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Unfair terms in insurance contract changed but consumers reminded to read the policy

A complaint to dispute resolution service FSCL has resulted in an insurer changing unfair contract terms – but not for the reason complained about.

FSCL Chief Executive Officer Susan Taylor is reminding consumers that despite strengthened laws around unfair contract terms under the Fair Trading Act, they still need to check the details of financial contracts they enter into –– especially the cancellation clauses.

“Whether it’s an insurance contract, loan, gym membership or mobile phone plan, these are legal agreements, so you need to take steps to make sure you know what you’re signing and agreeing to. Seek independent advice if need be.”

FSCL recently investigated a case where a woman bought a car from a second-hand dealer and took out mechanical breakdown insurance at the same time. The policy required an upfront lump sum premium payment of $1,500 for three years’ cover.

A year later the woman decided to move to Australia and sold her car. She contacted the insurer to cancel the policy and get a premium refund but was declined on the basis that a refund was only available during the cooling-off period – 15 days after the policy’s start date.

The woman complained to FSCL that this was unfair, particularly when she had never claimed under the policy.

Ms Taylor said FSCL’s investigation found that the insurer’s terms were in fact unfair.

“The insurer could cancel the policy, in which case the unused premiums would be refunded, but if the insured person cancelled, the premiums would not be refunded unless it was within the cooling-off period.”

As a result of the investigation, the insurer agreed to make changes to the cancellation section of its contracts to ensure it was fair to both the insurer and insured. This included a change so that the insured could cancel the insurance policy and receive a refund of the unused premiums if the vehicle was stolen, badly damaged or repossessed.

“Terms and conditions set out the rights and responsibilities of each party to the contract. In this case, the young woman assumed she’d be able to get a refund if she went overseas, but this wasn’t set out as a term in the contract. If the contract does not meet your needs, you can negotiate or shop around,” said Ms Taylor.

The insurer nonetheless refunded the premiums as a goodwill gesture.


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