An introduction to the Insurance Contracts Bill
The release of the Insurance Contracts Bill for public feedback on 24 February 2022 foreshadows the most fundamental revisions to insurance law in New Zealand since the reforms of the late 1970s which limited insurers’ rights to decline claims for misstatements and rely upon certain exclusions. The Bill proposes to:
- Make fundamental changes to the duty of disclosure.
- Open up insurance contracts to the unfair contract terms (UCT) regime in the Fair Trading Act 1986 (FTA).
- Introduce new obligations upon insurers in relation to the presentation of consumer insurance contracts.
- Modernise the ability of third parties to make claims upon the liability insurance of persons they are sueing, including providing broad powers to request information.
- Consolidate New Zealand’s disparate insurance legislative regime into (nearly) a single statute.
The Bill follows a public consultation on proposed reforms to insurance contract law in late 2019. It aims to address shortcomings in insurance contract regulation identified in the Ministry of Business, Innovation and Employment’s 2019 consultation. Interested parties have until 4 May 2022 to make submissions upon the proposed changes.
In this article, we outline the main features of the new Bill and the potential impacts for insurers. The changes are significant and their impact upon the insurance industry is likely to be profound. They will fundamentally change insureds’ duties of disclosure, introduce new unfair contract terms rules and consolidate other laws.
Who will the Bill apply to?
The Bill will apply to a “contract of insurance” as defined in the Insurance (Prudential Supervision) Act 2010 so it will have broad reach over the insurance industry, affecting both general and life insurance providers as well as reinsurers, and providing greater protections for policyholders. In addition, insurers who enter into consumer insurance contracts will have additional disclosure obligations.
What are the key changes?
Changes to the duty of disclosure
Part 2 of the Bill reforms the current duty of disclosure placed on policyholders. Currently, 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 replaces the current duty with separate levels of disclosure duty for consumers and non-consumers:
A policyholder under a “consumer insurance contract” – a contract of insurance entered into by a policyholder wholly or predominantly for personal, domestic, or household purposes.
Policyholders must “take reasonable care not to make a misrepresentation to the insurer” taking into account all relevant circumstances. Relevant circumstances include: type of insurance product, how clear and specific the questions asked by the insurer were, how clearly the insurer communicated the importance of disclosure and whether the consumer received financial advice.
Consequence of breach
An insurer will no longer have the absolute right to avoid an insurance contract where there is material non-disclosure by the policyholder. The new 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 range from reducing the amount paid on a claim (where the insurer would have entered the contract on different terms) to avoidance of the contract (where the nondisclosure is deliberate or reckless, or where the insurer would not have entered into the contract on any terms).
Note that the Bill carries on 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.
A policyholder to a contract that is not a “consumer insurance contract” (i.e. a contract taken out for business purposes).
Policyholders must make a “fair representation of the risk” of the contract. The Bill details what a “fair representation” of risk means. Briefly, the non-consumer policyholder must make a disclosure of material circumstances that they know or ought to have known, in which every representation made is substantially correct.
Consequence of breach
Where there is a breach of this duty, the Bill provides (similarly to that for consumer policyholders) that an insurer has a proportionate remedy available.
These are fundamental changes. While much of the detail around disclosure obligations is still unclear, as it will be detailed in regulations that have not yet been shared in draft, the Bill makes 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.
A related change that is also very important is that insurers will no longer be entitled to avoid policies and decline to pay claims where there has been a material non-disclosure or misrepresentation in every case, as these remedies have been 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 will create challenges for insurers’ actuaries 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.
The Bill also introduces new duties on insurers to:
- inform all policyholders of their disclosure duty and its consequences before they enter into a contract; 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.
Insurance contracts to be subject to UCT regime
The Bill proposes to make insurance contracts subject to the UCT regime by removing the insurance specific exemptions in the FTA and clarifying how the generic exemptions apply to insurance contracts.
