Ch-ch-changes! Reforming insurance law – draft Insurance Contracts Bill released for consultation

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Significant changes to New Zealand’s insurance laws are in the pipeline.  Following public consultation on proposed changes in 2018 and 2019, Cabinet has made policy decisions on the key changes which are to occur to insurance law.  Last month, MBIE released an exposure draft of the new Insurance Contracts Bill which aims to brings New Zealand closer into line with the policyholder-friendly changes which have already occurred in Australia and the United Kingdom.  While further public consultation is invited, it appears much of the change has been already been decided.    

Background

New Zealand’s existing insurance contract laws are spread across a variety of statutes and case law.  The Bill aims to modernise the law into one statute and make substantial change in some areas with the aim of providing greater protections to policyholders. 

Changes include:

  • Reforming the policyholder’s duty of disclosure, and insurer’s remedies for breach of that duty.

  • Removing the exemption for insurance contracts from the unfair contract term provisions in the Fair Trading Act.

  • New duties on insurers to inform policyholders of their obligations and to assist them to understand insurance contracts.

  • Abolition of charges over liability insurance proceeds which are to be replaced with direct rights for third parties to sue a liability insurer where the insured is insolvent.

  • Time limits for notifying claims under claims-made policies will apply more strictly if insurers provide notice of the consequence of failure to notify claims within the stipulated period.

  • Certain increased risk exclusions will apply, even if the excluded circumstance did not contribute to the loss.   

Who does it apply to?

The Bill applies to all contracts of insurance, spanning consumer and business policies.  It will apply to all categories of insurance including life, health, and reinsurance.  The Bill introduces changes to duties owed by brokers as well as insurers. 

Changes

Duty of Disclosure

Currently, before an insurance contract is entered into or renewed, a policyholder must disclose all material information that would influence the insurer’s judgement in setting the premium or insuring the risk, regardless of whether the insurer explicitly asked for the information or not.  

The Bill replaces this duty with different disclosure duties for consumers and non-consumers.

Consumer insurance contracts

In the case of consumer insurance contracts, the Bill requires policyholders to “take reasonable care not to make a misrepresentation to the insurer” having regard to all relevant circumstances. 

The onus will shift to the insurer to ask questions when the customer applies for a policy.  The policyholder must answer truthfully and accurately any questions asked, taking into account factors including the type of insurance contract, how clear and specific the insurer’s questions were, how clearly the insurer communicated to the policyholder the importance of answering the questions, and whether the policyholder received professional advice in relation to the information disclosed.

As MBIE notes, this approach will make it hard for an insurer to suggest a consumer breached the duty to take reasonable care if the insurer asks an open-ended question such as “please tell us your health history”.  In future, it will be key for insurers to ask the targeted questions to elicit the information the insurer considers relevant.

Business insurance contracts

For business insurance contracts, the Bill replaces the policyholder’s disclosure duty with a duty to make a “fair presentation of the risk”.  In short, the policyholder is obliged to disclose every material circumstances which they know or ought to know, in a reasonably clear and accessible manner.  Every representation must be substantially correct and made in good faith.

Remedies for breach of duty by consumers and non-consumers

The Bill aims to provide remedies to insurers for misrepresentation or breach which are more proportionate than the current remedy of avoidance.     

The Bill prescribes remedies depending on whether the misrepresentation or breach was deliberate or reckless, and whether the insurer would have issued the policy on any terms if the correct information had been disclosed by the customer. 

The insurer may avoid the contract, refuse all claims, and retain the premium where the breach was deliberate or reckless.  This is also the outcome if the breach was not deliberate or reckless, but the insurer can demonstrate it would not have entered into the contract on any terms if the information had been correctly disclosed. 

If the breach is not deliberate or reckless, and the insurer would still have issued the policy but on different terms, the insurer’s remedy is limited to reducing the amount payable on the claim by the extra premium they would have charged if the correct information had been disclosed.  MBIE is seeking feedback on this approach which may be open to change.

