Federal Court Strikes Down Pre-Existing Condition in Disability Insurance Policy

In ASIC v HCF Life Insurance Company Pty Ltd [2024] FCA 1240 the defendant, HCF Life, a life insurer, offered products to the public which contained exclusions in respect of pre-existing conditions. HCF Life adopted a definition of a pre-existing condition that excluded cover, where a medical practitioner was of the opinion that signs or symptoms of the relevant condition existed before policy inception.

Importantly, HCF Life did not advert to or explain the existence or effect of s 47 of the Insurance Contracts Act 1984 (Cth) (ICA), which provides that an insurer may not rely upon an exclusion in respect of a pre-existing condition where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability.

The plaintiff, ASIC, claimed that by distributing product disclosure statements and entering into policies on pre-existing condition terms which were rendered partially unenforceable by virtue of s 47 of the lCA, HCF Life engaged in conduct that was liable to mislead the public as to the nature, characteristics and suitability of financial services in contravention of s 12DF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

ASIC also claimed that the terms were unfair within the meaning of s 12BF of the ASIC Act.

At [93] to [99], Jackman J of the Federal Court found that s 47 of the ICA rendered the pre-existing condition terms partially unenforceable:

Does ICA s 47 render the Pre-Existing Condition Terms partially unenforceable?

93. ASIC’s complaints in the present case both rest upon an allegation that the Pre-Existing Condition Terms are rendered partially unenforceable by s 47 of the ICA.  In my view, that foundational allegation is made out for the reasons below.
94. The inquiries under the Pre-Existing Condition Terms and s 47 of the ICA are fundamentally different.  On the one hand, the Pre-Existing Condition Terms turn upon whether a registered medical practitioner holds a subjective opinion that the signs or symptoms of a condition, illness or ailment existed before the police was entered not.  On the other, s 47 of the ICA asks whether the insured was aware (or a reasonable person in the circumstances could be expected to have been aware) of the underlying sickness at the time of contracting.  Unsurprisingly, those different inquiries will, in some circumstances, yield different outcomes.
95. Consider the following example provided by Fletcher Moulton LJ in Joel v Law Union and Crown Insurance Company [1980] 2 KB 863 at 884:

Let me take an example.  I will suppose that a man has, as is the case with most of us, occasionally had a headache.  It may be that a particular one of those headaches would have told a brain specialist of hidden mischief.  But to the man it was an ordinary headache undistinguishable from the rest.

96. Suppose that a registered medical practitioner reasonably forms and states an opinion that headaches experienced by an insured in March were symptoms of a cancer subsequently diagnosed in May.  If the insured purchased a Recover Cover Product in April, the cancer would be a Pre-Existing Condition as defined – a registered medical practitioner is of the opinion that the symptoms of the illness existed before the Cover Commencement Date.  But unless the insured was aware (or a reasonable person in his or her circumstances could be expected to have been aware) of the cancer at the time of contracting in April, s 47 would preclude HCF Life from relying upon the Pre-Existing Condition Term to deny a claim.  The term is partially unenforceable.
97. There are two fundamental reasons that the inquiry under the Pre-Existing Condition Terms materially differs from that under 2 47 of the ICA.  First, there is a distinction between the existence of signs and symptoms, on the one hand, and awareness of the underlying condition, illness or ailment to which they relate, on the other hand.  As Shepherdson J (with whom McMurdo P and Thomas JA agreed) observed in Australian Casualty and Life Ltd v Hall (1999) 151 FLR 360 at [73]:  “a symptom is not a condition”.  That observation was picked up by the Hon J C Campbell KC in “Unenforceable Exclusions in Travel Insurance” (2018) 29 Insurance Law Journal 71 at 73 (Unenforceable Exclusions), in saying that “even if an insured knows that he or she has something that is in fact a symptom of a medical condition, that is not the same as knowing that he or she has the condition”.  I respectfully agree, and also go one step further in saying not that a symptom of a sickness is not a condition, but also that the symptoms of that sickness are not a condition.  Not all signs or symptoms will, upon first manifestation, cause a reasonable person to become aware of the underlying sickness to which they relate, even if arising in combination.  The signs or symptoms may not, at any time, warrant medical attention.  And even if medical attention is (or would, by a reasonable person, be) sought, the signs or symptoms may not (at that point in time) permit diagnosis, such that a reasonable person would not become aware of the illness to which they relate.  Notwithstanding this distinction, the Pre-Existing Condition Terms focus upon the existence of signs and symptoms, which s 47 of the ICA focuses upon knowledge of the condition, illness or ailment to which they relate.
98. Second, even if the inquiries under s 47 of the ICA and the Pre-Existing Condition Terms were otherwise identical, it is only the latter which gives determinative effect to the subject opinion of a registered medical practitioner.  A provision that is engaged upon one individual’s satisfaction of an objective fact will inevitably be broader than a provision that is engaged only upon the actual existence of that same fact.  Consider again the case where a registered medical practitioner forms and states the opinion that headaches experienced in March were symptoms of a cancer subsequently diagnosed in May. Suppose the opinion is reasonably formed, but in ensuing litigation the Court concludes that it is incorrect because the headache was entirely unrelated to the subsequent cancer.  The Pre-Existing Condition Terms would bar the insured’s claim, but s 47 of the ICA would intervene.  The possibility of conflict between the reasonable opinion of a medical practitioner and the opinion of the Court is not speculative, because the inquiries mandated by the Pre-Existing Condition Terms and s 47 of the ICA pose questions upon which reasonable minds may differ.  As Senior Counsel for HCF Life himself submitted: “to take your Honour’s example, that headache, or that mild temperature raise, or whatever it might be – shivering – is equally consistent with the absence of an identifiable condition, illness or ailment, as it is with one”: T69.31-33.
99. The upshot is that s 47 of the ICA renders the Pre-Existing Condition Terms partially unenforceable.  That foundational allegation having been made out, I turn now to consider whether HCF Life has contravened ss 12DF and/or 12BF or of the ASIC Act.

