Materiality, Transparency, and Unfair Terms in Insurance Contracts – Federal Court’s Decision in ASIC v Auto & General Insurance
On 5 June 2025, the Full Court delivered its judgement in Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2025] FCAFC 76.
The case concerned a provision (the Notification Term) within an Auto & General Insurance Company (A&G) Home and Contents Insurance Contract which ASIC claimed was an “unfair term” within the meaning of the Unfair Contract Terms (UCT) regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
In their judgement, the Full Court provided insight on the operation of the UCT with the ASIC Act, and the significance of transparency in determining whether an insurance contract term is unfair.
Background
The Notification Term within the A&G policy stated that the policyholder would need to notify the insurer “if anything changes while you’re insured with us”.
The primary judge found in favour of A&G. ASIC appealed to the Full Court on the basis that the primary judge had erred:
- In their construction of the Notification Term;
- In their assessment of whether the Notification Term would cause a significant imbalance in the rights and obligations of the parties arising under the contract; and
- In their assessment of whether the Notification Term was reasonably necessary to protect A&G’s legitimate interests.
Issues on Appeal
Ground 1 – Construction of the Notification Term
The majority of the Full Court (with Derrington J dissenting) held that the primary judge had indeed erred in their construction of the Notification Term.
The Full Court found that Jackman J at first instance incorrectly construed the Notification Term based on the principles of a ‘commercial contract’, rather than a ‘consumer contract’ as required by the UCT regime. This meant that the Notification Term was not considered based on how it would have been interpreted by a reasonable consumer.
The Court additionally found that:
- Although a ‘commonsense approach’ is preferred in the construction of policy terms, this does not mean that that Court can rewrite unambiguous terms merely because they are harsh or unreasonable; and
- Unreasonableness of a term alone does not equate to absurdity.
Based on these findings, the Court upheld ASIC’s appeal on Ground 1. This was because when correctly assessed through the eyes of the reasonable consumer, the wording of the Notification Term was not ambiguous. The Court also preferred ASIC’s interpretation of the Notification Term as one which sufficiently avoided absurdity.
Ground 2 – Imbalance of Parties’ Rights and Obligations
The Court rejected ASIC’s submission that the Notification Term created a significant imbalance of the parties’ rights and obligations (under section 12BG(1)(a) of the ASIC Act) due to a lack of transparency in accordance with section 12BG(2)(b).
It was held, based on ASIC’s own construction, that the Notification Term did no more than require the policyholder to:
[158]: “notify A&G of changes to the insured’s home or contents in so far as the change is material to the insured’s risk” (emphasis added).
Therefore, even if the Notification Term lacked transparency, it could not be said that the term significantly imbalanced the parties’ rights and obligations under section 12BG(1)(a).
The Court then drew attention to the parties’ assumption that section 12BG(1)(a) included an assessment of the parties’ rights and obligations as modified by sections 13 and 54 of the Insurance Contracts Act 1984 (ICA) relating to the duty of good faith. As this assumption was not contested on appeal, the Court proceeded on the basis that this was the correct approach. It was noted however (at [149]) that some doubt should be exercised regarding this assumption.
Ground 3 – Protecting Legitimate Interests
For the third and final ground of appeal, ASIC again contended that the Notification Term lacked transparency and therefore did not protect A&G’s legitimate interests as required by section 12(1)(b) of the ASIC Act.
It was held that ASIC were ‘undermined by its own concession’ since their accepted construction of the Notification Term meant that it would be understood by the reasonable consumer as only requiring a policyholder to notify A&G of changes that would materially impact the insured risk.
Since it was not denied by ASIC that an insurer choosing which risks to ensure against is a legitimate interest, the Court accordingly denied ASIC’s third ground of appeal.
Importance
The Full Court has provided rare insight into how the provisions of the UCT regime intersect with Insurance Contracts under the ICA.
Although the case proceeded on the assumption that section 13 and 54 of the ICA applied to the operation of the UCT regime, the Court importantly cast doubt on whether this approach is preferable.
The Court’s findings also emphasise that an insurance contract provision will not be unfair due to a lack of transparency alone.
Danielle Snell, Managing Partner & Co-Founder | [email protected] | 0401 812 885.
Robert McGirr, Partner & Co-Founder | [email protected] | 0413 944 023.
Article co-authored by Kieran Bull, Paralegal at Elit Lawyers.