A phoenix rises: The Contracts of Insurance Bill

  • Legal update

    09 May 2024

A phoenix rises: The Contracts of Insurance Bill Desktop Image A phoenix rises: The Contracts of Insurance Bill Mobile Image

The Contracts of Insurance Bill, now a Government Bill (Bill), had its first reading last week and has been referred to a select committee. The consultation period is short, with a deadline of 3 June 2024 for comment and reporting scheduled for 3 September 2024.

Why is the Bill important?

The Bill proposes to make significant changes to the rights of policyholders, so it is important not only for the insurance industry, but also for its customers. Insurers will need to make changes to the way in which they offer policies, particularly in relation to the questions they ask private ‘consumer’ customers. Policyholders should be aware of the proposed changes to their obligations to disclose information to their insurers, their rights if they make a mistake and a number of other new rights and obligations.

Where has the Bill come from?

The Bill is a development of the previous Government’s draft Insurance Contracts Bill, which was issued by the Ministry of Business, Innovation and Employment as an exposure draft but was not introduced to Parliament before the end of the last term. The former Minister, Dr Duncan Webb, placed it in the private member’s ballot from where it was drawn last month as a private member’s bill. It has now in effect been adopted as a Government Bill, with some changes.

We discussed the exposure draft of the previous Bill in issue 24 of our Cover to Cover publication and Dr Webb’s private member’s version in issue 30. Both versions proposed significant changes to important aspects of New Zealand’s insurance law, including merging various disparate pieces of insurance legislation, introducing consumer protection changes, delineating between consumer and non-consumer insurance and introducing fundamental changes to the common law duty of disclosure. The Government Bill now largely adopts Dr Webb’s version, a notable exception being the removal of some of the “unfair contract” consumer protection proposals.

If passed, the current Bill proposes a lead-in time of three years to enable the industry to implement and bed in the changes. Insurers will likely need this time to make the necessary changes to their policies and systems.

What is the purpose of the Bill?

The Bill would make important changes to the rights of insurers and policyholders. The most significant change would fundamentally alter a policyholder’s duty of disclosure. An insurance policy is a contract of “utmost good faith” which imposes a strict duty upon policyholders to disclose to their insurer all information that could influence the judgment of a reasonable insurer in insuring the risk, regardless of whether the insurer asked for the information or not. This in effect requires policyholders to know what insurers view as important, notwithstanding that they may not know anything about insurance.

The Bill proposes to replace that duty with new obligations of disclosure that are intended to provide a better balance between insurers’ need to understand the risks they are insuring and policyholders’ ability to provide them with the necessary information. It would replace the present duty which applies equally to all policyholders with new duties that differ between consumers and non-consumers. These may be summarised as follows:

  • For consumers: A new duty to “take reasonable care not to make a misrepresentation to the insurer”, taking into account all relevant circumstances. This is a fundamental change because it effectively shifts the onus from the customer to advise the insurer of any relevant information to an onus upon insurers to ask questions that will reveal all the information they require. In terms of whether a statement is misleading, the Bill provides guidance: relevant circumstances would include the type of insurance, how clear and specific any questions asked by the insurer were, how clearly the insurer communicated the importance of disclosure and whether the policyholder received financial advice. Insurers will also have new obligations in relation to the presentation of consumer insurance policies.
  • For non-consumers: Non-consumers (primarily businesses) would have a new duty to make a “fair representation of the risk”. This is closer to the existing duty of disclosure, although it does not require customers to understand what is important to insurers. The Bill sets out what this means, which in summary, is that the policyholder must disclose material circumstances that they know or ought to know, every representation of fact they make must be substantially correct and every material representation as to a matter of expectation or belief must be made in good faith.

The latest version of the Bill introduces a new provision clarifying that a failure by a policyholder to comply with an insurer’s request to confirm or amend particulars previously given is capable of being a misrepresentation. It also features new provisions that would clarify the standard expected of a reasonable policyholder. A new guidance note has been inserted to explain the intended interplay between the statutory duties and the modified common law duty of utmost good faith, which in effect is that the former will replace the latter only in relation to the duty of disclosure.

The Bill would also protect policyholders from some of the most damaging consequences of breaching their duty of disclosure. An insurer would no longer have the right to “avoid” an insurance contract (i.e. declare it void from the outset) for every failure or misrepresentation by a policyholder. Instead, the insurer will have proportional remedies available, based on how it would have responded if it had known the relevant information and whether the policyholder’s nondisclosure was intentional or reckless. Remedies would range from reducing the amount paid on a claim (if the insurer would have provided the insurance on different terms) to avoidance of the policy (where the nondisclosure is deliberate or reckless, or where the insurer would not have insured the risk on any terms). While this appears fair at first glance, its effect is that insurers will only be able to recover the increased premiums they would have charged if they had known the true position when policyholders make claims. The economic effect of this may be that they insure increased risks for which they will not receive increased premiums. Insurers will need to consider how this might affect their underwriting decisions and premiums.

The latest version of the Bill also includes a new clause which provides that an insurer cannot rely upon a misrepresentation by a policyholder who is a consumer where the insurer was not misled by it, or the misrepresentation did not affect the insurer’s underwriting decision.

For life insurance, the Bill provides that where a policyholder under a life insurance policy makes a misrepresentation, the insurer may only reduce the cover to that which a reasonable insurer would have provided had the true position been known. There are exceptions where the misrepresentation was fraudulent, or was made within three years before the death of the person whose life is insured or the date on which the insurer wishes to avoid the policy for the misrepresentation. This provides insurers with some protection against policyholders who knowingly mislead insurers, or who do so innocently but in relation to an issue that is presumably sufficiently serious to result in their making a claim.

For non-consumers, the Bill provides - similarly to the provision for consumer policyholders - that an insurer will have a proportionate remedy available.

The Bill omits some of the more controversial consumer protection proposals that featured in earlier versions.  In particular, it omits provisions that would have opened up all insurance contracts to the unfair contract terms regime in the Fair Trading Act. Under the current draft, exclusion clauses are not subject tot to the unfair contract terms regime. This will relieve insurers of the need to decide which of their policy provisions, upon which they rely to manage their exposure to claims, may be at risk of a legislative fairness overlay.

However, it will apply to other standard form contracts entered into by insurers with parties in trade (i.e., non-consumers) where the annual value of the trading relationship is $20,000 or more. That is significantly lower than the $250,000 threshold in the Fair Trading Act 1986.

The Bill would also improve the ability of persons who wish to make claims against other persons to obtain information about their liability insurance so they can make claims directly against their insurers, including broad new powers to request information.

What is happening now?

The insurance industry and any other interested parties may now give feedback during the consultation process. This is their opportunity to influence the direction of future legislation that will be important for all insurers and policyholders. Submissions are open to the public until 3 June 2024. MinterEllisonRuddWatts intends to provide feedback.