Mind your Ts and Cs

Mind your Ts and Cs

Spring heat is emerging in Australia and one of the hottest debates of the new season is centred on unfair terms and conditions in insurance policies. David Craik has the latest on developments down under

First published in ITIJ 106, November 2009

Spring heat is emerging in Australia and one of the hottest debates of the new season is centred on unfair terms and conditions in insurance policies. David Craik has the latest on developments down under

The battleground is in the Australian Parliament, where the government is proposing amendments to the country’s Trade Practices Act (TPA) in order to implement new consumer laws and create a national consumer law regime that will address unfair contract terms and include penalties and enforcement powers. The proposed changes all sound very noble in championing consumer rights but, in fact, consumer groups such as the Consumer Action Law Centre are vehemently critical of the new bill and the reason, they say, is that it will not cover contracts taken out with insurance companies.

Layers of protection

Indeed, the insurance industry has convinced the Australian Treasury that the new bill should not include its policies and contracts because these are already covered by an existing law called the Insurance Contracts Act (ICA). Paul Giles, general manager of communications at the Insurance Council, explains: “Consumers have been well protected for some time by the ICA. Importantly, it requires both the insurer and insured to act with utmost good faith. Evidence does not support the need for the application of the proposed unfair contracts terms legislation to general insurance. In the Financial Ombudsman Service’s Annual Review 07/08 of 3,167,439 claims lodged with insurers, over 98 per cent were paid.” He argues that applying the TPA over the ICA would result in an “unwarranted layering of regulatory requirements on insurers” and would lead to operating inefficiencies. “The cost of this would ultimately be passed on to the consumer,” he says. “The proposed legislation will create uncertainty in the application of insurance terms to claims, which will likely lead to further disputes resulting in inconvenience and delay for consumers in settlements, increasing costs and possibly premiums.”

However, Nicole Rich, director of policy and campaigns at the Consumer Action Law Centre, says: “There is no reason to exclude insurance contracts from coverage under the new unfair contract terms provisions. There should be no carve-outs for any sector of the economy. There were many industries that sought this but if we start exempting individual industries we diverge from the economy-wide approach that underpins the value of the reforms.”

consumers of insurance have just as much trouble with unfair terms in contracts as other consumers

Rich argues that the ICA does not cover problems with unfair terms in insurance contracts: “It does not address the inclusion of unfair terms in contracts drafted by the supplier. The practical experience strongly shows that consumers still have problems with unfair terms in insurance contracts all the time – including travel insurance,” she says. “Consumers commonly have their claims for lost, damaged or stolen items or baggage denied under their travel insurance policies because insurers commonly include a term in their contracts excluding cover for loss, theft or damage of property left ‘unattended’ or ‘unsupervised’ in a public place. This essentially ensures that the insurance cover consumers believe they have bought for lost or stolen property is generally not useful as it is precisely when consumers take their eyes off their property that it is likely to be lost or stolen.”

Rich states that ‘numerous determinations’ in favour of insurers in such cases have been made by the Financial Ombudsman Service over the years. “In just one recent case, a consumer whose luggage was stolen after he boarded a city transfer bus at Hong Kong Airport and placed his luggage in the luggage rack on the lower level of the bus but sat on the top deck had his claim denied because he did not keep it under observation,” she explains. “In another recent case a consumer’s claim for one stolen bag was denied after he hailed a taxi on a road in Thailand to go to the airport and left his bags three to six metres away while he was haggling with a taxi driver over the fare.”

Fairly exempt?

Rich has a supporter in Katherine Lane, principal solicitor of the Insurance Law Service. She says: “To exempt one industry is nonsensical and inelegant. Consumers of insurance have just as much trouble with unfair terms in contracts as other consumers. Insurance contracts are standard documents drafted by the solicitors of the insurance company to be in the best interests of the insurance company.” She continued: “This necessarily creates unfair terms as there is power imbalance between the parties. Consumers have almost no ability to negotiate the terms of insurance contracts.” She also believes that the ICA does not adequately protect insurance policyholders in Australia from unfair terms because unfair terms continue to appear in insurance contracts. “The Insurance Law Service is not aware of any unfair term ever being voided by the Insurance Contracts Act,” she says. “As insurance is such a vital consumer product, this regulation is even more vital for insurance policyholders.”