Jackman J turned to consider whether HCF Life had engaged in misleading conduct and contravened ss 12DF of the ASIC Act, finding that it had:

Misleading Conduct

100. Section 12DF(1) of the ASIC Act provides that:

A person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services.

101. The applicable principles are not in dispute.  There is first instance authority stemming from O’Loughlin J’s decision in Trade Practices Commission v J & R Enterprises Pty Ltd (1991) 99 ALR 325 at 338-9 that the phrase “liable to mislead” creates a higher standard than the similar phrase “likely to mislead or deceive” used in the progeny of s 52 of the Trade Practices Act 1974 (Cth):  see Australian competition and Consumer Commission v Master Wealth Control Pty Ltd [2024] FCA 344 at [38] (Jackman J).  It is common ground that s 12DF(1) is only contravened if there is “an actual probability” that the public will be misled by the impugned conduct.
102. The error into which the public must be led is not at large, but must be as to “the nature, the characteristics, the suitability for their purpose or the quantity” of any financial services.  In Australian Securities and Investments commission v Westpac Banking Corporation (No 2) [2018] FCA 751; (2018) FCR 147 at [2311], Beach J noted that cognate terms appear in s 55 of the Trade Practices Act (now s 33 of the Australian Consumer Law) and accepted “that no narrow or technical meaning should be attributed to those terms”.  Similarly, in Australian Competition and Consumer Commission v Meriton Property Services Pty Ltd [2017] FCA 1305; (2017) 350 ALR 494 at [195], Moshinsky J observed that:

The expressions “nature”, “characteristics” and “suitability for their purpose” are not defined in the Australian Consumer Law. In my opinion, they are to be given their ordinary meaning, in the context of the consumer protection purpose of the provisions. The word “nature” is defined in the Macquarie Dictionary (6th ed, 2013) as meaning (among other things) “the particular combination of qualities belonging to a person or thing by birth or constitution; native or inherent character” and “character, kind, or sort”. See also Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 at 302. The word “characteristic” is defined as meaning (as a noun) “a distinguishing feature or quality”. Different views have been expressed as to whether the word “characteristics” in s 33 (or its predecessor, s 55 of the Trade Practices Act) is limited to the internal constitution or utility of goods, or also extends to the manner of their creation: see IAustralian Competition and Consumer Commission v Snowdale Holdings Pty Ltd (2016) 339 ALR 455; [2016] FCA 541] at [528]-[535]; cf Australian Competition and Consumer Commission v Turi Foods Pty Ltd (No 4) [2013] FCA 665 at [124]-[129]. However, this issue does not arise in the present case. The word “suitability” is defined by reference to the adjective “suitable”, which is defined as meaning “such as to suit; appropriate; fitting; becoming”.

103. The words “the public” do not mean the world at large or the whole community; there will be a sufficient approach to the public if the approach is general and random, and if the number of people approached is sufficiently large: Master Wealth Control at [38]. In Shahid v Australian College of Dermatologists (2008) 168 FCR 46 at [206], Jessup J (with whom Branson and Stone JJ relevantly agreed) stated that:

I would accept that a representation might be regarded as being addressed to the public in the relevant sense notwithstanding that the potential users of the services in question were, in the nature of things, few in number. I have in mind, for example, a representation made in an advertisement for services of a very specialised kind. It would be the generality of the range of persons to whom the representation was addressed, rather than the practical likelihood of many of them being interested in acting upon the representation, that would justify the conclusion that it was addressed to the public.

