NZ Bill to reform insurance industry
by Resolve Editor Kate Tilley
The consultation period for the New Zealand Insurance Contracts Bill has just ended and the Ministry of Business, Innovation and Employment (MBIE) will now consider the submissions and provide a new draft.
Minter Ellison NZ says MBIE will analyse the feedback and consider any changes that may be required. Once drafting of the Bill is complete, it will be introduced to Parliament, but MBIE has given no timing for that to occur. However, Minter Ellison expects the NZ Government wants that to happen before the next election, which will be before the end of 2023.
McElroys says the release of the draft Bill followed an extensive review and consultation process that began in March 2018.
“The Bill is broad in scope and, if enacted, will be perhaps the most significant overhaul of insurance law in NZ’s history. Some areas will change fundamentally, while some will be revised, modernised or codified. Other areas will be ‘carried over’ from and replace existing legislation,” McElroys said.
McElroys partners Kiri Harkess and Andrew Colgan presented a seminar that outlined key elements of the draft Bill.
Ms Harkess said she did not expect significant changes after MBIE’s analysis of feedback. “There may be some tweaking and ironing of wrinkles, but the concepts will largely remain the same,” she said.
The Bill creates two classes of insurance contracts for consumers and non-consumers.
Under clause 10, which Ms Harkess said was similar to Australian legislation, a consumer insurance contract (CIC) is one that “a policyholder enters into wholly or predominantly for personal, domestic or household purposes”.
She said determining whether an insurance contract was a CIC would likely involve subjective and objective elements, “although the Bill creates a presumption that an insurance contract is a CIC where a party claims it is, unless the contrary is established”.
Clause 12 provides a mechanism for insurers to obtain Financial Markets Conduct Act 2013 certificates from policyholders “to confirm the contract is not a CIC and that the policyholder understands they will have less protection”.
The Bill introduces a new regime for pre-contractual disclosure. “Some of the impetus for change is the perceived unfairness of the current situation,” Ms Harkess said. How does a policyholder know if something is material to the insurer?
Clause 14 requires a policyholder to take reasonable care not to make a misrepresentation before entering into or varying a CIC. Ms Harkess said the new disclosure duties for CICs and non-CICs replaced the duty of utmost good faith for pre-contractual disclosure, but the duty was otherwise preserved by clause 59: ‘A contract of insurance is a contract based on the utmost good faith.’
Insurers can still avoid CICs if the policyholder breaches the duty to take reasonable care not to make a misrepresentation and the insurer proves it would not have entered into the contract without the misrepresentation.
However, Ms Harkess said the current “all or nothing remedy for nondisclosure, to avoid or cancel the policy in its entirety”, is replaced with an option for a proportionate response if, in the absence of the misrepresentation, the insurer would have contracted on other terms.
Ms Harkess said while the Bill “does not entirely close the door on nondisclosure or silence for CICs, clause 17 says: ‘The policyholder must not be taken to have made a misrepresentation merely because the policyholder —
(a) failed to answer a question; or
(b) gave an obviously incomplete or irrelevant answer to a question.’
“The onus is on the insurer to seek clarification or more information,” Ms Harkess said.
The Bill is prescriptive in remedies for breach of the duty to take reasonable care, with clause 15 detailing matters to consider in determining breach. Ms Harkess warned there would be “a real focus on communications with policyholders”. Explanatory material would be examined. “It will be harder to establish a breach if questions asked by the insurer are ambiguous, double barrelled or unclear.”
She said clause 16 requires insurers who are aware or ought reasonably to be aware of policyholders’ particular characteristics or circumstances to acknowledge those factors when considering misrepresentation.
Characteristics might include whether the policyholder is a vulnerable customer, whether English is a second language, and the complexity of the policy.
Ms Harkess said clauses 26-29 set out when the insurer had a remedy for precontractual misrepresentation for a CIC and the insurer had to prove that, without the misrepresentation, it would not have entered into the contract at all or would have done so only on different terms.
For deliberate or reckless misrepresentation, an insurer can avoid the contract, refuse all claims and retain the premium. For inadvertent misrepresentation, the same applies if the insured would not have entered into the contract but the insurer must return the premium. If the insurer would have entered into the contract on different terms, the insurer has the election to treat the contract as if it were on those terms and can adjust the premium accordingly.
Ms Harkess said MBIE was seeking comment on a three-year carve out that applies for life policies and it “may be removed”.
Clauses 55-58 detail insurers’ duties to policyholders, including clearly stating the policyholder’s duty and the consequences of a failure to comply with their duty.
Non-CIC disclosure regime
Mr Colgan said the new non-CIC disclosure regime would introduce new terminology and mechanisms. However, the end result may not be significantly different from the current position. It was advantageous that provisions mirrored the United Kingdom’s Insurance Act 2015, which meant more than five years of case law and commentary was available.
The draft Bill requires non-CIC policyholders (clauses 31-43) to make a pre-contractual “fair presentation of the risk” to an insurer and disclose “every material circumstance they know or ought to know”.
Like CICs, remedies for a breach of the duty of fair presentation require a determination of whether it was a qualifying breach (clause 51) and, if so, whether it was deliberate or reckless, or just inadvertent (clause 52).
Mr Colgan said the claim notification clause 68 was a carry-over of s9 of the Insurance Law Reform Act 1977, with a carve out for claims-made policies (clause 69), which aimed to overcome a perceived unfairness created by s9.
The draft Bill largely carried over provisions for increased risk exclusions (clause 71), but 71 (3) had a carve out that would mean some exclusion clauses could be relied on by insurers even where the excluded event or circumstances did not cause the loss – for example, an exclusion applying where a vehicle was being used for commercial purposes.
Mr Colgan said the draft Bill’s provisions for third-party claims against insurers were “a big change”, in part aimed to overcome the “Steigrad issue”, and were modelled on the NSW Civil Liabilities (Third Party Claims Against Insurers) Act 2017. (See background on Steigrad from law firm HFW here.)
Clear, concise contracts
The draft Bill includes changes to the Financial Markets Conduct Act (FMCA) about insurers’ duties to help policyholders understand insurance contracts.
Under proposed amendments to the FMCA, insurers must ensure contracts are clear and concise and consider whether the wording and presentation help policyholders understand their rights and obligations under the contract.
Ms Harkess said: “I love that ‘concise’ is defined with reference to the wording and presentation, not the overall length.”
MBIE had said the changes were not intended to be prescriptive but to promote greater transparency in the market.
The draft Bill amends the Fair Trading Act on unfair contractual terms to reduce exceptions for insurers.
It presents two options. Option A, consistent with Australian legislation, has only limited exceptions and “brings insurance contracts closer into line with other standard form consumer contracts”, Mr Coglan said. Option B is a “broader approach” that gives insurers greater certainty in upholding exclusions.
Misrepresentation requires representation
In an insurance newsletter, law firm Keegan Alexander emphasised that the Bill “sends a clear message to insurers: the onus is on them to ask all the questions they require to be satisfied whether to take the risk on and, if so, on what terms.
“To make a misrepresentation requires the policyholder to make a representation to the insurer in the first place. Therefore … a policyholder who is asked no questions and offers no material information to the insurer can never breach the duty.
“If the insurer misses a key question out, and the policyholder volunteers no information [about] the subject matter of that question, there is unlikely to be a breach of the duty.”