Insurance contracts back on Parliament’s agenda

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    01 May 2024

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We reported on MBIE’s exposure draft of the Insurance Contracts Bill in Issue 24 of Cover to Cover back in March 2022. The draft Bill proposed to make fundamental and long-overdue changes to New Zealand’s insurance law, including significant changes to policyholders’ duties of disclosure to insurers.

The Bill was not introduced into Parliament’s legislative programme before the end of the term, but life was breathed back into it with its selection as a private member’s Bill in March of this year, and its recent adoption as a Government Bill, with some changes. This article was prepared just as the Government Bill was released and does not reflect all of its changes.

Changes to the duty of disclosure

Probably the most significant change proposed in the exposure draft of the Bill was a fundamental change to the insured’s duty of disclosure. Under the current law, before a contract of insurance is entered into or renewed, a policyholder must disclose to the insurer all information that could influence the judgement of a reasonable insurer in assessing the risk they are assuming by providing the insurance, regardless of whether the insurer explicitly asked for the information or not. This must be done in accordance with the common law duty of “utmost good faith”, which is a very high standard. 

The Bill would replace that duty with separate levels of disclosure duty for consumers and non-consumers.

Proposed key changes to current law

The Bill in its new form features some changes from the 2022 exposure draft. To recap, the key changes to the current law that were proposed in the exposure draft were the following:

  • Fundamental changes to the insured’s duty of disclosure and the consequences of a breach.
  • The Bill in private member's form would have opened up insurance contracts to the unfair contract terms regime in the Fair Trading Act 1986, but this has nown been changed. 
  • Introduce new obligations upon insurers in relation to the presentation of consumer insurance policies.
  • Improve the ability of third parties to make claims upon the liability insurance of persons they are suing, including broad new powers to request information.
  • Consolidate New Zealand’s disparate insurance legislative regime into (nearly) a single statute.
Consumer policyholder

Policyholders who take out insurance for personal, domestic, or household purposes would have a new duty to “take reasonable care not to make a misrepresentation to the insurer” taking into account all relevant circumstances. Relevant circumstances would include: the type of insurance product, how clear and specific questions asked by the insurer were, how clearly the insurer communicated the importance of disclosure and whether the consumer received financial advice. 

An insurer would no longer have the right to “avoid” an insurance contract (i.e. declare it void from the outset) where there is material non-disclosure by the policyholder. The Bill provides that where the policyholder has breached the duty to take reasonable care, the insurer will have proportional remedies available based on how the insurer would have responded to the information and whether the policyholder’s nondisclosure was intentional or reckless. Remedies would range from reducing the amount paid on a claim (where the insurer would have entered the contract on different terms) to avoidance of the policy (where the nondisclosure is deliberate or reckless, or where the insurer would not have entered into the contract on any terms).

The Bill includes further 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 exposure draft of the Bill proposed to carry over the prohibition on life insurers in the Insurance Law Reform Act 1977 from avoiding a contract of insurance for misrepresentation unless it was made in certain circumstances. The revised Bill provides that where an insured under a life 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, however, where the misrepresentation was fraudulent, or it 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 insureds 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.

Non-consumer policyholder

A policy that is not a consumer insurance contract will normally be taken out for business purposes. Such policyholders would have a new duty to make a “fair representation of the risk”. The Bill details what a “fair representation” of risk means, which in summary, is that the policyholder must disclose material circumstances that they know or ought to have known, in which every representation made is substantially correct.

Where there is a breach of this duty, the Bill provides (similarly to the provision for consumer policyholders) that an insurer will have a proportionate remedy available.

Effect of these changes

These would be fundamental changes, as they would mark an important move away from the present requirement for policyholders to put themselves in the shoes of an insurer and disclose what a reasonable insurer would consider relevant, to a requirement upon insurers to ask necessary questions of consumer policyholders and a duty of fair presentation upon non-consumer policyholders. Also important would be the removal of the insurer’s right to avoid policies and decline to pay claims where there has been a material non-disclosure or misrepresentation in every case, replaced with ‘proportionate’ remedies that may in some cases result in partial payments to policyholders who would otherwise have had no entitlement at all.

This would create challenges for insurers, who will have to calculate premiums on an assumption that policyholders who misdescribe their risks may nevertheless be entitled to a partial indemnity. This is likely to result in an increase in premiums for careful and honest policyholders who present their risks accurately as well as those who do not. It may however remove some unfairness for insureds who act honestly but who make mistakes.

Unfair Contract Terms regime

As we reported in March 2022, the exposure draft of the Bill proposed two options for applying the unfair contract terms regime to insurance policies: “Option A”, which would apply the regime to all policy terms other than those that define the subject matter of the policy, the sum insured and the excess, and “Option B”, which would limit its application to a narrower range of policy terms. The private members Bill was amended along the lines of Option A, meaning that for most purposes the unfair contract terms regime would have applied.

This would have provided an increased level of protection for policyholders, but open insurance policies up to a fairness review by the courts, which may result in significant uncertainty for insurers. Having said that, most other consumer facing industries have moved to a point at which the need to comply with unfair terms legislation is an accepted part of doing business. The Government Bill now amends this approach to any event and limits it to terms that are not insurance specific.

Other proposed changes

The exposure draft of the Bill also proposed to introduce new duties on insurers to:

  • inform all policyholders of their disclosure duty and its consequences before they take out a policy; and
  • where an insurer seeks permission to access medical or other third-party records, the insurer must inform consumer policyholders of the information the insurer will likely access.

The revised Bill now includes additional proposed changes which appear to be intended to further protect consumers’ interests.

The revised Bill now provides for a new express duty on an insurer to accept or reject, assess and settle a claim within a reasonable time. The courts have recognised similar duties already, however. 

There are also new provisions for interest on claims. The revised Bill would introduce a new obligation upon insurers to pay interest on payments that should have been made once the delay in payment becomes unreasonable, with a rebuttable presumption that it is unreasonable to withhold payment beyond 12 months after the date on which the claim is made. For life insurance contract claims, the revised draft of the Bill reduces the time after which the insurer is liable to pay interest from the current timeframe of 91 days under the Life Insurance Act 1908 to 30 days.

Next steps

We await developments in the Government’s legislative programme. It is not yet clear whether the Bill will be amended further. The Bill was drawn from he ballot as a private member’s bill from an opposition MP, Dr Duncan Webb, and the  Commerce and Consumer Affairs Minister, Andrew Bayley, responded to its selection with a statement that he is reviewing insurance contract law and intended to seek Cabinet approval shortly to proposed amendments. The Bill has now been adopted as a Government Bill. There will now be an opportunity for insurers and other industry participants to make submissions upon the revised Bill or any replacement, with some changes.