The Insurance Contracts Bill exposure draft released last week will, if enacted, modernise insurance law and provide a legislative “fix” to the need created by the 2007 Steigrad decision for directors separately to insure against defence costs.
New Zealand is late to the reform field, Australia and the UK having changed their insurance laws years ago – and given us some useful models to draw from. One of the statutes the Bill will repeal predates World War I.
The Ministry of Business, Innovation and Employment (MBIE) is primarily seeking feedback on whether the draft achieves the policy intent or could have unintended consequences. Submissions close on 4 May 2022.
Third party claims for liability insurance money
The Bill repeals Part 3 of the Law Reform Act 1936 which places statutory charges over liability insurance monies in favour of third party claimants and provides a mechanism to pursue claims against the estates of deceased persons who were insured for the relevant liability.
From a practical perspective, the proposed approach should resolve the complications arising from the 2013 Steigrad decision. In particular it should no longer be necessary for policyholders to have separate liability and costs insurances, which was one of the practical responses adopted by the insurance industry following Steigrad.
The proposed replacement regime would no longer create a statutory charge over the insurance proceeds. Instead third parties would be able to pursue claims directly against the insurer who will stand in the place of the policyholder. The Bill adopts a modified version of the New South Wales Civil Liability (Third Party Claims Against Insurers) Act 2017 and also leverages the information sharing provisions of the UK Third Parties (Rights Against Insurers) Act 2010.
Significantly the new regime would produce a “race to judgment”, because claims covered by the insurance will be paid out in the order in which they are settled or judgment is obtained. This contrasts with the pro-rata approach under the existing regime for claims that arose from the same event.
Key features of the third party claims regime are:
- leave of the court will be required for a claim
- a third party can make a claim only where the policyholder is insolvent or dead
- reinsurance is excluded
- the claim against the insurer is a claim against the policyholder for limitation purposes
- insurers cannot rely on defences arising from the policyholder’s actions after the event that gives rise to liability
- where there are multiple claimants, priority will be given to the first claimant to obtain a judgment or settlement, and
- a third party can request certain specified information from another person (including the policyholder) if they have reasonable cause for thinking this would assist their claim.
Other changes and our view
The Bill reflects the Government’s decision that insurance contract law needs to be fundamentally rebalanced in policyholders’ favour to align New Zealand closer to UK and Australian law.
The benefits that flow to consumers from this alignment, and the wider advantages to policyholders (including corporate policyholders) will be balanced against the upfront costs and ongoing shift in risk to the insurance industry.
It remains to be seen what implication this shift may have on premiums as insurers adjust to these changes, and whether this will follow the pattern in the larger UK and Australian markets or may be more pronounced in the smaller and tighter New Zealand market.
Certainly removal of the Steigrad complexity should be welcomed.