HCF Life’s ‘pre-existing condition’ clause in life insurance contracts declared misleading but not an ‘unfair contract term’ by Federal Court

Following proceedings commenced by the Australian Securities and Investments Commission (ASIC), the Federal Court declared on 28 October 2024 that a term used by HCF Life Insurance Company Pty Ltd (HCF Life) in consumer contracts was misleading, but not an unfair contract term.

The HCF Life case follows a number of other high profile cases following reforms to the unfair contract terms regime in 2023, and provides guidance on determining whether a term is ‘reasonably necessary’ to protect a business’s ‘legitimate interests’.  The decision adds to a growing body of jurisprudence on when contract terms in a consumer or small business contract may be unfair and unlawful, and is a timely reminder for businesses to complete contract reviews to ensure their documentation continues to be compliant.

It also highlights the importance of providing accurate and complete information to customers, particularly in the insurance sector, with ASIC Deputy Chair Sarah Court stating that:

“consumers rightly expect that insurers will provide accurate information to them about their rights. Consumers rely on this information to make insurance claims, often in trying personal circumstances”.

Context of the case

The defined term and provision in question before the Federal Court concerned exclusions for a pre-existing condition in Product Disclosure Statements for various HCF Life income protection, recovery and life insurance products (Pre-Existing Condition Terms).

The Pre-Existing Condition Terms had been varied four times since August 2019, however the current Pre-Existing Condition Term had the effect of excluding HCF’s liability to pay the consumer a benefit if a ‘pre-existing condition’ existed. A pre-existing condition was defined as “any condition, illness or ailment where the signs or symptoms of which in the opinion of a registered medical practitioner, existed at any time before the Cover Commencement Date, even if a diagnosis had not been made”. A pre-existing condition therefore included conditions of which the consumer was not aware.

Allegations by ASIC

ASIC’s foundational allegation was that the Pre-existing Condition Terms are rendered partially unenforceable by section 47 of the Insurance Contracts Act 1984 (Cth) (ICA), which states that:

“where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into”.

In such circumstances, ASIC further alleged that:

• by distributing the Product Disclosure Statements and contracting on the relevant HCF Life policies, HCF Life engaged in conduct that was liable to mislead the public in contravention of section 12DF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act); and
• the Pre-Existing Condition Terms were unfair within the meaning of section 12BG of the ASIC Act.

Section 47 of the ICA

Justice Jackman determined that ASIC’s foundational allegation that the Pre-Existing Condition Terms was partially unenforceable under the ICA given the Pre-Existing Condition Terms were fundamentally different to the requirement under section 47 of the ICA and would (in certain circumstances) yield different outcomes (our emphasis):

“On the one hand, the Pre-Existing Condition Terms turn upon whether a registered medical practitioner holds a subjective opinion that the signs or symptoms of a condition, illness or ailment existed before the policy was entered into. On the other, s 47 of the ICA asks whether the insured was aware (or a reasonable person in the circumstances could be expected to have been aware) of the underlying sickness at the time of contracting…”

Misleading conduct

In consideration of the High Court’s four steps to assess misleading or deceptive conduct in trade or commerce,^[1] the Federal Court ultimately concluded that HCF Life had contravened section 12DF(1) of the ASIC Act, which provides that:

“a person must not, in trade or commerce engage in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services”.

Publishing each Product Disclosure Statement, giving the Product Disclosure Statements to members of the public, and entering into the contracts with members of the public, amounted to engaging in conduct that was ‘liable to mislead’ in circumstances where the Product Disclosure Statements:

• contained the Pre-Existing Condition Terms; and
• did not advert to, or explain, the existence or effect of section 47 of the ICA or that the Pre-Existing Condition Terms were partially unenforceable.

As to the meaning conveyed by the relevant conduct, Justice Jackman accepted ASIC’s submission that an ordinary and reasonable member of the public would read and understand the Pre-Existing Condition Terms to be an accurate and complete statement of when benefits would not be payable by reason of a pre-existing condition including because such terms were absolute and unqualified. Furthermore, an ordinary and reasonable reader would be ignorant of the potential effect of section 47 of the ICA including (as discussed by Justice Jackman in his rejection of other submissions by HCF Life) on the basis that the Product Disclosure Statements did not make reference to any terms being unenforceable or subject to the application of other laws.

