One of Australia's largest insurers has been hit with a lawsuit over its allegedly unfair use of the term "pre-existing condition" in life insurance policies.

The corporate watchdog has taken HCF Life Insurance to the Federal Court accusing it of misleading customers.

The Australian Securities and Investments Commission (ASIC) launched the civil case on Friday regarding HCF's "Recover" range of insurance products.

The watchdog is seeking to void the term "pre-existing condition" from HCF's policies, claiming it is unfair and misleading.

ASIC believes the term means HCF can deny life insurance coverage if a customer did not disclose a pre-existing condition before entering the contract, even if they did not know they had it.

"Insurers need to ensure that all terms in their contracts, including important pre-existing condition terms, accurately communicate the rights of customers," ASIC deputy chair Sarah Court said.

"The inclusion of allegedly unfair and misleading terms can deter customers from making a claim, which is not a good consumer outcome."

As well as voiding the term, the watchdog is also seeking a penalty for HCF allegedly knowingly misleading its customers.

This is the second lawsuit against an insurance company over contract terms after ASIC took Auto & General Insurance to court last month.

"ASIC's current focus on enforcement action concerning unfair contract terms should not come as a surprise," Ms Court said.

"Rather, it should serve as a reminder to providers of financial services, whose contracts are subject to the regime, that potentially unfair terms should be removed from their standard form consumer contracts."

HCF Life has been contacted for comment.