The much-anticipated Contracts of Insurance Act received Royal Assent late last year. It helpfully consolidates and modernises New Zealand’s disparate and, in some cases, antiquated insurance legislation. The Act also better aligns New Zealand insurance law with the statutory regimes in the United Kingdom and Australia.
Many insurers and intermediaries will need to make changes to their processes and procedures. Staff training, process changes and IT transformation projects will need to be implemented within a relatively short timeframe, with the Act coming into force in November 2027 at the latest.
We summarise the key practical issues arising from fewer key changes in the Act and how insurers and other industry participants will be preparing for the new regime.
Change 1: New distinction between consumer and non-consumer insurance contracts
Substance of the change
Definition of consumer and non-consumer insurance contracts in section 10:
- Focus on the purpose of the contract rather than the identity of the policyholder.
- Contract of insurance must be “ordinarily entered into by a policyholder wholly or predominantly for personal, domestic, or household purposes”.
Practical considerations and steps
Insurers will need to identify which category each of its policies will fall within. This may be done at a product level. However, some existing products may fall within both categories.
Insurers will need to assess whether product design changes are necessary to ensure clarity of categorisation.
Change 2: Consumer insurance contracts – a diluted disclosure obligation
Substance of the change
- Policyholder must “take reasonable care not to make a misrepresentation to the insurer”.
- Effectively shifts the burden of ensuring adequate disclosure to insurers by requiring insured only to answer questions asked of them.
Practical considerations and steps
Insurers will need to make changes to proposal forms to ensure questions cover all material points and are sufficiently specific and clear to put them in the best position to argue a breach of the disclosure duty. For insurers with online proposal and application forms, this will require technology solutions as standalone work stream or part of a broader tech transformation project.
It may be useful to review historical claims and declinature information to inform the design of:
- The types of additional information that should be specifically requested; and
- Factors that may have contributed to claims disputes in the past.
There is a balancing act required; so that forms do not become unwieldy for the insurer or policyholder.
Significant amendments will also be required for disclosure statements and warnings in standard policy documents including proposal and application forms, renewal reports and policy wordings, and template letters and emails.
Change 3: Non-consumer insurance contracts – a different expression of the disclosure duty
Substance of the change
- Duty to make a fair presentation of the risk, which is reliant on the policyholder’s knowledge.
- This knowledge will include that of the policyholder’s brokers and their employees.
- Policyholders ought to know what could be revealed by a reasonable search for information available to them including information held by their broker.
Practical considerations and steps
Insurers and insurance intermediaries will need to amend policy documentation and other communications to ensure that the description of the duty of disclosure is accurate. This will include language designed to clearly explain the obligation on the policyholder and the potential consequences of not complying with fair presentation obligations. This includes undertaking a search for material information.
Change 4: Insurer’s right to claim against a specified intermediary for failing to pass on disclosure information
Substance of the change
- A specified intermediary will be required to take reasonable steps to pass on a representation by a policyholder of a consumer insurance contract.
- A specified intermediary will be required to take all reasonable steps to disclose every material circumstance known by them or in relation to a non-consumer insurance contract.
- Where the specified intermediary, rather than the policyholder, has breached the duty of disclosure, an insurer will not be entitled to exercise a remedy against the policyholder for breach of duty. But the insurer can apply to be indemnified by the specified intermediary.
Practical considerations and steps
Important to ensure specified intermediary arrangements are fit for purpose, including in relation to policyholders’ obligations to make a fair presentation. For example, information a broker has should be required to be disclosed, to the extent it is relevant to a fair presentation of the risk.
The Act allows a specified intermediary to contract out of this liability with the relevant insurer. Specified intermediaries will need to consider whether to attempt to negotiate such an arrangement or limit their liability. We expect that this would meet resistance. It will likely be easier to do so in circumstances where the specified intermediary has a binder relationship with a specific insurer.
This should be a catalyst for brokers to ensure they have adequate file management systems in place so that information can be provided to insurers, accessed and readily recalled.
Change 5: New proportionate remedies for non-disclosure (Schedule 2, Part 1)
Substance of the change
Provides an alternative to avoiding the policy. Subject to certain conditions, allows for a proportionate reduction in the amount paid in response to a claim or for the insurer to treat the policy as if it had been placed on the terms that the insurer would have been willing to provide had there been proper disclosure.
Practical considerations and steps
Check that policy terms are consistent with the new regime and do not contain avoidance rights that are wider than or inconsistent with the Act. This should be amended as part of the disclosure piece in
policies.
Insurers may find it helpful to include tables in their documentation explaining the various rights on breach of the disclosure duties.
Check that systems are equipped to help with counterfactual analysis – so that the insurer can prove what it would have done.
Change 6: Abolition of third party statutory charge (Schedule 1, Part 1)
Substance of the change
Third parties now have a direct claim against a specified policyholder’s insurer(s), rather than a statutory charge.
Practical considerations and steps
Consider whether insurer rights/protections in relation to control of litigation are adequate in insurance policies.
Insurers will need to allow for policyholders being less likely to seek separate defence costs cover because the sum insured will not be subject to a statutory charge (which prevents access to the sum insured to pay defence costs).
Insurers and insurance intermediaries will need to consider processes to address third party requests for insurance information pursuant to Schedule 3 of the Act.
This may involve:
- Criteria against which to assess whether the third party’s request for information provides sufficient particulars of their reasonable belief that an insured liability has been incurred and it may be able to recover the amount of that liability under the Act;
- Ensuring compliance with the 28 day period for response; and
- A policy addressing when, if at all, to charge the third party for the cost of providing the information.
Change 7: Unfair contract terms regime
Substance of the change
Extends the unfair contract terms regime in the Fair Trading Act 1986 to non-consumer insurance contracts with an annual premium value of $20,000 or less.
Practical considerations and steps
Insurers will need to consider whether this financial cut-off will create uncertainty where standard form insurance contracts are used in policies under and above the annual value. The result will be that the unfair contract terms regime applies to some relationships but not others on the same wording/terms.
Insurers will need to review non-consumer and consumer standard form contracts for unfair contract terms risk.
In-house legal teams may need to conduct further training to ensure wide understanding of this issue to non-consumer and consumer standard contracts.
Time is ticking
The earlier insurers and intermediaries consider these and other issues, the more time they will have to design and implement solutions. In our experience, those changes requiring technology transformation projects will be difficult to achieve if not started this year.