104. The publication of product disclosure statements in respect of financial products available, on application, to members of the public have this quality. HCF Life accepts that its conduct was directed to the public.
105. Subject to those matters, the propositions concerning the more general prohibition of misleading or deceptive conduct in trade or commerce in s 18 of the Australian Consumer Law summarised by the High Court in Self CareIP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; (2023) 408 ALR 195 at [80]-[84] are apposite: ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 at [21] (O’Bryan J). Determination of contravention there involves four steps (Self Care at [80]):

first, identifying with precision the “conduct” said to contravene s 18; second, considering whether the identified conduct was conduct “in trade or commerce”; third, considering what meaning that conduct conveyed; and fourth, determining whether that conduct in light of that meaning was “misleading or deceptive or … likely to mislead or deceive”. 

106. Where, as here, “the conduct was directed to the public or part of the public, the third and fourth steps must be undertaken by reference to the effect or likely effect of the conduct on the ordinary and reasonable members of the relevant class of persons”:  Self Care at [83].  In order to undertake that analysis, it is not necessary to adduce evidence from members of the public themselves.  The question is one for the court:  Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 634; (2014) 317 ALR 73 at [45] (Allsop CJ).
107. In accordance with the parties’ submissions, I will structure my reasoning with reference to the four steps identified in Self Care before turning to an additional aspect of s 12DF.

The first and second steps – impugned conduct in trade or commerce

108. The impugned conduct is HCF Life’s publishing of each Recover Cover PDS, giving the Recover Cover PDSs to members of the public, and entering into the Recover Cover Contracts with members of the public, in circumstances where the Recover Cover PDSs:
     1. contained the Pre-Existing Condition Terms; and
     2. did not advert to, or explain, the existence or effect of s 47 of the ICA or that the Pre­ Existing Condition Terms were partially unenforceable.

109. HCF Life does not dispute that it engaged in that conduct, nor that it did so in trade or commerce.

The third step – meaning conveyed

110. ASIC submits, and I accept, that the ordinary and reasonable member of the public would read and understand the Pre-Existing Condition Terms within each Recover Cover PDS as being an accurate and complete statement of when benefits will not be payable under a policy by reason of a pre-existing condition.
111. Take, for example, the Smart Term Pre-Existing Condition Term. It provides:

WHAT ISN’T COVERED

No benefit is payable to You in the case of death or Terminal Illness which occurs directly or indirectly as a result of:

…

• a Pre-existing Condition

That statement is made in absolute and unqualified terms.

112. Similarly, the definition of “Pre-Existing Condition” is framed in a way that appears both unqualified and complete:

Pre-existing Condition: means any condition, illness or ailment where the signs or symptoms of which in the opinion of a registered medical practitioner, existed at any time before this Policy was entered into, even if a diagnosis had not been made.

