Case note: Full Federal Court upholds finding that Auto & General notification clause is not an unfair contract term

1

Finding: The primary judge accepted A&G's argument that the Notification Term only obliges the insured to notify A&G if there is any change to information about the insured's home or contents that the insured previously disclosed to A&G prior to entry into the contract.

Reasons: The primary judge reasoned that the word "anything" cannot be given literal meaning because it would lead to absurdity, an argument which ASIC did not resist.  He rejected ASIC's argument on the basis that their construction would impose an unrealistic burden on the insured, requiring the insured to assess what changes to their home and contents would be relevant or material to the insurance cover. 

The term obliges the Insured to notify A&G if anything changes about the insured's home or contents that is relevant or material to the insured risk (ASIC Construction).  

ASIC argued the primary judge's finding was not faithful to the contractual words and involved rewriting the text.  ASIC submitted that the word "anything" supports a disclosure obligation for all information, not just information previously disclosed. 

The term only obliges the Insured to notify A&G is there is any change to the information about the insured's home or contents that the insured previously disclosed to A&G prior to entry into the contract (A&G Construction).  

Primary judge erred in his finding:  The primary judge erred in accepting the A&G Construction.  The ASIC Construction is the preferred construction as it is consistent with the apparent purpose of the Notification Term to notify A&G of any change in circumstances that alters the risk that is insured. 

Reasons:  The Notification Term should not be construed on its ordinary meaning of the words, as that would lead to absurd results (ie. tell us anything regarding changes to an insured's home and contents).     Instead, the Court must construe the term objectively to ascertain the intended meaning of the term. 

There are three factors that point to the ASIC Construction being the intended meaning of the term: (1) the Notification makes no reference to information previously disclosed by the insured to A&G.  (2) The Notification Term seeks to illustrate or explain the obligation imposed on the insured by use of examples, whereas the A&G Construction (which does not require examples) is self-defined as information previously disclosed by the insured.  (3) There is no contextual support for A&G's construction in circumstances where parts of the contract specify that the insured is to inform A&G of changes to information previously provided to A&G.     Yet, the Notification Term does not make that specification.  

Ground 1 upheld. 

2

Finding: The Notification Term (on A&G's construction) does not cause significant imbalance in circumstances where if an insured failed to notify of such changes to information previously disclosed prior to entering the insurance contract, A&G 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 only to the extent that it would be consistent with commercial standards of decency and fairness for A&G to do so. 

The Notification Term imposed a disadvantageous burden or risk on the insured (ie. potential cancellation of the policy, or a claim being refused by reason of failing to inform) and the Notification Term did not make plain or clear the scope of the notification obligation, or that its effect was subject to the statutory good faith implied term (section 13 of the IC Act).  On the whole, the Notification Term lacked transparency. 

A&G submitted there is a meaningful relationship between the notification obligation and protection of the insurer's interests, and that insurer's rights upon breach of the Notification Term by an insured is qualified by operation of ss 13 and 54 of the IC Act. A&G argued that the extent to which a term is transparent depends on the degree of seriousness of the imbalance and detriment the term creates.  However, if the term does not create imbalance in the parties' rights and obligations, a lack of transparency cannot result in significant imbalance. 

Primary judge did not err in this finding: ASIC has not demonstrated that the Notification Term, on its construction and taking into account its transparency, caused a significant imbalance on the parties' rights and obligations arising under the contract.  

Reasons: The Court acknowledged that the clause could have been clearer and that insureds would not necessarily be aware of their statutory protections under ss 13 and 54 under the IC Act.  However, lack of transparency alone does not make a term unfair if the term, as properly construed, does not cause a significant imbalance.  Section 54 of the IC Act also moderates the insurer's ability to rely on the Notification Term, and even if consumers were not aware of their statutory protections, the clause itself (when read with the statutory constraints) does not tilt the contract unfairly in A&G's favour. 

Therefore, due to the materiality threshold per the ASIC Construction (ie. that insured's are only required to notify of changes material to the risk insured), the Notification Term does not cause a significant imbalance. 

Ground 2 rejected.  

3

Finding: The Notification Term was reasonably necessary to protect A&G's legitimate interest and the lack of transparency in the term does not yield any different result. 

Reasons: The phrase "reasonably necessary" contemplates a range of permissible terms and there is no requirement of absolute necessity.  A&G's legitimate interest included its ability to choose which risks it will insure against, and the information-gathering process ensured that it was not covering risks which it was not willing to insure against. 

The Notification Term constrains A&G to exercise its powers consistently with commercial standards of decency and fairness, with the practical effect being that those powers can only be used by A&G to the extent the insured's failure to notify a change in information has prejudiced A&G's interests. 

The primary judge failed to take into account the lack of transparency of the Notification Term and failed to find there were other terms which A&G could have employed to protect its legitimate interests to the same extent, but which were not significantly lacking in transparency. 

A&G did not consider the Term lacks transparency for reasons outlined above. 

Finding: The lack of transparency that may arise from the insured not being aware of the further effect of the IC Act on A&G's exercise of rights does not undermine the conclusion that the Notification Term (on ASIC's construction) was reasonably necessary to protect A&G's legitimate interests.

Reasons:  There was force in ASIC's submission that the exercise of the parties' rights and obligations under the Notification Term would not have been known to most insureds.  Lack of transparency is also relevant to assessing whether the Notification Term was reasonably necessary to protect A&G's legitimate interests.     However, on the ASIC Construction, the Notification Term does not suffer from a fatal lack of transparency given the Insured is only obliged to notify A&G of changes to the insured's home or contents in so far as the change is material to the insured risk.     By definition, a reasonable insured must be taken to understand this was the effect of the Notification Term. 

Ground 3 rejected.