Radical change options in play for insurance contract law

06 May 2019

The Options Paper to reform New Zealand insurance contract law contains a number of proposals which, if implemented, would increase business risk and cost to insurers. That in turn risks premium rises and reducing insurance uptake for those who can least afford it.

But this potential is identified in the document, which expressly recognises the need to ensure that New Zealand remains “an attractive place in which to provide insurance”, given the country’s high natural hazard profile.

This indicates an open mind by the Government and underlines the importance of engaging in the consultation process. Submissions close on 17 June 2019.

Most of the detail of the Options Paper is directed to (a) the insured’s duty of disclosure and (b) unfair contract terms. We also briefly touch on the options proposed regarding the comprehensibility and comparability of insurance policies.

Disclosure duties

The Options Paper proposes six alternatives; three relating to the consumer’s duty of disclosure, and three to the disclosure obligations on business.

Individual consumers

Three formulations are proposed.

Option one

Replace the duty of disclosure for consumer insureds with a duty to take reasonable care not to make a misrepresentation. Insurers would have to identify, through questions, the information they need to underwrite the risk. Insureds must answer as “truthfully and as accurately as is reasonable”, taking into account factors such as how clear and specific the insurer’s questions were, and whether the insured was represented by a broker.

Under this option the risk of non-disclosure would lie with the insurer. If a material fact is not brought to the underwriter’s attention because the questionnaire does not pose a question which will elicit that information, the insurer has no remedy against the insured.

Option two

The duty would be to disclose information that the consumer knows, and that a reasonable person in the circumstances could be expected to know, is relevant to the insurer in deciding whether to accept the risk. This would take into account the type of insurance product and the target market for the insurance.

Option three

Under this option, the current duty of disclosure on insureds would remain the same but life and health insurers would be obliged to seek permission to access consumer medical records in deciding whether to underwrite the risk. The Ministry of Business, Innovation and Employment (MBIE) accepts that this requirement would impose significant costs on the industry.

Although this option is framed as a change to the insurer’s duty of disclosure, it simply reduces the risk that life and health insurance policies will be written without full knowledge of the insured’s medical history.

Proposed changes, to apply whichever of these options is adopted, are a statutory requirement on insurers to:

  • warn insureds in writing of their disclosure duties before a policy is entered into, and
  • inform the consumer about whether and when any third party records are accessed, and whether this relieves the insured of the duty to disclose certain information.

Disclosure by business

Option one

This would create a duty to disclose what a reasonable person would know to be material (taking into account the circumstances and characteristics of the insured). Although similar in scope to consumer option two above, MBIE expects that in practice a higher standard would apply because businesses are expected to have a higher level of resources and knowledge and are more likely to use brokers. It accepts that regulator guidance or case law would be needed to determine the standard of reasonableness.

Option two

This would require businesses to disclose every material circumstance which they know, or ought to know, or – where they are unable to do this – to give “sufficient information to put a prudent insurer on notice that it should ask further questions to reveal those material circumstances”.

In the case of a corporate, this would cover information that:

  • ought to be known by senior management or the people responsible for the corporate’s insurance, and
  • should have been revealed had the insurer conducted a reasonable search.

Option three

To replace the duty to disclose with a duty to take reasonable care not to make a misrepresentation (as with option one above). This seems unlikely to make first base as MBIE concedes that it could be inappropriate for firms with complex or unique risks, and that it would create practical difficulties for insurers as they would have to draft complex questionnaires for businesses in which they had little expert knowledge.

Other questions are:

  • whether insurers and insureds should be able to modify the duty (recognising that some businesses have significant bargaining power and may be content to agree to contracts on terms different from the default scheme set out in law), and
  • whether small businesses should be subject to the business disclosure regime, and how they should be defined.

Disclosure remedies

Currently, where the insured breaches the duty of disclosure, the insurer is entitled to avoid the contract and refuse all claims on the policy.

The Options Paper sets out proposals for modifying the remedies available to the insurer where the insured has breached their duty of disclosure. The three options are designed to apply to both consumers and businesses.

Option one – remedies based on intention and materiality

This would allow insurers to avoid contracts and/or reject all claims where there has been deliberate or reckless non-disclosure or misrepresentations that are material and induced the insurer to enter the contract on those terms. Premiums would not need to be returned unless this would unfairly penalise the insured (e.g. a life insurance policy with an investment element or a joint policy where only one policyholder has made a misrepresentation).