The debate has moved on in recent weeks and last month Australia’s Senate Economic Committee stated that the ICA should indeed be revisited and run in parallel with the new provisions of the Trade Practices Act. “It formally found that consumers are not provided with adequate protection in insurance contracts under existing law,” Rich says. “We strongly believe that the current Bill should ensure that insurance contracts are covered by the unfair contract terms laws, just like other consumer contracts. However, this could potentially be done by making a consequential amendment to the ICA to clarify that the general unfair contract terms laws apply to insurance contracts.” Rich added: “As long as insurance contracts are covered by the same unfair contract terms laws as other contracts, it is not so important how this is achieved technically. We would be very concerned if a full-scale review of the ICA meant that there were any delays to coverage of insurance contracts or insurance contracts were not covered in the same way as other consumer contracts.” Giles of The Insurance Council counters: “We support legislation to update the Insurance Contracts Act, but we do not agree with the Committee that it should be revised to allow insurance contracts to be reviewed for unfair contract terms. We do not see that need.”

Reasonable expectations

Walter De Angeli, founder of Travel Insurance Australia, wants more reason brought to the debate. “Travel insurance, unlike life insurance, is not an item that affects the long-term finances of a person. It is a leisure decision,” he says. “The only issue that clouds travel insurance is the supposed free insurance coverage on credit cards. These policies are never out in the open. The ICA does adequately cover travel insurance policyholders.” He then went on to say that often, consumers themselves are the problem: “We find that the majority of times the client has not wanted to read the terms. Laziness on their part is normally the biggest problem. People do not understand the issue of actuarial risk even on a very basic level. The current rules do not prevent insurers from contracting on unfair terms but the option to not take the product remains.”

So what terms does he think are unfair? “At times, the terms are ludicrous. [Issues] such as age restriction coverage for trips to certain destinations and pre-existing medical conditions,” he states. “What relevance does my age have on Qantas mishandling my luggage?” But De Angeli believes the insurance sector will ‘fight hard’ to protect what they have, never mind what the Senate says. “These regulations are leading to a highly restricted number of suppliers with no capacity for new players. It’s time to cut travel insurance away from these inane regulations, which result in less choice. We can’t be steam rolled again.”

Rich, however, believes insurers would not find the changes onerous. “The new laws would still allow insurance companies to use standard-form contracts. So long as they are fair there should be no problem. If it is true that costs would go up under the new laws, then to the extent that consumers are paying less now because the insurance cover they are buying is unfair and providing illusory cover, this is a false economy. However, there is no evidence to suggest costs would go up materially under the new laws.  Fairer cover does not necessarily cost more.”  Rich looks with a little envy at the comparative situation in the UK and Europe. “Consumers there have more protection with the benefit of unfair contract terms laws as well as the new European Union (EU) unfair commercial practices directive being implemented in EU member states.”

In the UK, a number of different bodies, including the Office of Fair Trading and the Financial Services Authority (FSA), have responsibility for enforcing unfair consumer contract term regulations on firms including travel insurers. The terms must be comprehensible to consumers and they must know exactly what they are getting under the contract. The work is ongoing and in January this year, it was extended to regulate the sale of insurance sold alongside a holiday. “We are monitoring the sales of such insurance, particularly when sold online, for example with budget flights. We are concerned that consumers find they have purchased insurance when they did not wish to because of opt-in tick boxes in the sale process. If our concerns grow, we will communicate with firms to ask them to review their practice,” says an FSA spokesman.

current rules do not prevent insurers from contracting on unfair terms

But problems persist. According to the Financial Ombudsman Service, which deals with individual cases of complaints, the number of those involving travel insurance stood at 1,973 in 2008/09, up from 1,628 in 2007/08. “The proportion of cases we upheld in favour of consumers last year was 39 per cent, a similar level to previous years,” a spokesman says. He adds, “Travel insurance is complicated. There are a bundle of different policies and some key features are buried in the small print. We investigate whether this has been fairly done or not such as burying an alcohol exclusion policy on an 18-30 booze cruise. An insurer can’t flag up everything but they should do more to flag up key areas at the point of sale.”

A spokeswoman for the US Travel Insurance Association says travel insurance is regulated by each state in the US. “A traveller can appeal to the insurer if they feel their claim has been unjustly denied. If that avenue doesn’t prove satisfactory to them they can contact the State insurance commission. Travel insurers here constantly strive to provide clarity in their policies.”

What Australia would do for such calm.