Government releases important policy decisions for insurance law review

Hon Kris Faafoi, Minister of Commerce and Consumer Affairs, has released some important policy decisions for the proposed reform of aspects of New Zealand’s insurance law regime (media release available here).  The announcement follows public consultation.  Links to our news alerts at these stages are available here and here.

The Treasury, FMA, Commerce Commission, Ministry of Justice, Department of the Prime Minister and Cabinet (Policy Advisory Group), and the Reserve Bank were all consulted.  Minister Faafoi has sought Cabinet’s authority to release an exposure draft Bill for public consultation.

Who needs to read this?

All insurers and insurance intermediaries should be aware of the proposed reforms.  They are likely to make significant changes to long-standing duties and rules, as well as changing the way that consumer insurance policies are drafted and compared.  There is also likely to be a wider change to the way in which unfair contract terms are considered in relation to insurance and more generally in financial products and services.

What has been proposed?

Minister Faafoi has made a number of detailed proposals, the most significant of which we discuss below.

Four technical issues

1. Insurer responsibility for intermediaries’ failure to pass on information

Where an intermediary such as a broker receives a commission or other consideration from an insurer, they are deemed to be the insurer’s representative.  The insurer is then fixed with the intermediary’s knowledge of information received from the insured prior to the insurer’s acceptance of the proposal.

Minister Faafoi proposes to introduce a legislative requirement for intermediaries to pass onto the insurer all relevant material information known to the intermediary.  This would mean that the insurer will be able to recover losses from the intermediary if the intermediary fails to pass on information.  The proposed reform would impose a statutory duty on intermediaries that has not existed in the past.

2. Insurers’ ability to rely upon policy exclusions in some situations

Insurers cannot rely on certain policy exclusions where the excluded event or circumstance did not cause or contribute to the loss.  An example cited in the Cabinet paper is where a private vehicle is insured on terms that exclude commercial use and the vehicle is damaged while being used for commercial purposes but it is stationary at a red light, so the fact of the commercial use did not contribute to the loss.  The insurer would be precluded from declining cover on the basis of the commercial use exclusion in these circumstances.

Minister Faafoi proposes a reform to provide that certain exclusions are not subject to the statutory restriction discussed above.  The relevant exclusions are likely to “include where vehicle used for commercial purpose where not permitted by policy, and qualifications of the driver of vehicle.”  There will also be a power to make regulations to add further exclusions that are not subject to the statutory restriction.

3. Third party claims for liability insurance payments

Minister Faafoi proposes to replace section 9 of the Law Reform Act 1936, which provides for statutory charges on liability insurance proceeds in certain circumstances, with the following:

  • A provision that allows third parties to claim directly against the insurer, standing in the shoes of the insured person.
  • A duty on the insurer, the insured and certain other parties to give necessary information to third parties to support the rights of the third parties.

The proposals will mark a major change for the benefit of underlying claimants.  The second proposal above is likely to expose insurers to a greater number of claims which they may have avoided otherwise given the information asymmetry between claimants and insured defendants.

4. Cover for long-expired liability policies

The current statutory regime allows insurers to refuse to accept claims made outside the time limits specified in the policy, where the insurer can show it has suffered prejudice.  Minister Faafoi notes that claims under liability policies may arise after the event that gives rise to the claim and long after the policy period in which that event occurred.  Insurers are not able to know with certainty whether these claims will be covered and are therefore required to set aside reserves.

Minister Faafoi proposes to make a change to provide that an insurer under certain types of liability policies can decline a claim if the policyholder notifies the claim or the circumstances giving rise to a claim after a defined period after the end of a policy term.  Policyholders should be able to claim under their current policy where they did not have knowledge of a claim or circumstance until after the expiry of the policy in which the event giving rise to the claim occurred.  This proposed change will provide comfort to insurers.  However, it may mean that some insureds will miss out on claims where they have ceased insuring for whatever reason and claims are made arising from past events.  It will be important for insureds and brokers to consider whether it is necessary to ensure policy continuity for the full period in which claims could arise.