Where the non-disclosure or misrepresentation falls short of the “deliberate or reckless” standard, but was careless and induced the insurer to enter the contract, the insurer would be entitled to “re-underwrite” the contract with the benefit of the information previously denied to it, and:

  • if the insurer would not have entered the contract, avoid it and refuse all claims (but must return the premiums)
  • if the insurer would have varied the terms, reflect those variations (although with no change to the premiums), or cancel the contract by giving reasonable notice
  • if the insurer would have charged higher premiums, reduce the claim amount accordingly, or cancel the contract by giving reasonable notice.

Option two – ability to avoid limited to fraud

This would allow insurers to avoid contracts only where the non-disclosure or misrepresentation was fraudulent and induced the insurer to enter the contract on those terms.

A court or dispute resolution scheme could disallow avoidance of a contract or order the insurer to pay an amount in respect of the claim where the insurer has not suffered any significant loss or where it would be “harsh and unfair”. An insurer would not be allowed to avoid a contract for non-fraudulent non-disclosure, even where the insurer would not have entered the contract had the non-disclosure not taken place.

Option three – materiality only

This would create proportionate remedies based on what the insurer would have done if correctly informed at the time of application, regardless of the intent behind the non-disclosure – e.g. if it was deliberate but not material to the insurer and would not have affected the terms or price of the contract, the claim would have to be paid out.

Unfair contract terms

MBIE is concerned that the scope of the insurance-specific exceptions may expose consumers to genuinely unfair contract terms but also recognises the uncertainty insurers would face were terms previously exempt to become subject to challenge.

Terms identified as potentially problematic in the Options Paper are:

  • travel insurance requiring pre-approval before incurring health costs or providing broad exclusions for any claim relating to mental health
  • clauses giving the insurer the ability to make unilateral changes to a contract
  • income protection policies which give the insurer the discretion to decide if a person is unable to work
  • third party claims where the insured must follow the defence recommendations of the insurer’s lawyer
  • car insurance where the insurer may decline an accident claim if they cannot contact the person at fault
  • life insurance exclusions for any “unlawful act”, and
  • broad exclusions for pre-existing conditions which allow insurers to decline claims for any symptom regardless of whether the insured knew it was a symptom.

In developing its options in relation to unfair contract terms, MBIE has applied two criteria:

  • that consumers are protected from terms that disadvantage them and are not necessary to protect the insurer’s legitimate interests, and
  • that insurers have confidence that they can effectively measure and price risk.

Three approaches are offered but only two seem to be seriously in play.

Option one

This would remove the insurance-specific exceptions from the FTA and tailor the generic terms exempt from the FTA regime to accommodate the particular features of insurance contracts.

Australia is currently considering a similar proposal, which may be influential with the Government.

Option two

This option would eliminate any special treatment for insurance from the FTA and apply the UTC regime to insurance contracts unconditionally.

A proposed variation is to follow the UK’s UTC law which provides that core terms in insurance contracts – main subject matter and price – are exempt from being declared unfair unless they are not transparent and/or are not prominent

Promoting policy comparability

Options are to require:

  • insurance policies to be written in plain language
  • contracts and policies to clearly define core policy terms
  • a summary statement alerting consumers to core aspects of the policy to be provided
  • insurers to work with third party comparison platforms
  • concise and clear disclosure of key information – e.g. product features, complaints process, obligations on the parties, incentives.

MBIE rightly accepts that there would be implementation difficulties attached to each and all of these requirements.

Chapman Tripp comments

Reform is overdue. It has long been recognised that aspects of New Zealand insurance law are outdated and out of step with comparable jurisdictions. The challenge for the Government is to strike the appropriate balance so that the choice available to consumers is enhanced without unreasonably pushing up premium costs or reducing availability.

Failure to get this right and the review runs the real risk of reducing insurance penetration – and probably in the groups that can least afford being without it.

The Government’s aim is to have legislation in the House during this term.

This work stream is running in parallel with the Financial Institutions Conduct Review, which contains recommendations arising from the Reserve Bank/Financial Markets Authority findings relating to commission and incentive payments and to culture (see Chapman Tripp’s commentary here).

It is important for the industry to engage early and constructively in both consultation processes to achieve the best outcome possible.

For more information or assistance preparing a submission, please get in touch with our contacts.

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