Background
HCF Life Insurance Company sold life insurance products containing exclusions for pre-existing conditions. In August 2019, HCF adopted a definition of “pre-existing condition” that barred cover whenever a registered medical practitioner was of the opinion that signs or symptoms of the relevant condition existed before the policy’s inception date. This definition was broader than the protection Parliament had enacted in s 47 of the Insurance Contracts Act 1984 (Cth), which prevents an insurer from relying on a pre-existing condition exclusion where the insured was not aware — and a reasonable person in the circumstances could not have been expected to be aware — of the relevant sickness or disability at the time of contracting. HCF’s product disclosure statements and welcome communications made no reference to s 47 or its limiting effect on the exclusion.
ASIC brought proceedings alleging two contraventions of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act): first, that distributing the policy terms without disclosing s 47’s operation constituted conduct liable to mislead the public under s 12DF(1); and second, that the Pre-Existing Condition Terms were unfair contract terms within the meaning of ss 12BF and 12BG. At trial, ASIC’s case on unfairness was built on the premise that s 47 of the Insurance Contracts Act was part of the legal context to be assessed under s 12BG(1). The primary judge found in ASIC’s favour on the misleading conduct count but ruled against ASIC on unfairness, concluding that once s 47’s ameliorative effect was taken into account there was no significant imbalance in the parties’ rights and obligations, and that the terms were reasonably necessary to protect HCF’s legitimate interests in offering guaranteed-acceptance products and mitigating anti-selection risk.
ASIC appealed to the Full Court on the unfairness question only. Its first ground — which required leave to withdraw the concession made at trial — was that the primary judge should not have factored in s 47 at all when assessing imbalance. Its alternative second ground was that, even on the primary judge’s own approach, he erred in concluding there was no significant imbalance and no lack of transparency.
The Court’s Holding
The Full Court (Halley and McEvoy JJ, with Derrington J agreeing) refused ASIC leave to pursue Ground 1 and dismissed Ground 2, affirming the primary judge’s conclusion that the Pre-Existing Condition Terms were not unfair. On Ground 1, the Court held that what ASIC characterised as a “concession” was in truth the very foundation of ASIC’s own case: ASIC had alleged imbalance precisely by reference to the disconformity between the terms and s 47, and had explicitly confirmed at trial that s 47 should inform the s 12BG(1) assessment. Permitting ASIC to disavow that position on appeal would amount to allowing it to run a materially different case that the primary judge never had the opportunity to consider, and would prejudice HCF, which had structured its evidence — including expert actuarial evidence — on the shared assumption that s 47 was part of the s 12BG analysis. The Court also noted that HCF would lose its as-of-right entitlement to appeal any adverse first-instance ruling on a ground never put to the trial court.
On Ground 2, the Court agreed with the primary judge that ASIC had not discharged its burden of establishing a significant imbalance under s 12BG(1)(a). The suggestion that misleading terms would deter insureds from making or pursuing legitimate claims was speculative and unsupported by evidence: ASIC did not adduce material to demonstrate that any such chilling effect was realistic rather than theoretical, and the respondent’s actuarial evidence indicated that policyholders tend to make claims even when they are aware of limiting conditions. The Court likewise rejected ASIC’s transparency argument, declining to find that the primary judge had adopted an unduly narrow reading of s 12BG(2)(b) and (3) by focusing on the clarity of the terms as written.
Derrington J wrote separately to express concern about a developing tendency in regulatory proceedings to advance substantially new arguments on appeal that were not run below, emphasising that appeals by way of rehearing exist to correct error, not to afford a second chance to litigate on a different basis.
Key Takeaways
- A regulator’s tactical choice at trial — including which statutory provisions to incorporate into its case theory — is not a bare legal “concession” that can be withdrawn on appeal without prejudicing the opposing party; where that choice shaped the entire evidentiary record, leave to resile will ordinarily be refused.
- Under s 12BG(1)(a) of the ASIC Act, the applicant bears the burden of establishing that a term “would cause a significant imbalance” in party rights; abstract or speculative evidence that consumers might be deterred from claiming is insufficient to discharge that onus.
- When assessing whether a life insurance pre-existing condition exclusion is unfair under the ASIC Act, a court must consider the full legal context — including the ameliorative operation of s 47 of the Insurance Contracts Act 1984 — not merely the face of the contractual term.
- The transparency criterion in s 12BG(2)(b)–(3) asks primarily about the clarity of a term as expressed; a finding of misleading conduct under s 12DF does not automatically translate into a finding that the same terms lack transparency for unfair-contract-terms purposes.
Why It Matters
This decision is significant for life and health insurers operating in Australia because it confirms that pre-existing condition exclusions — even where they differ from the statutory floor set by s 47 of the Insurance Contracts Act, and even where that divergence gives rise to misleading conduct liability — are not automatically unfair contract terms. The ruling clarifies that the s 47 safety net is treated as part of the practical and legal equilibrium against which imbalance is measured, reducing the risk that commercially standard guaranteed-acceptance products will be invalidated on unfairness grounds provided insurers can demonstrate reasonable necessity to protect against anti-selection.
The case also carries a procedural lesson with wider implications for ASIC and other regulators: the Full Court’s refusal of leave, and Derrington J’s pointed criticism of the practice, signals that courts will be slow to permit enforcement agencies to prosecute on appeal a theory of liability materially different from the one presented at trial. Regulators must therefore carefully construct and commit to their case theories before the evidentiary hearing, knowing that a later shift in regulatory guidance or appellate authority will not readily justify a second bite of the cherry.