided by the insured. His Honour found that Auto & General’s legitimate interests included Auto & General’s ability to choose which risks it insured against and not having to pay claims where the loss giving rise to those claims was caused by a risk that it would not have insured against.

Accordingly, His Honour held that it was reasonably necessary to protect Auto & General’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 it had declined to grant cover, for that reason. This is because the Notification Clause could only be applied or relied on where, and to the extent that, the insured’s failure to notify a change in information prejudiced Auto & General’s interests.

Further, his Honour held that the words ‘reasonably necessary’ contemplate a range of permissible terms, and there is no requirement of absolute necessity. However, in determining whether a term falls within that reasonable range, it is relevant to consider alternatives which are less demanding of the other party to the contract.

Detriment to the insured

Justice Jackman took a broad view of detriment, and considered that the question was whether the Notification Clause would cause detriment in the sense of some disadvantage to the insured which need not necessarily be significant. Even if that disadvantage represented a fair outcome, it would nevertheless be a disadvantage. Accordingly, Justice Jackman regarded the third element of the meaning of ‘unfair’, detriment, as satisfied, because any reliance upon the Notification Clause by Auto & General would necessarily be detrimental to the insured.

Transparency

In terms of transparency, Justice Jackman held that the concept of a term being ‘expressed in reasonably plain language’ includes the concept of clarity of meaning, and thus an ambiguity in meaning (including a legal ambiguity) will point towards a lack of transparency. His Honour referred to Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA 1044, in which it was found that a term lacked transparency where it did not clearly disclose ‘the nature and extent of the obligations’ and where there was a lack of ‘transparency as to the way it would be applied’.

Accordingly, his Honour held that ‘the question whether a term is expressed in a manner which allows consumers readily to know and understand the parties’ rights and obligations’ is relevant to the issue of transparency. His Honour stated that consumers generally may not have reached the construction his Honour had reached with regard to the Notification Clause, and few consumers would have been aware of the operation of the ICA and its impact on the Notification Clause.

His Honour turned to the question whether the lack of transparency should be taken into account, and noted that a lack of transparency is not an independent element of unfairness as defined in section 12BG(1). As was stated in the Explanatory Memorandum to the Australian Consumer Law, ‘if a term is not transparent it does not mean that it is unfair and if a term is transparent it does not mean that it is not unfair’. However, the greater the imbalance or detriment inherent in the term, and the less a term is regarded as reasonably necessary to protect legitimate interests, the greater the need for the term to be expressed and presented clearly.

Ultimately, his Honour concluded that the Notification Clause was reasonably necessary and was not significantly imbalanced, and the lack of transparency in the term did not yield any different result.

Key takeaways

Unless all three criteria in section 12BG(1) (or section 24(1) of the ACL) are satisfied, a term in a standard form contract is not unfair. Given that two of the criteria were not satisfied in this case, the Notification Clause was not unfair.

This decision is particularly noteworthy because the Court held that section 13 of the ICA, which reads in a good faith clause, was relevant to analysing the criteria of unfairness, including whether there was a significant imbalance in rights and obligations. Further, the Court also held that section 54 should also be a relevant factor in that determination. The decision is a welcome addition to the jurisprudence in the UCT space – the Court making clear that an assessment of a potential UCT should not be made in a vacuum when there is clear statutory overlay that impacts the contract as was the case here. The question that follows is how far this approach could be taken to apply in other contexts – for example, in the franchising context, what impact does the Franchising Code of Conduct’s mutual obligation of good faith have in the assessment of a UCT?

The decision is also a reminder that transparency, in and of itself, is not determinative of whether a term of a contract is unfair. Parties should carefully consider the criteria set out in section 12BG(1) (or 24(1) of the ACL), and have regard to the contract as a whole, any other contract or document referred to in the text of the contract, and the interaction of the contract with statutory provisions.

ASIC may yet appeal the decision, so this may not be the end of the matter.  Any further consideration of any pleaded issues at the appellate level would be expected to produce further welcome guidance on assessing UCTs.

In addition, ASIC is currently in proceedings against HCF Life, alleging unfair and misleading contract terms in insurance policies.  The trial is scheduled for September. These proceedings are anticipated to lead to further judicial guidance on the role of statutory overlay (in this case, section 47 of the ICA) and, unlike the Auto & General case, whether the impugned terms are, of themselves, misleading.

Since 9 November 2023, the making of standard form contracts with a UCT, or the enforcement of a UCT, can attract significant penalties. Gadens’ experienced UCT practitioners continue to be available to review contracts of concern and to provide advice on these significant legal issues.

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Authored by:

Adam Walker, Partner
Maggie Laing, Lawyer