113. The ordinary and reasonable reader would be ignorant of the potential effect of s 47 of the ICA, and nothing in the Recover Cover PDSs adverts to the possibility that it may preclude HCF Life from relying upon the Pre-Existing Condition Terms in particular circumstances.
114. HCF Life submits that all that is conveyed to readers of the Recover Cover PDSs is that HCF Life is willing to treat with members of the public on the terms of the Recover Cover Contracts, including the Pre-Existing Condition Terms. I reject that submission, which is redolent of the argument that was dismissed by Edelman J in Australian Competition and Consumer Commission v Valve Corp (No 3) [2016] FCA 196; (2016) 337 ALR 647 (Valve) and the Full Court in Valve Corporation v Australian Competition and Consumer Commission [2017] FCAFC 224; (2017) 258 FCR 190 (Dowsett, McKerracher and Moshinsky JJ) (Valve Appeal). In those proceedings, the standard form Steam Subscriber Agreements (SSAs) deployed by Valve contained a statement that “ALL STEAM FEES ARE PAYABLE IN ADVANCE AND ARE NOT REFUNDABLE IN WHOLE OR IN PART”, and a later version added the words “EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT”. The statement was literally correct as a statement of the parties’ contractual rights under the SSAs, but omitted to mention that the consumer may have a statutory right to a refund under s 263 of the Australian Consumer Law. Both Edelman J and the Full Court found that Valve’s conduct conveyed the misleading representation that consumers had no entitlement to a refund from Valve for video games they had purchased in any circumstances: Valve at [237]-[246]; Valve Appeal at [158]­ [159]. In doing so, their Honours rejected arguments by Valve that the SSAs conveyed only that “fees are ‘not refundable’ as a matter of contract”, and that the SSAs “only purported to describe Valve’s ‘default global contractual position”‘. In this regard, Edelman J noted that the relevant provisions of the SSAs “were expressed in absolute terms” and “without any qualification”: at [232] and [239]. Similarly, the Full Court noted “the unqualified terms in which” the SSAs were expressed: Valve Appeal at [159]. That was notwithstanding the fact that the SSAs contemplated (in separate clauses) the possibility that some of their terms may be found to be unenforceable, or (in some versions of the SSA) may be subject to the application of other laws.
115. In my view, HCF Life’s submission is even weaker than the argument advanced and rejected in Valve. This is for two reasons. First, the Recover Cover PDSs were not mere recitations of contractual terms. As the PDSs made clear, each was designed to help insureds decide whether the product is right for them. Section 1013C of the Corporations Act 2001 (Cth) required the PDSs to include, inter alia, significant benefits to which an insured would or may become entitled and the circumstances in which and times at which those benefits would or may be provided. Second, unlike in Valve, the Recover Cover PDSs do not refer at all to the possibility that any of their terms may be unenforceable or may be subject to the application of other laws.
116. HCF Life sought to distinguish Valve on two grounds. The first was that the relevant statutory guarantees under the Australian Consumer Law imposed a free-standing right in favour of consumers from the date of contract, whereas s 47 merely has preclusive operation. The second was that the SSAs provided that there would be no right to a refund “except as expressly set out in this agreement”, whereas the Recover Cover PDSs do not contain a similar statement.
117. I reject both arguments. With respect to the first point, there is no practical distinction in the present context between a free-standing right and a bar on contractual enforcement. As for the second point, HCF Life’s submission overlooks the fact that the additional statement was only included in two of the three SSAs at issue in Valve.
118. The short point is that the Recover Cover PDSs did not merely convey that HCF Life was willing to treat with members of the public on the terms of the contract described therein. Instead, each PDS purported to provide an accurate and complete statement of when benefits would and would not be payable under the policy.

The fourth step – liable to mislead

119. ASIC submits, and I accept, that the meaning conveyed by the impugned conduct is misleading because it presents as an accurate, complete and unqualified statement of the circumstances in which benefits will not be payable to a consumer by reason of a pre-existing condition, whereas in fact s 47(2) of the ICA renders the Pre-Existing Condition Terms partially unenforceable. The Hon JC Campbell KC describes the misleading nature of such conduct at 125 and 127 of Unenforceable Exclusions as follows:

For insurers to include in their standard terms and conditions provisions which will inevitably be to some extent unenforceable if challenged, and that fail to identify the only circumstance in which such a clause can be enforceable, is deceptive market behaviour. It is a particularly undesirable form of market behaviour when the vast majority of the consumers who are the potential purchasers of the contracts are ordinary consumers with no knowledge of insurance law. They would have no reason for believing that the exclusion clause did not mean what it said, and would not have the legal knowledge to enable them to challenge the enforceability of the exclusion clauses according to their literal wording.

…

Section 12DF(l) of the ASIC Act prohibits a person from, in trade or commerce, engaging in conduct that is liable to mislead the public as to (inter alia) the nature or the characteristics of any financial service. Making a practice of issuing standard form contracts that contain unenforceable terms seems likely to contravene that provision.

