Have your say on the Contracts of Insurance Bill

20 May 2024

The Contracts of Insurance Bill, which has the potential to fundamentally rebalance the insurance relationship in favour of policyholders, is now under select committee review.

Submissions close on 3 June 2024.

The proposed changes reflect similar reforms in Australia and the United Kingdom and have already been extensively consulted on in New Zealand through an exposure draft released by the Ministry of Business, Innovation and Employment (MBIE) in 2022.

This suggests that the content will not be easily changed so it will be important that the industry engages in the submission process.

The Bill in brief

The Bill aims to reform and modernise New Zealand’s insurance contract laws to:

  • promote the confident and informed participation of insurers, policyholders, and other participants in the New Zealand insurance market; and
  • ensure that the provisions included in contracts of insurance, and the practices of insurers in relation to those contracts, operate fairly.

Key changes

We note that further amendments have been made since the Exposure Draft, reinforcing the value of engagement as the Bill progresses. 

  • Disclosure duties - the Bill introduces a distinction for policyholder disclosure purposes between consumer and non-consumer insurance contracts using the consumer definition from the CCCFA – the latest draft of the Bill allows for regulations to reclassify contracts of insurance. The disclosure obligations are:
    • Policyholders under consumer insurance contracts must take reasonable care not to make a misrepresentation to the insurer before the contract is entered into or varied.
    • Policyholders under non-consumer insurance contracts must make a fair presentation of the risk to the insurer in a manner that is reasonably clear and accessible, and disclose every material circumstance that the policyholder knows or ought to know, or disclose sufficient information to notify the need to make further inquiries.
  • Exceptions to non-consumer disclosure duties – non-consumer policyholders are exempt from disclosing a circumstance if:
    • it diminishes the risk;
    • the insurer knows, ought to know, or is presumed to know the circumstance; or
    • it is something to which the insurer waives disclosure.
  • Insurer’s disclosure obligations - before a contract is entered into or varied, insurers must take all reasonable steps to clearly inform policyholders of the general nature and effect of their disclosure duty and the potential consequences of failing to comply. The latest version of the Bill introduced the ‘reasonable steps’ criterion.
  • Duty of utmost good faith - the disclosure duty under the existing common law duty of both the insurer and policyholder to act with utmost good faith throughout the insurance relationship is replaced by the Bill’s new disclosure duties.
  • Implied term about payment of claims - the Bill imposes an implied term requiring insurers to pay any sums due in respect of a claim within a “reasonable time”, including a reasonable time to investigate and assess the claim. Reasonable time will depend on all the relevant circumstances, including, for example: type of insurance, size and complexity of the claim, compliance with laws or guidance, whether undisputed amounts have been paid, whether there are any reasonable grounds to dispute the claim and factors outside the insurer’s control (such as the Auckland Anniversary floods where the volume of claims caused a shortage of skilled people to do the remediation work).
  • Third party claims - the Bill allows a third party wronged by a policyholder to claim directly against the policyholder’s insurer. This replaces an existing statutory charge mechanism under the Law Reform Act 1936, which provides for a charge on insurance moneys that are payable as an indemnity for a policyholder’s liability to pay damages or compensation to a third party and which gave rise to the issues identified in the Steigrad case.
  • Interest payable under life policies - life insurers will need to pay interest on money payable under a life insurance policy beginning on the 31st day after the date of written or oral notification of the death (as opposed to the 91st day after the date of death in the Exposure Draft and under current law).
  • Clear contract wording and presentation – wording and presentation of consumer insurance contracts and life or health insurance contracts will be required under the Financial Markets Conduct Act 2013 to be clear, concise and effective.
  • Unfair contract terms apply to standard form insurance contracts, except for the main subject matter of the contract - the existing exception for standard form insurance contracts and small trade contracts from the unfair contract term provisions in the Fair Trading Act 1986 is removed by the Bill, with the Bill excluding instead the “main subject matter” of the contract, which cannot be declared unfair. The latest draft of the Bill adopts the broader option B subject matter description from the consultation on the Exposure Draft. This amendment is consistent with the UK and Australian frameworks.
  • Proportionate remedies - the Bill ensures that the insurer’s remedies for misrepresentations and breaches provide proportionate consequences based on how the insurer would have responded to the information at the time of entering into the contract, and whether the policyholder’s misrepresentations or breach were deliberate or reckless. See the summary below.
  If breach was deliberate or reckless If breach was neither deliberate nor reckless and insurer would not have entered into the contract (or agreed to the variation) on any terms If breach was neither deliberate nor reckless and insurer would have entered into the contract (or agreed to the variation) on different terms
Qualifying breach occurs before entry into the contract Insurer may avoid the contract and refuse all claims and need not return the premium. Insurer may avoid the contract and refuse all claims (but must return the premium).

Insurer may—

  • treat the contract as if it had been entered into on those different terms; and
  • reduce proportionately the amount paid on a claim.
Qualifying breach occurs before variation of the contract Insurer may treat the contract as having been terminated from the time when the variation was made and need not return any of the premium. Insurer may treat the contract as if the variation were never made (but may need to return any extra premium).

Insurer may—

  • treat the variation as if it had been entered into on those different terms; and
  • reduce proportionately the amount paid on a claim.
  • Time limits for claims-made policies: Insurers currently cannot decline claims on the basis that the claim was not notified within the time limits set out in the policy. The Bill proposes to make an exception for claims-made policies, which are typically professional indemnity insurance. The Bill provides that an insurer can decline a claim under a claims-made policy if the claim, or circumstances that might give rise to a claim, were not notified within 90 days (up from 60 days in the Exposure Draft) after the end of the policy term.

The Member’s Bill promoted by Labour MP Duncan Webb and selected for introduction to the House in the March ballot would have clarified that policyholders could not be taken to have made a misrepresentation where the insurer was not in fact misled, or the misrepresentation did not affect the underwriting decision of the insurer.  This provision has not been picked up in the Bill.

For more detail on the Exposure Draft, see our commentary here.

Next steps

Submissions on the Bill are open until 3 June 2024. The Select Committee report back, including any recommendations for change, is expected in September 2024.

If you would like help with making a submission or more information on how the proposed changes to New Zealand’s insurance law might impact your business or organisation, please get in touch with one of our experts.

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