Unfair contract term exemption

Unfair contract terms in standard form consumer contracts are prohibited under the Fair Trading Act. A term can be declared unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract, if it is not reasonably necessary to protect legitimate interests, and if the term would cause detriment to a party to the contract.

Currently, insurance is exempt from these provisions.  This exemption is to be removed.  Insurers will only be able to rely on generic exceptions, including a “main subject matter” exception.  The Bill sets out two options on how the exception will apply to insurance:

  • Option A:  the main subject matter exception is limited to an insurance term that describes what is being insured, or a transparent term which sets the sum insured or the excess.  Exclusions would not generally fall within the exception, so could be scrutinised by the Court.

  • Option B:  the main subject matter exception will extend more broadly.  It will also include terms which identify the event/subject/risk insured, and exclusions and policy limits which apply in certain circumstances.  These terms would not be open to review for unfairness.

Option A would enable a wider range of terms to be declared unfair.  If this option is adopted, insurers may find themselves required to pay claims they did not intend to cover, or called upon to defend exclusion clauses on the basis these are necessary to protect their legitimate interests.

New duties on insurers

The Bill introduces specific new obligations on insurers, the breach of which may result in civil liability.  These include obligations to inform policyholders of their duty of disclosure and the consequences if the policyholder fails to comply with it; to inform policyholders that the insurer may rely on third party information such as medical records; and to ensure policies are worded in a clear, concise manner and are consistent with presentation requirements which may be prescribed by regulation.

Third party claims against insurers

Charges over liability insurance proceeds under section 9 of the Law Reform Act 1936 are to go.  Modelled on New South Wales legislation, the Bill will allow third parties to claim directly against the insurer where the policyholder is insolvent, as defined in the Bill. 

The Bill also introduces a right to obtain information about the insurance from insured policyholders, including details of the amount of insurance currently available to meet the claim.

The Bill does not provide for any priority of claims over insurance proceeds, potentially creating a race to secure the insurance funds where multiple parties have claims arising from an insured liability event.  The transitional provisions in the Bill suggest existing charges will continue where proceedings are issued prior to the commencement of the Act. 

Time limits for notifying claims under claims-made policies

The Bill will enable an insurer to decline a claim under a claims-made policy on the basis that the policyholder failed to notify the claim within a stipulated time period.  This changes the current position under section 9 of the Insurance Law Reform Act 1977, which provides that insurers can only decline a claim on the basis of late notification where the insurer has suffered prejudice.

The Bill proposes that policyholders be provided with 60 days after the end of the policy period to notify claims or circumstances, and the insurer will need to notify the policyholder in writing of the effect of failing to notify claims or circumstances within 14 days after the end of the policy period.

Increased risk exclusions

Section 11 of the Insurance Law Reform Act 1977 provides that an insurer must accept a claim which falls within a policy exclusion if the exclusion was inserted because of an increased risk of loss occurring in the excluded circumstance, but the circumstance did not cause or contribute to the loss which is the subject of the claim.  The Bill adds some exceptions to this rule for circumstances that raise a greater statistical likelihood of loss occurring.  These concern the age, identity, qualifications or experience of a driver, pilot, operator or ship’s master; the geographical area in which the loss must occur; and use of a vehicle or other property for a commercial purpose.

Timeline

MBIE is seeking submissions on the draft Bill by 4 May 2022.  We anticipate the Government will wish to have the legislation passed before the next election in 2023.

Comment (Cecily Brick)

The reforms in the Bill represent the most wide-ranging change ever made to New Zealand’s insurance law.  While fundamental decisions about the nature of the reforms have already been made, MBIE indicates there are still aspects which are open to change, and it is important for insurers and other industry players to make submissions on the draft, while they have the chance.  

Once the wording of the new law is settled, there will be much for insurers to do to ensure that their policies and processes meet the new requirements.  This work will likely be required in a short timeframe given the Government’s appetite for reform in this area.

Cecily Brick is a Partner at Fee Langstone