Insurance reforms should bolster consumer protections

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. 

We summarise the key changes. We have separately published notes about the impact of the Bill on insurers and on consumers.

Please contact any of our consumer law team listed should you wish to discuss these matters further. 

Policyholders’ disclosure duty replaced

The Bill would replace the duty to disclose “all material information that would influence the judgement of a prudent insurer”, whether the insurer explicitly sought the information or not, with new disclosure duties according to whether the contract is a consumer insurance contract or a non-consumer insurance contract. 

“Consumer” is defined as under the Credit Contracts and Consumer Finance Act 2003. The new duties apply both before the insurance contract is entered into and when it is varied.

Consumer insurance contracts

For consumer insurance contracts, the Bill proposes that policyholders would have the duty to “take reasonable care not to make a misrepresentation”. This effectively requires the policyholder to answer any questions asked by the insurer truthfully and accurately, and is the approach taken in the UK and Australia. 

When assessing whether this duty has been met, the Bill specifies that regard must be given to all the relevant circumstances, and:

• lists factors that may be taken into account – which include the type of insurance product, how clear and specific any questions asked by the insurer were, how clearly the insurer communicated to the policyholder the importance of answering the questions, and whether the consumer received professional advice in relation to their disclosure
• requires that insurers must have regard to the policyholder’s particular characteristics or circumstances, of which the insurer was aware, or ought reasonably to have been aware, and
• provides that a policyholder must not be taken to have made a misrepresentation merely because they failed to answer a question, or gave an obviously incomplete or irrelevant answer to a question.

MBIE observes that these requirements would make it “harder for an insurer to suggest a consumer breached the duty to take reasonable care if the insurer asked an open-ended question such as “Please tell us about your health history”.” 

Intermediaries required to pass on representations

The Bill proposes to require “specified intermediaries” to pass on to insurers representations made by policyholders before the contract is entered into or varied. 

Consistent with the Insurance Law Reform Act 1977 Act, representations made to specified intermediaries are treated under the Bill as having been made to the insurer, except where the specified intermediary is not required to pass on the representation in respect of a consumer insurance contract.

For consumer insurance contracts, specified intermediaries must take all reasonable steps to pass on the representations, except where the intermediary reasonably believes that the representation is a misrepresentation.

If a specified intermediary fails to pass on information which should have been passed on and the insurer suffers loss or damage as a result, insurers are given a right to apply for a compensation order. 

Insurers’ rights to avoid insurance contracts restricted

The Bill proposes restricting when insurers may avoid insurance contracts where policyholders breach their disclosure duties. 

The Bill proposes that insurers will have prescribed remedies that are proportionate to how the insurer would have responded had the disclosure duty not been breached and whether that breach was intentional or reckless.

An insurer would have a remedy only if it would not have entered into the contract or agreed to the variation, or would have done so on different terms, absent the breach – referred to as “qualifying misrepresentation” (for consumer insurance contracts).

For non-life policies, the Bill proposes that the insurer would have the following remedies where the qualifying misrepresentation occurred before the contract was entered into:

• deliberate or reckless qualifying misrepresentation– contract may be avoided and all claims may be refused and all premiums retained
• not deliberate nor reckless qualifying misrepresentation, but the insurer would not have entered the contract on any terms – contract may be avoided and all claims refused but premiums must be returned
• not deliberate nor reckless qualifying misrepresentation, but the insurer would have entered the contract on different terms – contract must be treated as entered into on altered terms and claims amounts paid would be adjusted to reflect the altered terms, less the difference of the premium that would have been charged and the premium actually charged.

Modified rules apply to which remedies are available if the qualifying misrepresentation occurs before a variation of non-life policies.

New insurer disclosure obligations

To support the new disclosure duties, the Bill proposes that insurers must inform policyholders:

• of the general nature and effect of the disclosure duty and the potential consequences of failure to comply before they enter the contract or, in some circumstances, where there is a variation, and
• where they seek the policyholder’s consent to access medical or other third party records, that the information may be accessed and taken into account by the insurer (this duty applies to variations where the policyholder has not previously given their consent).

Breach of these duties would:

• reduce the insurer’s remedy to circumstances where the policyholder knew that the qualifying misrepresentation was untrue or misleading (for consumer insurance contracts), and
• create a risk of civil liability under the Financial Markets Conduct Act (FMCA), giving rise to a maximum $600,000 fine.

The Bill proposes codifying the common law duty on both the insurer and the policyholder to act with utmost good faith.  

Unfair contract terms extended to standard form insurance contracts

The Bill proposes to remove the exceptions for standard form insurance contracts from the unfair contract terms provisions in the Fair Trading Act 1986 (FTA) and to clarify how these apply to insurance contracts (and to standard form “small trade contracts” once the Fair Trading Amendment Act 2021 comes into force).

