MBIE’s Options Paper considers proposed insurance law changes
MBIE has now released an Options Paper for its review of insurance contract law. The review is intended to:
- ensure that insurers and insureds are well-informed and able to transact with confidence;
- increase fairness, efficiency and transparency within the market;
- minimise barriers to insurance being provided; and
- protect consumers’ interests.
The Options Paper identifies three primary problem areas in insurance contract law:
- Insureds’ duty of disclosure;
- Exceptions to the unfair; and
- Insureds’ difficulties in understanding and comparing policies.
Duty of Disclosure
Insureds are under a duty to disclose material information to their insurer, based on what a prudent insurer would consider material. Failure to disclose may result in the insurer rejecting claims under the policy and avoiding the policy altogether. However, insureds often do not understand what a prudent insurer may consider to be material or may be unaware of the duty to disclose. This lack of understanding around disclosure obligations creates risks for insureds and reduces the quality of information available to insurers, making it more difficult to operate effectively.
The Options Paper considers the following possible options in relation to disclosure:
- replacing the duty of disclosure with a duty to take reasonable care to not make any misrepresentations in answering insurers’ questions. The insurer would then be required to identify (through questions) the information they require to underwrite the risk;
- amending the duty to cover only what a reasonable person would know, or would in the circumstances be expected to know, to be relevant to the insurer in making a decision to accept risk;
- retaining the duty of disclosure, but requiring life and health insurance providers to seek permission to access and use consumer medical records to underwrite their risk;
- requiring insurers to inform insureds in writing of the duty to disclose before any contract is entered into; and
- requiring insurers to inform insureds about their access to third-party records.
In relation to customers who are businesses, the Options Paper makes a number of specific suggestions:
- replacing the duty of disclosure with a duty to take reasonable care to not make any misrepresentations in answering insurer questions;
- amending the duty to cover only what a reasonable person would know to be a material fact; and
- changing the duty to require businesses to disclose enough information for a prudent insurer to be put on notice that it should make inquiries (perhaps with the ability to contract out of this duty).
The Options Paper also asks for comment on whether such modified duties should apply to small businesses, which lack the resources and sophisticated processes of larger businesses.
In relation to disclosure remedies (for both insureds and businesses), the Options Paper suggests that remedies may be based on:
- intention and materiality, allowing avoidance where the non-disclosure or misrepresentation is deliberate, reckless or objectively material, as well as permitting proportionate responses to careless non-disclosure or misrepresentation that induced the insurer to enter into the contract;
- the same as the previous option, but without allowing avoidance for material disclosure that is non-fraudulent; or
- materiality alone without regard to intention, allowing proportionate remedies based on how the insurer would have acted if it had known the correct information when the insured applied to them.
The consequences of avoiding a contract on past claims that have been paid out would also need to be decided upon, as would the interaction between this new law and general contract law.
Unfair Contract Terms
Under the existing regime (which only applies to policies entered into after 17 March 2015), unfair terms in standard form consumer contracts are prohibited, with a list of specific exceptions which apply to insurance contracts. The Options Paper also considers:
- removing these specific exceptions but amending the other generic exceptions so that they can more easily accommodate the specific features of insurance contracts (either in statute or through guidance from the regulator);
- removing the specific exceptions and leaving the other generic exceptions as they are to apply to insurance contracts unconditionally; or
- exempting insurance contracts completely from the unfair contractual terms regime and relying only on conduct regulation, the costs and benefits of which would depend on the outcome of a separate review being carried out by MBIE into the way that conduct is regulated in the insurance industry.
Understanding and Comparing Policies
Insureds face a number of difficulties in trying to understand and compare policies. Different insurers also often present their policies in different ways, which can make it more difficult to compare.
The Options Paper considers requiring:
- insurers to have their policies written in plain language;
- insurance contracts and policies to include clear definitions for core policy wording;
- policies to highlight core policy terms or include a summary statement to draw insureds’ attention to its key aspects;
- insurers to work with third-party comparison platforms; or
- insurers to disclose key information, clearly, concisely, effectively and using plain language, to insureds.
The Options Paper also raises a number of issues outside those primary areas, for example that:
- insurers are deemed to know everything known to their representatives;
- insurers may be able to rely on exclusions where the conditions are satisfied even though there is no causal link to the loss in question; and
- insurers cannot decline claims on the basis that the insured failed to comply with time limits for making claims unless that prejudiced the insurer such that it would be inequitableto require the insurer to accept the claim.
Any reforms that come out of this review may have a considerable impact on the insurance sector. We expect the end result to include some change
(likely a reduction) in the duty of disclosure.
MBIE has asked for submissions on the Options Paper by Friday 28 June 2019. It will be important for insurance industry participants to engage in the law reform process to ensure any law changes are fit for purpose.
Financial Services Legislation Amendment Act 2019
The Financial Services Legislation Amendment Act 2019 was passed into law in April 2019. This new regime will be supplemented by regulations and a new Code of Professional Conduct for Financial Advice Services. The Act has remained substantially in the same form as considered in the second reading late 2018.
The Code is intended to provide for minimum standards of professional conduct when regulated financial advice is given to retail investors. The Code was submitted to the Minister of Commerce and Consumer Affairs by the Financial Advice Code Working Group on 6 March 2019, and was approved on 7 May 2019. The Code will come into force late 2019, and existing advisers will have a further two years after that to move into compliance with the new standards.
The nine standards of the Code are divided between two parts, with Part 1 covering ethical behaviour, conduct and client care, and Part 2 covering competence, knowledge and skill. Each of the standards is accompanied by a description of the ways that it can be demonstrated, as well as commentary to explain it. These standards are designed to be high-level principles rather than prescriptive rules, and are framed around promoting positive, rather than forbidding negative, conduct.
Regulations supplementing the new regime are also to be released. These will provide specific requirements around disclosure, registration, and levies and licensing fees. Of particular importance are the disclosure requirements, which have been decided on by Cabinet but are yet to be set in regulations. Currently, the intention is for disclosure of specified matters to be provided to consumers at particular points in the advice process rather than all at once, allowing it to be more comprehensible to consumers as well as simpler for advisers to tailor to their processes.
While some of the provisions of the Act came into effect following the Royal Assent, most are still to follow by Order in Council. Any remaining provisions will come into force on 1 May 2021. The regime is intended to commence once the Code and Regulations come into force, which is likely to be the second quarter of 2020. This will be followed by a 2-year transitional period, with a competency safe harbour and transitional licensing in effect. Applications for transitional licensing will open six months before the transitional period begins.
Appointed actuary review
The Reserve Bank of New Zealand is conducting a thematic review of the appointed actuary regime with the objectives to:
- better understand how the appointed actuary role works in practice for insurers, actuaries and supervisors; and
- identify potential areas for improvement to make the role and regime more effective for insurers, actuaries and the Bank.
In March/April 2019 the Bank conducted meetings with industry and stakeholder groups to discuss the draft plans for the review and seek feedback. The Bank incorporated some aspects of that feedback into its finalised plans for the appointed actuary review, whilst it intends to use other feedback in the general Insurance (Prudential Supervision) Act 2010 review. In May 2019 the Bank issued letters and fact-based survey requests to selected insurers and appointed actuaries to participate in the review, with a view to conduct on-site visits with those selected insurers and appointed actuaries later in 2019. Other stakeholders can provide input on a voluntary basis. The Bank intends to publish a report in early 2020 with generalised findings, good practices, and suggestions for possible changes
to the regime. We understand that the selected insurers will receive individual feedback. Any consultation on intended policy changes is intended to occur early 2020.