The Federal Court agreed that the meaning conveyed by the relevant conduct was misleading in circumstances where section 47(2) of the ICA would render the Pre-Existing Condition Terms partially unenforceable. Furthermore, an omission to mention a qualification in such circumstances is also conduct that is regarded as misleading.[2] HCF Life’s submission that section 12DF of the ASIC Act requires the public to be misled to their detriment was rejected; Justice Jackman opined that ordinary and reasonable readers who remain unaffected by the Pre-Existing Condition Terms would still have been misled by HCF Life’s conduct.

Unfair contract term

The Federal Court concluded that the Pre-Existing Condition Terms ultimately did not satisfy all three threshold requirements for a clause to be considered ‘unfair’ under section 12BF of the ASIC Act.

The Court determined that:

• The Pre-Existing Condition Terms satisfied the ‘detriment’ criterion of the unfair contract term test. The Court stated that detriment can be construed as being disadvantageous to the consumer (if relied on), and therefore the fact that the Pre-Existing Condition Terms were liable to mislead was sufficient to be considered a ‘detriment’.
• However, the Pre-Existing Condition Terms were not found to cause a ‘significant imbalance between the parties’. On the significant imbalance criterion, ASIC argued that the liability of the Pre-Existing Condition Terms to mislead put the consumer at a real practical disadvantage in exercising their right to claim under the policy and in challenging any denial of their claim by HCF Life. Justice Jackman rejected this argument, stating that the fact that a consumer is left confused about their rights and obligations does not mean those rights and obligations are imbalanced. Interestingly, the fact that the Pre-Existing Condition Terms were liable to mislead did not, in the Court’s view, create a relevant imbalance between the parties.

Helpfully, in rejecting ASIC’s submission that the Pre-Existing Terms were not transparent, the Federal Court clarified that section 12BG(2)(b) of the ASIC Act requires inquiry on the extent to which the term is transparent, not the extent to which the parties’ rights and obligations are transparent.

• The Federal Court found that the Pre-Existing Condition Terms were ‘reasonably necessary in order to protect the legitimate interest’ of HCF Life and therefore did not meet the third criterion for finding an unfair contract term. HCF Life submitted that its relevant ‘legitimate interest’ was being able to offer the Recover Cover products on a ‘guaranteed basis’, which presents risks to insurers including anti-selection risk. ASIC did not dispute HCF Life’s legitimate interest, rather it relied on the presumption that the Pre-Existing Condition Terms were not reasonably necessary to protect HCF Life’s legitimate interests, including because previous variations of the Pre-Existing Condition Terms were examples of terms that would have provided equal protection of HCF Life’s legitimate interests.

The Federal Court accepted that an assessment of reasonably necessary is not a test of the term being included or excluded, and that it may take into account other options available to the party to protect its business that are less restrictive to the other party. However, Justice Jackman cautioned that the existence of a reasonable alternative is only relevant if it would have caused a significantly lesser imbalance in the parties’ rights and obligations. For this reason, the Federal Court concluded that the reasonable alternatives available to HCF Life were not relevant considerations as the balance of the parties’ rights and obligations under the Pre-Existing Condition Terms were identical.

What next?

ASIC is seeking penalties in relation to the misleading conduct. The decision provides useful guidance in relation to ensuring public documentation, material and contracts accurately reflect any legal rights or obligations and does not mislead consumers (particularly vulnerable persons).

The Federal Court’s assessment of the provisions from an unfair contract terms perspective also provides useful guidance, particularly in relation to:

• the fact that a disadvantage to one party as a result of term does not necessarily result in a ‘significant imbalance’ between the parties; and
• the legitimate interests test and a broader assessment of the context as a whole and the purpose of a provision and relevant alternatives of the consumer.

As the new year commences, businesses should continue to consider whether their standard form contracts are, or continue to be, aligned with the law on unfair contract terms and, more generally, with the law on misleading or deceptive conduct. Please contact Gadens’ consumer law team should you have any questions or require assistance.

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Authored by:

Adam Walker, Partner
Breanna Davies, Partner
Edward Martin, Partner
Eve Lillas, Senior Associate
Brittany Dorney, Associate

[1] Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; (2023) 408 ALR 195 at [80]-[84].

[2] Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 489-90.