The four main areas of reform

1. Duty of disclosure – three key reforms

Prospective insureds currently have a duty to disclose all material facts that would influence a prudent insurer in determining whether to provide insurance and if so on what terms.  Many insureds have difficulty understanding the limits of this duty and the consequences can be severe, including, in certain circumstances, avoidance of the policy from inception (as though it never existed).  Minister Faafoi proposes to:

  • For consumers: Change the disclosure duty to a duty to take reasonable care not to make a misrepresentation. This has been described as a duty to answer questions asked by the insurer truthfully and accurately.  This marks a step-change from the current general duty and aligns with the current UK approach.
  • For non-consumers (mostly businesses): Change the disclosure duty to a duty to make a fair presentation of the risk. This is similar to the status quo but will provide clarity to the insureds about what they are deemed to know, require the insured to undertake a reasonable search for material information as opposed to simply disclosing what they know and clarify that in certain circumstances an insurer is obliged to ask further questions.  This also aligns with the UK approach.
  • For all insureds: Impose obligations on insurers to:
    • inform policyholders of the duty of disclosure and its consequences before they enter the contract;
    • respond proportionately to any non-disclosure based on how the insurer would have reacted to the information at application time and whether the insured intended to mislead or deceive the insurer or was reckless. This would mark a very significant change that would benefit insureds who, at present, would be at risk of their policies being avoided for non-disclosure and their claims declined, even where the insurer would have granted cover on different terms if disclosure had been made; and
    • advise prospective insureds of the intended use of medical information accessed by the insurer.

2. Unfair Contract Terms – application to insurance policies

The unfair contract terms[1] provisions in the Fair Trading Act 1986 do not apply to certain clauses in insurance policies, including terms that exclude or limit the insurer’s liability on the happening of certain events and terms that set the basis on which claims are settled.  Minister Faafoi proposes:

  • To remove insurance specific exemptions from the unfair contract terms regime and clarify how the generic exemptions apply to insurance.
  • To consult on two options for clarifying how the generic exemptions apply to insurance:
    • provisions that define the main subject matter of insurance contracts in narrow terms (i.e. to describe the thing that is insured e.g. a house, a car, the life of a person); or
    • provisions that define the main subject matter of insurance contracts in broad terms (i.e. terms that define the risk accepted by the insurer).
  • That the FMA share responsibility with the Commerce Commission to monitor and enforce compliance with any new requirements in contracts in relation to financial services or financial advice products.

These changes are likely to impact upon the drafting of consumer insurance policies and will need to be considered carefully by insurers.

3. Assisting consumer understanding and decision-making in relation to policies – clear drafting

Insurers are not required to present policy information in any particular way, which risks leading to uncertainty and makes it difficult for insureds to compare different insurance products.  Minister Faafoi proposes to:

  • Require insurers to present consumer insurance policies clearly to assist understanding.
  • Allow for regulations to prescribe specific presentation requirements and mandatory publication of information in relation to consumer insurance policies. Further work may be necessary to determine the precise nature of the requirements to be regulated.
  • Make the FMA responsible for monitoring compliance with presentation and information publication obligations.

4. Duty of utmost good faith

The nature and limits of the common law duty of utmost good faith in insurance contracts are not well understood.  Minister Faafoi proposes that:

  • The duty be codified in legislation and apply to both parties to the insurance contract. The aim of the codified duty is to make policyholders aware of its existence, give more certainty to the kinds of conduct that will constitute breach and permit policyholders to enforce the duty through dispute resolution schemes or the courts.
  • The FMA be able to take court action for breach of the duty, but not seek a pecuniary penalty, which would be better dealt with in the regulation of financial service providers.

What next?

We recommend that all insurance industry participants take an active role in public consultation on the exposure draft Bill, which is expected in 2020.  We see this as a significant opportunity to ensure that any law changes are balanced and achieve their intended purpose.

If you have any questions in relation to the insurance contract law reform process, or are considering how the changes may affect your business, please contact one of our experts:

[1]  A term is “unfair” if it would cause an imbalance in the rights and obligations of the parties to the contract, is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term and would  cause detriment to a party to the contract.

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