Currently, the UCT regime only applies in respect of consumer contracts. However, from 16 August 2022, it will benefit small businesses who have contracts that meet the definition of a small trade contract as defined in the Fair Trading Amendment Act 2021, being a contract with an annual consideration of NZD250,000 or less. If the Bill comes into force in its current form, insurance contracts that are consumer contracts or small trade contracts will need to comply with the UCT regime. We consider a small trade contract in relation to insurance contracts that will be caught by the UCT regime to be those with an annual premium, including any fees payable, of below NZD250,000 annually.
The present UCT regime applies to most standard form consumer contracts but it includes exceptions for insurance contract terms, including the subject or risk insured against, the sum insured, exclusions to liability, the basis on when claims may
be settled, payment of premiums, the duty of utmost good faith, and disclosure requirements.
The original rationale for these insurance-specific exceptions was to apply the generic “main subject matter” and “upfront price” exceptions, meaning that the terms which relate to these aspects of a contract are not subject to the unfair contract terms regime, to insurance contracts. However, the insurance-specific exceptions effectively remove insurance contracts from the UCT regime in the FTA altogether.
MBIE has not yet decided how the UCT regime will apply to insurers. The Bill sets out two options for consultation, which we have set out in the table below. Either way, the Bill proposes that the UCT regime will apply to insurers. In deciding how to tailor the regime to insurance contracts, it will be critical that any amendment can provide protection to policyholders while allowing insurers to adequately calculate the risk of a policy. This is also in the interests of policyholders as it will ensure that their policies are accurately priced, and that availability is not unduly affected.
Define the main subject matter of insurance contracts in narrow terms (clause 171 of the Bill). This means that the main subject matter exception would apply only to
the thing insured, the terms that set out the sum insured, and terms that set the quantum of the excess.
Pros/Cons: Option A provides a high level of protection for policyholders, but it opens insurance contracts (and the risk they cover) to review by the Courts, which results in significant uncertainty for insurance underwriters.
Define the main subject matter of the insurance contracts (clause 172 of the Bill). This would mean that the policy limitations and exclusions that affect the scope of cover would be considered part of the main subject matter and therefore excluded from being declared unfair.
Pros/Cons: Option B would not be of any great benefit to consumers given that it would exclude clauses that set out the scope of cover (exclusion clauses) from being subject to the unfair contract term regime. In its initial consultation, MBIE highlighted a number of terms in insurance contracts related to exclusions from the scope of cover – Option B would do little to remedy such terms.
We think that the approach of setting out two options for consideration is sensible. Both should be considered carefully as they each have differing merits. 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 and we expect that the insurance industry will do likewise.
Presentation of consumer insurance policies
The Bill introduces a requirement for consumer insurance contracts to be written and presented clearly, at subpart 7B of Part 7. This involves complying with specific presentation requirements and publishing certain information in a prescribed format to assist consumers in choosing and comparing insurers.
These obligations will apply to contracts entered into by licensed insurers that are consumer insurance contracts, or contracts of insurance that provide for life and/or health insurance.
The Bill proposes to amend the Financial Markets Conduct Act 2013 to introduce a duty for licensed insurers to ensure that consumer insurance contracts are worded and presented in a clear, concise and effective manner. It is expected that further regulations will be issued providing more detail on the form and presentation of consumer insurance contracts as well as what information must be presented to policyholders. Many insurers already attempt to issue policies in ‘plain English’, with varying degrees of success, but the statutory requirements will likely result in a wholesale reconsideration of those terms. Some types of policy are difficult to set out in plain terms, including because there are necessarily a range of exceptions and exclusions of cover, and the industry is likely to face challenges in this respect.
Changes to third party claims upon liability insurers
The Bill proposes to replace the present entitlement of third party claimants to rely upon a statutory charge on the proceeds of a defendant’s liability insurance policy (section 9 of the Law Reform Act 1936). Instead, the Bill will allow third parties to claim directly against an insurer. The Bill aims to resolve issues experienced with the previous statutory charge, namely whether costs that were subject to the statutory charge could be paid out to policyholders to defend a claim and priority issues where there are multiple statutory charges.
The key features of the new subpart 4 of Part 3 are:
- Leave of the Court – A person must have leave of the Court to make a third-party claim.
- Limited to insolvency/death – A person can only claim where the policyholder is insolvent or dead.
