The government has released exposure draft legislation that extends the unfair contract term regime to insurance contracts, as recommended by the banking Royal Commission.

Consumer law protects consumers against unfair contract terms that:

  • Would cause them detriment
  • Would significantly imbalance their rights and obligations under a contract
  • Are not reasonably necessary to protect the business

However, insurance is currently exempt from this unfair contract term (UCT) regime.

Treasurer Josh Frydenberg, echoing the Royal Commission’s final report, said there is no reason why insurance should not be bound by the same regime as other financial products.

“Removing the exemption for insurance contracts from the UCT regime will ensure consumers and small businesses have the same protections, regardless of which financial service or product they are purchasing,” he said.

Australia’s small business ombudsman, Kate Carnell, welcomed the government’s exposure draft legislation, but said more should be done to protect small businesses.

“While my office is able to resolve many contract disputes by using the unfair contract term provisions as a lever, on occasions when these negotiations fail an SME is forced to seek a ruling through the courts,” she said.

“This is a very costly exercise for small businesses, and larger companies have more resources to delay court proceedings until the SME either gives up or goes out of business.”

Ms Carnell said that regulators should be given greater powers to both determine and deal with unfair contract term cases.

Unfair contract terms should be made illegal, penalties should apply to breaches and the legislation should also be extended to cover contracts up to $5 million, according to Ms Carnell

“If and when this exemption for insurance contracts is removed from the unfair contract term regime, small businesses will still have to wait a further 18 months at least before it applies to contracts they enter into,” she said.

“In the meantime, we will continue to advocate for a change in how small businesses can challenge unfair contract terms outside the court system. 

“At the end of the day, all changes to legislation or regulation that affect small businesses should aim to reduce red tape and level the playing field between small and large businesses.”