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Insurance contracts ‘unfair and complex’, say consumer advocates

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Insurance companies are exploiting an exemption to unfair contract rules and hiding behind complex product disclosure statements, consumer advocates say. 

The Consumer Action Law Centre told a senate inquiry into Australia’s general insurance industry that there is currently no legal framework effectively regulating general insurance products, and customers were suffering the consequences.

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“Insurance policies are riddled with terms which, on their face, could be unlawful if unfair contract terms laws applied to insurance,” Gerard Brody, chief executive of CALC said. 

“Insurers enjoy an exemption from the unfair contract terms regime that applies to virtually every other business operating in consumer markets. And it is to the detriment of their customers.”

Insurance policies are unnecessarily complex and hard to compare, consumer advocates say. Insurance policies are unnecessarily complex and hard to compare, consumer advocates say.  

Speaking at a hearing into the industry by the Senate Economics References Committee, Mr Brody said one example of insurers potentially acting unfairly was cash settlement clauses in home building policies.

“These allow many insurers to settle a home building claim with a one-off cash payment. This means that if someone loses their home in a flood or fire, an insurer can get a quote on the rebuild, with all their bulk trade discounts, and just pay out that amount. It can bear little resemblance to the real cost of someone rebuilding their own home.

Mr Brody said there was a need for greater transparency in the industry and an improved standard cover regime, which would allow consumers to better compare policies. 

He said product disclosure statements, or PDSs, were usually thousands of words long and most consumers did not read them. 

Around 80 per cent of customers do not read a Product Disclosure Statement before purchasing a policy. Around 80 per cent of customers do not read a Product Disclosure Statement before purchasing a policy. 

“All an insurer has to do to comply with the [current] standard cover regime is to give the customer a PDS. That’s a ridiculously low bar,” he said.

“It’s fair to say that standard cover is not a reality. We have no minimum standards for insurance and no benchmarks for comparison.”

About 80 per cent of customers do not read a PDS before purchasing a policy, recent research has showed.

Representatives from the Australian Securities and Investments Commission appeared before the Senate inquiry on Wednesday, calling for standardised insurance definitions to make it easier for people to compare policies.

ASIC executive Michael Saadat said standardised definitions were “a real issue” and that consumers might not always appreciate the nuances in different policies.

Insurance companies have pushed back against calls for a regulator-backed comparison website that would compare policies on things like claims success ratio, saying it could create a “dangerous” situation in which consumers are left underinsured. 

The inquiry is examining transparency and competition in the home, strata and car insurance industries.

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