- Exclusion for reinsurance – A person cannot make a third-party claim in the case of reinsurance.
- Limitation period linked – The claim against the insurer is treated as a claim against the policyholder for limitation purposes, removing the need for the third parties to make a claim against the policyholder.
- Insurer cannot rely on defences after event giving rise to liability – Insurers cannot rely on defences arising from their acts or after the event that gives rise to liability.
- Multiple Claimants – The first claimant to obtain a judgment or settlement has priority, putting third parties in the same position as if they were claiming against a policyholder.
In addition, the Bill provides new rights for a third-party claimant to access information about a defendant’s insurance. Clause 93 of the Bill provides that if a person making a third party claim reasonably thinks that another person has information that would assist with their claim, they can request this information from them. Schedule 3 of the Bill sets out the information that can be requested, how that information may be requested, and who that information may be requested from.
The Bill introduces a broad right to information, allowing a third-party claimant to require information from any person who is able to provide it, including the policyholder, insurer, or broker. The information that may be sought includes who the insurer is, what the terms of the contract are, whether the policyholder has been informed that the insurer has claimed not to be liable in respect of the supposed liability, details of any proceeding between the insurer and policyholder, limits on funds available to meet claims, and whether there are security interests on any sums paid out under a contract.
Codification of common law duty
The Bill replaces the common law duty of good faith with a statutory duty of good faith, but without any guidance or explanation as to its intended scope. It is not clear, therefore, whether it is intended to differ from the common law duty in any way. It is difficult to see how this assists insurers or policyholders.
Consolidation of other insurance legislation
Parts 3, 4 and 5 of the Bill will consolidate and replace a number of pieces of existing insurance legislation:
Marine Insurance Act 1908 to be kept separate
Redundant provisions of the Act have been repealed in relation to the duty of disclosure. The Bill proposes to repeal certain provisions relating to warranties.
Life Insurance Act 1908 Part 5
The Act has been carried over and updated.
Insurance Law Reform Act 1977 Part 3
The Bill largely carries over the provisions of the Act, although it makes changes to:
- The time limits for making claims under claims-made liability policies (section 9 of the Act). The Bill provides that an insurer can decline a claim under a claims-made policy if the policyholder notifies the insurer of a third-party claim or potential third-party claim after a defined period after the end of a policy term.
- The insurer’s ability to rely on increased risk exclusions (section 11 of the Act). The Bill provides that in some instances of an increased risk exclusion, and insurer may be able to rely on the exclusion even where the exclusion did not cause or contribute to the loss subject to a claim (such as where a policyholder on a personal policy uses the car for a commercial purpose).
Insurance Law Reform Act 1985 Part 3
The Act has been carried over and updated.
Insurance Intermediaries Act 1994 Part 4
The Act has been carried over and updated, with small changes to provide clarity, remove references to cheques and include references to security interests in light of the Personal Property and Securities Act 1999.
The Bill proposes to increase penalties for non-compliance significantly, bringing penalties in line with civil pecuniary penalties under the FMCA.
Consultation on the draft Bill closes on 4 May 2022. Once consultation closes, MBIE will analyse the feedback and consider any changes that may be required to the Bill. Once finalised, the Bill will be introduced to Parliament. MBIE have not indicated when they expect the Government will introduce the Bill, let alone when the Bill will be enacted and receive the Royal assent. However, our expectation is that the Government would like that to occur before the next election, which must take place before the end of 2023.
Generally, the provisions in the Bill are proposed to come into force by Order in Council, with all provisions coming into force by the third anniversary of the Bill receiving Royal assent. The commencement date for the Bill will likely be scheduled after the Bill is in its final legislative stages. It follows that the core reforms in the Bill are likely to be in force some time in 2025 or 2026, although the Government could move more quickly if it regards the regime as a priority.
It will be important that MBIE listens carefully to feedback from the insurance industry. The industry is complex and the availability and pricing of its products are sensitive to changes that may have unintended effects. It would be unfortunate if the end result of the reforms included premium increases and a reduction in the availability of cover, as the resulting disadvantage to policyholders could outweigh the intended benefits.
Co-authored by Sarah Jones, a Solicitor in our Financial Services team.