120. As Bowen CJ said in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 489-90: “An omission to mention a qualification, in the absence of which some absolute statement made is rendered misleading, is conduct which should be regarded as misleading”. The omission to mention the qualifying effect of s 47(2) on the operation of the Pre-Existing Condition Terms is misleading in this way.
121. This reasoning is not undermined by the facts that: (a) the ICA does not oblige insurers to notify insureds of the effect of s 47; and (b) s 47 does not render inconsistent contractual provisions void. Save to the extent provided for by s 15, the ICA is not an exhaustive code applying to the exclusion of other pieces of beneficial consumer legislation.
122. It is also insignificant that the impugned conduct in the present case presents the Recover Cover Products as less desirable than they actually are. Section 12DF impugns conduct that is “liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services”. There is no requirement that the conduct be “liable to mislead the public” in a particular direction.
123. HCF Life submits that ASIC has failed to demonstrate that the mismatch between s 47 of the ICA and the Pre-Existing Condition Terms is anything more than speculative, and thus does not give rise to a sufficient likelihood of outcome that its failure to advert to s 47 is liable to mislead. I reject that submission for two reasons. First, HCF Life’s submission erroneously treats the requirement in s 12DF that conduct be liable to mislead the public as a requirement that the public be misled to their detriment. Ordinary and reasonable readers of the Recover Cover PDSs who remain unaffected by the Pre-Existing Condition Terms will still have been misled by the impugned conduct. Second, in any event, in my view the probability of mismatch between s 47 of the ICA and the Pre-Existing Condition Terms is real and not speculative. While the Pre-Existing Condition Terms may well operate consistently withs 47 in the vast majority of circumstances, there are realistic scenarios in which they will not do so.
124. HCF Life also refers to Mr Goodsall’ s experience that insureds: (i) claim on policies without having read their terms; or (ii) claim on policies even when aware that an exclusion clearly says the claim is not eligible. But neither aspect of that evidence assists HCF Life’s submission that the ordinary and reasonable reader is not liable to be misled. With respect to (i), a person who does not read the policy terms at all cannot constitute the ordinary and reasonable reader. And with respect to (ii), the fact that such persons may not be prejudiced because they will try their luck does not mean they were not misled. While I am prepared to accept that Mr Goodsall’s second proposition is probably true for the vast majority of insureds when deciding to make a claim, I accept ASIC’s submission that Mr Goodsall’s evidence suffers from the usual limitation of inductive reasoning – persons who read policy terms and do not make claims when they understand an exclusion applies are, by definition, unlikely to come to attention. As I have indicated, Mr Goodsall’s report was not admitted as evidence of invariable policyholder behaviour.
125. As for HCF Life’s practice of applying the Pre-Existing Condition Terms consistently withs 47 of the ICA, this does not allay the fact that the impugned conduct was already liable to mislead the public.
126. It is also not determinative that ASIC has failed to adduce evidence of an individual having actually been misled, because the present question is one for the Court: Coles Supermarkets at [45] (Allsop CJ). For the reasons set out above, I am satisfied that the impugned conduct on the part of HCF Life was liable to mislead the public.

The nature, characteristics or suitability of financial services

127. Under s 12DF(l), the liability of the impugned conduct to mislead must be as to the nature, characteristics, suitability for purpose or quantity of any financial services.
128. HCF Life’s submission on this issue is that ASIC makes no complaint going to the nature, characteristics or suitability of the Recover Cover Contracts, but instead fixes on the failure to advert to an external circumstance, namely the existence of s 47 of the ICA and its operation. HCF Life emphasises that s 47 does not vary the Pre-Existing Condition Terms and does not alter the Recover Cover Contracts, but instead impacts the administration of a claim under the contract at a later date.
129. The fundamental issue with HCF Life’s reasoning is that it erroneously treats the words “any financial services” ins 12DP as if they are to be read as “any contract for financial services”. The fact that ASIC makes no complaint about the Recover Cover Contracts is beside the point, because the real object of inquiry is not the financial services contract but the financial services generally. The relevant financial service in the present case is the provision of insurance, and in my view the nature, characteristics or suitability of that service include the circumstances in which the insurer will be obliged to pay money to the insured. As explained above, the impugned conduct was liable to mislead the public as to the breadth of those circumstances.

Conclusion on misleading conduct

130. HCF Life has contravened s 12DP of the ASIC Act.

Jackman J then turned to consider whether HCF Life had also contravened s 12BF of the ASIC Act. Ultimately, it was found that the pre-existing condition terms, whilst misleading, were not unfair contract terms within the meaning of s 12BF of the ASIC Act because the criteria in s 12BG(1)(a) and (b) had not been met:

Unfair Contract Terms

131. ASIC submits that each of the Pre-Existing Condition Terms is an unfair contract term within the meaning of s 12BG of the ASIC Act. ASIC contends that those terms:
     1. would cause a significant imbalance in the parties’ rights and obligations arising under each Recover Cover Contract;
     2. are not reasonably necessary in order to protect the legitimate interests of HCP Life; and
     3. would cause detriment (whether financial or otherwise) to the insured consumers if they were to be applied or relied on.
132. Each of those contentions is denied by HCP Life.
133. In the alternative, HCP Life also contends that s 12BP of the ASIC Act has no application to the Pre-Existing Condition Terms on the grounds that the Pre-Existing Condition Terms define the main subject matter of the Recover Cover Contracts. That contention is denied by ASIC.

Relevant provisions of the ASIC Act

134. Section 12BP(l) of the ASIC Act provides as follows:

A term of a consumer contract or small business contract is void if:

1. the term is unfair; and
2. the contract is a standard form contract; and
3. the contract is:
   1. a financial product; or
   2. a contract for the supply, or possible supply, of services that are financial services.