The policy rationale for the move is to give insurance policyholders the same level of consumer protection as is available under other types of contracts.

Two approaches are proposed in the Bill and MBIE is seeking feedback on which of the two should proceed. Both would amend the prohibition on the courts declaring a term in a standard form consumer contract or standard form small trade contract to be an unfair contract term to the extent that it “defines the main subject matter of the contract” in section 46K of the FTA.

Option A

Option A is based on the Australian model and would exclude standard form insurance contracts and standard form small trade contracts from the unfair contract term provisions only to the extent that the relevant term:

• describes what is being insured (for example, a house, car, or a life), or
• is a “transparent term” that is disclosed at or before the contract is entered into and specifies the sum insured or assured, or any contributory sum due from, or amount to be borne by, a policyholder in the event of a claim under the insurance contract.

Option B

Option B would provide a broader range of exclusions to the extent that the relevant term:

• identifies the “uncertain event” or otherwise specifies the subject matter insured or the risk insured against
• specifies the sum or sums insured or assured
• specifies any contributory sum due from, or amount to be borne by, a policyholder in the event of a claim under the insurance contract, or
• excludes or limits the insurer’s liability to indemnify the policyholder where certain events or circumstances occur or exist.

MBIE does not expressly declare a preference. It notes that Option A gives better protection to consumers and is consistent with practice in the UK and Australia but also notes insurers’ concerns that it would create significant uncertainty and that, if an exclusion clause was declared to be unfair, insurers could end up paying out claims in circumstances which they did not intend to cover.

Whichever option is adopted, the Bill proposes that the Financial Markets Authority (FMA) would be able (along with the Commerce Commission) to seek a declaration that a term for a financial service or a financial advice product (including insurance contracts) is an unfair contract term under the FTA. The consultation paper states that an amendment to the FMCA will be introduced this year.   

Contract wording and presentation obligations

The Bill proposes inserting new presentation and information obligations into the FMCA for life or health insurance contracts entered into by a licensed insurer. These include that:

• the contract must be worded and presented in a clear, concise and effective manner (in determining whether this obligation is met, the other information the insurer has provided to policyholders about the implications of entering into insurance contracts may be taken into account)
• the contract complies with all requirements relating to the contract form and presentation prescribed in the regulations, and
• the insurer must make publicly available the information prescribed in the regulations in accordance with the prescribed requirements as to when this must occur. (MBIE says there is “presently no intention” to prescribe in detail how each aspect of an insurance contract is to be presented or to prescribe standard forms for key fact sheets or summaries, as are in place overseas.)

Non-compliance with these obligations would not result in civil liability but the FMA would be able to use its other enforcement tools, such as stop orders or prohibiting use of the contract. (Non-compliance with the enforcement tools could attract such liability).

Terms of insurance contracts

Time limits under claims-made policies

Generally insurers can’t 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 60 days after the end of the policy term, and
• the insurer informed the policyholder in writing of the 60-day timeframe no later than 14 days after the term ended.

MBIE is asking submitters to comment on whether the 60 day and 14 day timeframes are appropriate.

Increased risk exclusions

Section 11 of the Insurance Law Reform Act 1977 provides that an insurer must accept a claim which comes within a policy exclusion if the exclusion breach did not cause or contribute to the loss (e.g., if vehicle cover was excluded when the vehicle was being driven without a Warrant of Fitness but the vehicle was hit while stationary at a stop light).

The Bill takes the same approach but includes a list of specific increased risk exclusion breach categories, identified previously by the Law Commission, which insurers can apply without considering whether the breach caused or contributed to the loss. The categories apply to all policy types and are:

• the age, identity, qualifications or experience of the driver, pilot, operator or ship’s master
• the geographical area in which the damage occurred, and
• whether the vehicle, aircraft, goods or ship were being used for a commercial purpose.

Payments to intermediaries

Insurers raised concerns with MBIE during earlier reviews about insurance brokers being able to hold on to premiums for long periods of time, pocketing any investment profits made off that money while in the broker’s care. 

MBIE is seeking further feedback on whether to expressly limit brokers’ ability to invest premium money and keep the returns and whether funds held in insurance broking client accounts should be subject to similar requirements as those applied under the FMCA.

The Bill would increase the penalties for a broker’s failure to pass on premiums, make payments to the policyholder or comply with regulations to $200,000 for individuals, and $600,000 for corporates.

Our view

If the Bill is enacted in its current form, insurers will need to review their application and underwriting processes, and their contract terms, policy documentation and collateral. 

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. 

Read our previous insights:

Radical change options in play for insurance contract law