The test for unfairness, which will apply in New Zealand once the Contracts of Insurance Acts changes are implemented is almost identical to the test that has applied to insurance contracts in Australia since 2021. As a result, cases decided in Australia will provide important guidance for New Zealand insurers as they start to review their policy wordings for potentially problematic terms.

Since the extension of the Australian regime to insurers, ASIC has brought two proceedings alleging that insurance policies contain unfair contract terms. In both cases, ASIC failed to convince the Court that the terms complained of were unfair. On Friday, 6 June 2025, the Full Court of the Federal Court of Australia delivered its judgment following an ASIC appeal in one of these cases[1].

Construction of the problematic term

Auto & General (A & G) provided home and contents insurance policies to customers. The policies contained a notification term headed “Tell us if anything changes while you’re insured with us” followed by a direction to customers “While you’re insured with us, you need to tell us if anything changes about your home or contents”. The notification term then outlined potential consequences if a customer did not tell A & G about changes, including policy cancellation or refusal to pay claims. The term then provided eleven examples of changes that A & G wanted to be told about.

ASIC brought proceedings alleging, amongst other things, that the term was unfair because it was ambiguous about what needed to be disclosed, in particular, the requirement to disclose “anything”. The Court at first instance determined that the notification term could not be read literally because this would lead to absurdity: for example, the contents of a policyholder’s home changes whenever groceries are brought home from an everyday shopping outing, and again when they are consumed in preparing and eating meals. The Court found that no rational person would consider that the notification term was intended to compel the policyholder to notify such routine and everyday changes. ASIC did not disagree, but instead advanced a number of possible interpretations of the term. These included that the term only required disclosure of changes that were relevant or material to the insurance cover, or of the kind outlined in the eleven examples.

The Court at first instance accepted A & G’s approach to construction of the notification term – that it only required the policyholder to disclose changes to information about their home or contents that had been provided to A & G before the contract was entered into. For example, this might mean that if the policyholder had disclosed that their home had a monitored alarm but this changed, the policyholder would need to advise A & G about this.

Importantly, the majority of the Full Court did not agree that the literal interpretation would lead to absurdity. The Full Court found that, interpreted literally, the notification term would impose an unreasonable burden on customers to notify A & G of any change to their home or contents. The difference between these findings is that a term which leads to absurdity could be interpreted to avoid absurdity (i.e. re-written), whereas a term leading to an unreasonable burden would not. In practice, a term which would lead to absurdity and could be re-written would be harder to show to be unfair.

Because ASIC had agreed that a literal reading would lead to absurdity, the Full Court could not decide the appeal on this basis. This ultimately made it difficult for ASIC to establish that the term was unfair.

The Court’s consideration of unfairness

In Australia, as in New Zealand, a term is unfair if it satisfies all three limbs of the test, namely:

It would cause a significant imbalance in the parties’ rights and obligations under the contract; and
Is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term; and
There would be detriment to a party if the term were to be applied or relied on.

There was clearly detriment to policyholders if A & G relied on a breach of the notification term, so the Full Court was concerned only with the first two elements. On the construction of the term advanced by ASIC, there was no imbalance in the parties’ rights and obligations. ASIC had also failed to demonstrate that the term was not reasonably necessary to protect A & G’s legitimate interests.

Comment from Melissa Bell

The Full Court was very critical of ASIC’s approach to construction of the notification term. Had the Full Court been able to consider the case on the literal reading of the notification term – that the policyholder had to advise of any change to the home and contents – it seems likely that the Court would have accepted that the term led to a significant imbalance in the rights and obligations of the parties, and that it was not reasonably necessary to protect A & G’s legitimate interests. In fact, ASIC was able to point to alternative notification term wordings which A & G had utilised both prior to and after the wording in question. Those alternatives were more measured and more specific.

Most New Zealand home and contents policies contain similar alteration of risk clauses which require policyholders to notify their insurer of changes during the period of insurance. This decision reminds insurers that such obligations must be expressed in a way that does not create an undue burden on the policyholder, and that allows policyholders to readily know and understand their rights and obligations.

The Full Court summarised the problem as the risk of simplified expression being viewed by those with an eye zealously attuned to the detection of error. As New Zealand insurers and brokers review their policies for potentially unfair terms, they should be mindful not only of potential substantive unfairness in policy terms, but of the possibility that a simplified approach to expression, common with plain English drafting, could expose them to challenges under the unfair contract terms regime.