135. The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth) inserted a note at the end of s 12BF to the effect that the section applies to “Insurance Contracts Act insurance contracts in addition to the Insurance Contracts Act 1984″. As far as I am aware, the only decision to have considered the application of s 12BF to insurance contracts is Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272.
136. There is no dispute concerning whether the Pre-Existing Condition Terms were part of a “consumer contract”. Further, the defendant accepts that paras (b) and (c) of subs 12BF(l) are satisfied in the present case. The dispute instead concerns whether the Pre-Existing Condition Terms were unfair within the meaning of para (a), and whether s 12BF is disapplied by another provision.
137. The meaning of ”unfair” is dealt with in s 12BG, which provides as follows:

1. A term of a contract referred to in subsection 12BF(l) is unfair if:
   1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
   2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
   3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

2. In determining whether a term of a contract is unfair under subsection (1), a court may take into account such matters as it thinks relevant, but must take into account the following:
   1. the extent to which the term is transparent;
   2. the contract as a whole.
3. A term is transparent if the term is:
   1. expressed in reasonably plain language; and
   2. legible; and
   3. presented clearly; and
   4. readily available to any party affected by the term.
4. For the purposes of paragraph (1)(b), a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.

138. Section 12BH provides examples of unfair terms, but it is common ground that none capture the Pre-Existing Condition Terms.
139. Section 12BF is disapplied from specified terms by s 12BI, which relevantly provides that:

1. Section 12BF does not apply to a term of a contract referred to in subsection (1) of that section to the extent that, but only to the extent that, the term:
   1. defines the main subject matter of the contract; …

4. For the purposes of applying paragraph (l)(a) to an Insurance Contracts Act insurance contract, have regard to the main subject matter of the contract only to the extent that it describes what is being insured.

Are the Pre-Existing Condition Terms “unfair”?

140. Section 12B0(1) sets out three criteria to be applied to the relevant term of the contract. If all three of those criteria are satisfied, then the term is ”unfair” without any further evaluative judgment or exercise of discretion. The language of ss 12BF and 12B0 is substantially identical to ss 23 and 24 of the Australian Consumer Law (the ACL), being Sch 2 to the Competition and Consumer Act 2010 (Cth). Accordingly, decisions concerning ss 23 and 24 of the ACL are directly relevant and applicable to ss 12BF and 12B0 of the ASIC Act.
141. Two points concerning the proper construction of s 12B0 can be made at the outset. First, it is common ground between the parties that when assessing the three criteria of unfairness in s 12B0(1) the Court must take into account the context of the overall legal environment in which the terms of the contract operate, including s 47 of the ICA: T19.15-25.
142. Second, although there is no express provision to this effect, it is the time of entry into the contract that is the relevant time of assessment of the criteria set out in s 12B0(1): Karpikv Carnival pie [2023] HCA 39; (2023) 98 ALJR 45 at [52]; Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd [2019] FCA 1436 at [168] (Banks-Smith J).

