Introduction

The Ministry of Business, Innovation and Employment (‘MBIE’) has recently proposed a review of the law around insurance contracts. The law governing insurance is fragmented, spread across six different acts, some of which are over 100 years old.

MBIE sets two objectives for the issues paper regarding the whole lifecycle of an insurance policy. One, to ensure insurers and insureds can transact with confidence, and two, to make sure all interactions between insurers and insureds are fair, efficient and transparent.

Disclosure

A purchaser in New Zealand seeking insurance is required to disclose all material information within their knowledge. The test for materiality is whether the information would influence the judgement of a prudent insurer setting the premium or taking the risk. This is potentially a confusing exercise – asking the average consumer to put him or herself in the position of a prudent insurer. The remedy for non-disclosure is avoidance of the contract.

MBIE notes three major issues with the current position. Firstly, that there is a lack of consumer understanding around what needs to be disclosed. Secondly, that many consumers are not aware of the duty that they may be breaching. Thirdly, that the consequences for a breach are disproportionate.

Both Australia and the United Kingdom have initiated reforms of their insurance contract law. In Australia, the Insurance Contracts Act 1984 reduces the duty of disclosure of the insured, requiring them to disclose only the facts they or a reasonable consumer in their position would have known to be relevant to the insurer’s assessment of risk. An insurer can only reject a claim if the innocent non-disclosure would have caused them to reject the risk at the time of the contract formation. For fraudulent non-disclosure, the insurer can still avoid the contract. Although, the act gives the court the discretion to disregard the avoidance if it would be harsh and unfair not to do so, allowing the insured to recover all or part of the amount payable had the contract not been avoided.

In contrast, the United Kingdom has separate legislative schemes for consumers and businesses. The Consumer Insurance (Disclosure and Representations) Act 2012 replaced the consumer’s duty to disclose with a ‘duty to take reasonable care to not make a misrepresentation’ and the insurer must ask questions to identify the necessary information to underwrite the risk. The insurer may avoid a consumer insurance contract if a misrepresentation was deliberate or reckless, or if a careless misrepresentation would have caused the insurer to not enter the contract. For businesses, the Insurance Act 2015 requires the insured to give a fair presentation of risk. If the insured fails in that duty, the insurer’s response must be proportionate, i.e. the insurer can only void the policy if the failure to make a fair presentation of risk was deliberate or reckless.

The New Zealand judiciary has long called for reform. Barker J in Quinby Enterprises Ltd (in liquidation) v General Accident Fire & Life Assurance Corporation Plc [1995] 1 NZLR 736 argued that “uncertainty and possible injustice may be caused by the current state of the law in New Zealand as enacted.” (770)

In State Insurance General Manager v McHale [1992] 2 NZLR 399 both Cooke P and Hardie Boys J of the Court of Appeal acknowledged the Australian legislative shift to a reasonable consumer test and recommended New Zealand do the same. However, our law is largely based on old UK statutes. Thus, if Parliament opts for legislative reform, this history could influence them to go for an approach that splits insurance contract law into consumer and business statues, and shift the onus to the insurer to ask questions.

Conduct Regulation

There is currently no comprehensive regulation that covers the whole lifecycle of an insurance contract. For example, the Insurance Council of New Zealand (ICNZ) has developed the Fair Insurance Code, which provides voluntary minimum standards for its members. ICNZ’s members collectively write more than 95% of all fire and general insurance in New Zealand but ICNZ does not include life or health insurers in its membership.

The issues paper observes there have been consumer complaints regarding claims handling, such as settlement delays and threats to relegate claims to the end of a queue to encourage settlement. Further, there are concerns with sales incentives creating a culture of profit over consumer benefit. In 2016, the Financial Markets Authority released its findings into ‘insurance churning’, i.e. the practice of replacing policies for existing customers to gain a renewed commission on the policy. MBIE comments that the lack of regulation has also meant a lack of evidence to derive solutions and is calling for submissions in this area.

Consumer Knowledge and Confidence

A confident and informed consumer aids competition, ultimately delivering better outcomes for innovation and consumers. Ill-informed switching is detrimental to consumers, especially in the health and life insurance market, as consumers may lose pre-existing condition cover.

The issues paper observes that varied consumer attributes create unique price profiles. This, together with different levels of cover offered by a multitude of policy options, make it difficult and time consuming for consumers to find the best option for them. The rise of crowd-sourced information has created an accessible shared knowledge pool. Online comparison services such as Life Direct for the life and health insurance market and CanStar Blue aggregate consumer reviews, are helping to create a market of informed consumers, which ultimately aid the industry.

Comment

Matthew Atkinson, partner at Fee Langstone, says that compared to other jurisdictions, insurance law in New Zealand has had relatively little interference by the parliament. There have been a number of reviews in the past that have not resulted in legislation. However, with the impetus provided by the Canterbury earthquakes, it is only a matter of time before a comprehensive reform package is imposed on the industry. It is important that the industry engages in the process to ensure that any change in the law is clear, practical and fair to both insureds and insurers.