Significant imbalance

143. The following principles have been stated in the authorities dealing withs 12BG(l)(a) of the ASIC Act and s 24(1)(a) of the ACL (noting that where I refer below to Australian Competition and Consumer Commission v CLA TradingPty Ltd [2016] FCA 377 at [54], it should be borne in mind that that passage in the judgment of Gilmour J was quoted with approval in Australian Competition and Consumer Commission v Servcorp Ltd [2018] FCA 1044 at [15] (Markovic J) and in Australian Competition and Consumer Commission v Smart CorporationPty Ltd [2021] FCA 347; (2021) 153 ACSR 347 at [65] (Jackson J)):
     1. significant imbalance relates to the substantive unfairness of the contract: CLA Trading at [54(b)];
     2. significant imbalance requires consideration of the relevant term, together with the parties’ other rights and obligations arising under the contract: Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd [2015] FCA 1204; (2015) 239 FCR 33 at [51] (Edelman J); Australian Competition and Consumer Commission v Ashley & MartinPty Ltd [2019] FCA 1436 at [45] (Banks-Smith J);
     3. the word “significant” means “significant in magnitude”, or “sufficiently large to be important”, “being a meaning not too distant from substantial”: CLA Trading at [54(e)];
     4. a significant imbalance exists if the term is so weighted in favour of one party as to tilt the party’s rights and obligations significantly in its favour: Chrisco Hampers at [47]­[49]; CLA Trading at [54(d)]; and
     5. a useful factor in the analysis is the effect that the contract would have on the parties with the term included, and the effect it would have without it: CLA Trading at [54(c)].
144. If one were to focus solely upon the terms of the Recover Cover Contracts, the Pre-Existing Condition Terms may well be unfair (although I note that I express no opinion on that question one way or the other). As ASIC submits, the terms exclude cover in respect of illnesses or conditions of which the insured consumer may have been reasonably unaware at the time of contracting. However, ASIC has conceded that it is also necessary to take into account the ameliorative effect of s 47 of the ICA. Once s 47 is taken into account, in my view the Pre­ Existing Condition Terms do not cause a significant imbalance in the parties’ rights and obligations.
145. ASIC submits that s 47 only ameliorates the disadvantage caused by the Pre-Existing Condition Terms to an extent, because the provision does not alter the parties’ rights and obligations as a matter of contract. In that sense, ASIC says that the imbalance of purely contractual rights and obligations remains unaffected. I reject that submission. Section 12BG(l)(a) is concerned with the practical effect of a contractual term on the balance in the parties’ rights and obligations, such that there is no relevant difference in the present context between a contractual clause being void and unenforceable. As Banks-Smith J emphasised in Ashley & Martin at [66]: “an impugned term cannot be assessed in a vacuum which ignores the practical considerations which attach to the carrying out of contractual obligations “.
146. ASIC also submits that the Pre-Existing Condition Terms create a significant imbalance in rights and obligations because the liability of the terms to mislead puts the consumer at a real practical disadvantage in exercising their right to claim under the policy and in challenging any denial of their claim by claim by HCF Life. But one need only state that proposition to identify its flaw. The fact that a consumer is left confused about his or her rights and obligations does not mean those rights and obligations are imbalanced. If party A drafts a contract with party B requiring each party to transfer $100 to the other, the fact that the contract may be expressed in convoluted terms does not change the fact that the parties’ substantive rights and obligations are balanced.
147. ASIC relies upon the fact that the Court is obliged by s 12BG(2)(b) of the ASIC Act to have regard to the transparency of the Pre-Existing Condition Terms in considering each of the criteria ins 12BG(l). ASIC submits that the Pre-Existing Condition Terms lack transparency because they are liable to mislead the insured consumer as to the actual circumstances in which the consumer is entitled to be indemnified under their policy. ASIC quotes from Auto & General at [103], where I accepted its submission that “the question whether a term is expressed in a manner which allows consumers readily to know and understand the parties’ rights and obligations is an aspect of the concept of ‘transparent”‘.
148. I reject ASIC’s submission that the Pre-Existing Condition Terms are not transparent. The inquiry mandated by s 12BG(2)(b) is “the extent to which the term is transparent” (emphasis added), not the extent to which the parties’ rights and obligations are transparent. The focus is thus on the clarity of the meaning of the term, not the clarity of the parties’ rights and obligations generally. This is confirmed ins 12BG(3), which provides that a term is transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term. As ASIC accepts, the Pre-Existing Condition Terms are prominently presented and clearly convey the operation of the exclusion as a matter of contract. The Pre-Existing Condition Terms are therefore transparent for the purposes of s 12BG(2)(b). In the quotation from [103] of Auto & General set out at the end of the preceding paragraph, I should have inserted “as a matter of contract” after the words “rights and obligations”.
149. In any event, even if the Pre-Existing Condition Terms do lack transparency, that would not affect my conclusion on the issue of significant imbalance. I cannot see how the alleged lack of transparency in the present case could be deployed in considering the criterion in s 12BG(l)(a) other than the way identified by the High Court in Karpik at [32], namely that the greater the imbalance inherent in the term, the greater the need for the term to be expressed and presented clearly: see Auto & General at (107]. Even taking ASIC’s argument at its highest, I do not regard the alleged lack of transparency as leading to any different conclusion as to the criterion ins 12BG(l)(a).
150. All of this is relatively unsurprising when one considers that s 12BF is concerned with unfair terms, not unfair conduct generally. ASIC’s concerns about the Pre-Existing Condition Terms are caught by the prohibition on certain misleading conduct ins 12DF.

Reasonable necessity

151. The authorities concerning s 24 of the ACL establish the following relevant principles:
     1. the meaning of “legitimate interests” depends on the business of the supplier, including the circumstances of the business and the context of the contract as a whole: Ashley & Martin at [48] (Banks-Smith J); and
     2. what is “reasonably necessary” usually involves an analysis of the proportionality of the term against the potential loss sufferable, and may take into account other options that might be available to the party in terms of protecting its business and which are less restrictive to the other party to the contract: Ashley & Martin at [51]-[59]; Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 at [58(h)]; Smart Corporation at [67] (Jackson J).
152. The onus is on the defendant to prove that the term is reasonably necessary to protect its legitimate interests: s 12BG(4).
153. HCF Life submits that its relevant legitimate interest is being able to offer the Recover Cover products on a “guaranteed acceptance” basis such that there is no lengthy application form nor individual medical or lifestyle underwriting questions for a consumer entering into the contract to answer, nor any requirement for consumers to disclose their medical history or their family medical history or undergo any medical investigations or seek medical evidence before cover is issued. HCF Life explains that the provision of insurance on a guaranteed acceptance basis presents particular risks to insurers that arise from the insurer’s ability to ascertain or control the risk-profile of the cohort of insured covered under the applicable product. Those risks include anti-selection risk, being the risk that individual consumers who, inter alia, are aware that they suffer a sickness or disability falling within the terms of the Recover Cover Contracts choose to purchase that cover.
154. ASIC does not dispute that HCF Life has a legitimate interest in mitigating the risk of anti­ selection behaviour by prospective insureds to the extent permissible under the ICA. Instead, ASIC submits that the Pre-Existing Condition Terms are not reasonably necessary to protect that legitimate interest for two reasons. First, ASIC submits that a term which is expressed and presented in a manner that is liable to mislead consumers will not be reasonably necessary. That is said to be because there will always be a non-misleading alternative way in which the term could have been expressed and presented, while affording equal protection to any legitimate interest. Second, ASIC submits that a term which is expressed so broadly that it is partially unenforceable by reason of a mandatory statutory prohibition will rarely, if ever, be reasonably necessary. ASIC says that to the extent that a term cannot be enforced, there is no protection of any legitimate interest that is afforded; a term which is expressed and presented in a manner which aligns with the statutory prohibition will afford equal protection and will be appropriate and adapted to the end it serves. ASIC points to the Pre-2019 PEC Clause and the Current PEC Clause as examples of terms that would have provided equal protection of HCF Life’s legitimate interests.
155. In response, HCF Life submits that the Pre-2019 PEC Clause and the Current PEC Clause are not relevant points of comparison. According to HCF Life, the proper comparison is between Recover Cover Contracts with the Pre-Existing Condition Terms and without any comparable provision at all. I reject that submission. As confirmed by the authorities cited above, a determination of what is “reasonably necessary” may take into account other options that might be available to the party in terms of protecting its business and which are less restrictive to the other party to the contract. Accordingly, contrary to HCF Life’s submission, the comparison is not simply between a contract that contains the Pre-Existing Condition Terms and one that does not. Rather, the comparison is between a contract that contains the Pre-Existing Condition Terms and a contract that contains a similar term that protects HCF Life’s business but which is less restrictive to consumers.
156. In my view, an alternative term will relevantly be “less restrictive to the other party to the contract” if it imposes a significantly lesser imbalance in the parties’ rights and obligations for the purposes of s 12BG(l)(a). That approach is consistent with the way that proportionality works in other contexts. For example, where a law attracts judicial scrutiny for impinging upon the implied freedom of political communication, the law is necessary only if “there is no obvious and compelling alternative, reasonably practical, means of achieving the same purpose which has a less burdensome effect on the implied freedom”: McCloy v New South Wales [2015] HCA 34; (2015) 257 CLR 178 at [2] (French CJ, Kiefel, Bell and Keane JJ). Just as the central question in that context is whether the alternative law would have a less burdensome effect on the implied freedom, the central question in the present case is whether the alternative contractual term would cause a lesser imbalance in the parties’ rights and obligations. It is appropriate to transpose the updated requirement in the implied freedom context that the alternative must result in a “significantly” lesser burden (see Comcare v Banerji [2019] HCA 23; (2019) 267 CLR 373 at [35] per Kiefel CJ, Bell, Keane and Nettle JJ), lest the test of necessity be “misunderstood as a test of the ingenuity of counsel”: see Palmer v Western Australia [2021] HCA 5; (2021) 272 CLR 505 at [272] (Edelman J).
157. I accept ASIC’s submission that the Pre-2019 PEC Clause and Current PEC Clause would have equally protected HCF Life’s legitimate interests. The only relevant difference in the Pre­Existing Condition Terms was their inconsistency withs 47 of the ICA, and that inconsistency cannot advance HCF Life’s legitimate interests when the terms are to that extent unenforceable.
158. However, as discussed above, the existence of a reasonable alternative is relevant if it is less restrictive to the other party in the sense that it would have caused a significantly lesser imbalance in the parties’ rights and obligations. That is not the case here, because the balance in the parties’ rights and obligations under the Pre-Existing Condition Terms is identical to that under the Pre-2019 PEC Clause and Current PEC Clause. ASIC accepts that s 47 must be taken into account as an essential element in the overall legal environment in ascertaining whether para (b) of s 12BG(l) is established. And as explained in the preceding section, the fact that the Pre-Existing Condition Terms are liable to mislead does not create a relevant imbalance.
159. As to the issue of transparency, my reasoning above in the context of significant imbalance applies mutatis mutandis to the present issue of reasonable necessity: see Auto & General at [108]-[109].
160. Accordingly, I accept HCF Life’s submission that the Pre-Existing Condition Terms were reasonably necessary in order to protect its legitimate interests.

Overall, HCF Life was found to have contravened s 12DF of the ASIC Act, but not s 12BF. The link to the case can be found here.