News & Thinking

Long-awaited insurance contract law reform returns

Contributed by:

Nick Summerfield

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Nick Summerfield

Lucy King

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Lucy King

Insurance contract law is important – it affects almost every New Zealander – but it’s not particularly exciting. Various reforms have been proposed over the last 25 years, and with renewed focus since 2018. It looks like change may finally be happening, with the Contracts of Insurance Bill introduced to Parliament in early May.

The Bill includes some significant changes to the rights of policyholders, and will require all insurers to review their application processes and policy wording. However, some of the more difficult elements of earlier proposals for insurers have been removed.

But first, a tale of two Governments

The Bill has its origins in the previous Insurance Contracts Bill, released as an exposure draft in March 2022. Some further targeted consultation on that Bill (which we were involved in) took place last year, but that Bill wasn’t formally progressed under the previous Government.

The Bill resurfaced in March, with some finessing by former Minister Dr Duncan Webb, when it was drawn from the private member’s ballot. That seems to have forced the current Government’s hand, with the Contracts of Insurance Bill introduced not too long after that.

Having two Bills side-by-side (the former Labour Government’s Bill (as tweaked), and the National-led Government’s Bill) shows the evolution of the reforms under a new Government. The core of the reform is unchanged, but there has been a slight shift of the pendulum back in favour of insurers.

Reforming the duty of disclosure

The Bill’s biggest change is to reform to the duty of disclosure. The duty of disclosure is at the core of the relationship between insurers and their customers. It requires customers to disclose all information that could influence a reasonable insurer’s decision to cover the risk. Non-disclosure allows an insurer to avoid the contract, which can have draconian consequences (although this is more of an issue in theory than in practice).

Consumers’ duty of disclosure will be replaced with a duty to take reasonable care not to make a misrepresentation. In practice, this just means consumers will need to answer insurers’ questions truthfully. This is the most consumer friendly of the options originally consulted on, and reflects UK law. For non-consumers, the duty of disclosure becomes an obligation to make a fair presentation of risk. This also reflects the UK position, and isn’t too different from current law. In each case, insurers will have a duty to take all reasonable steps to explain the duty of disclosure.

Having two quite different legal tests will add complexity, particularly around the boundary (it’s not always clear where this will lie, and there are complexities such as transfers of policies to consider). However, it is a better outcome than the consumer test applying to all insurance. Business risks can be more complex, and businesses are generally better able to meet their disclosure obligations.

Proportional remedies for non-disclosure

Where there is non-disclosure, proportional responses will be required. Insurers will still be able to avoid the contract for deliberate or reckless non-disclosure. For non-disclosure that was not deliberate or reckless, insurers will need to respond in a way that reflects what they would have done if they knew the information before entering into the contract.

In our experience, insurers generally respond in this way already, so it’s good to see the law catching up. However, there remain some points of detail that we think could be clarified by the Select Committee, such as how an insurer can respond when non-disclosure is identified outside of claims time. There is a broader concern that, because premium adjustments can currently only be made at claims time, insurers could end up taking on increased risk without increased premiums.

Paying claims within a reasonable time

The Bill will imply a term into insurance contracts requiring claims to be settled within a reasonable time. A “reasonable” time includes reasonable time to investigate the claim, and what is reasonable will otherwise depend on the circumstances (such as the size and complexity of the claim). This compares with a provision in Dr Webb’s Bill that would have required insurers to pay interest after the date it became unreasonable to withhold payment. The Bill does not require interest to be paid, but it does make it clear that remedies including damages could be available to customers.

We think this provision strikes a fair balance. In reality, our experience is that insurers want to settle claims promptly. Delays in paying claims more often than not reflect complex claims issues that need to be understood, and the need to obtain further information from customers or third parties.

Unfair contract terms

Insurance contracts are currently excluded from the Fair Trading Act’s unfair contract terms regime. The Bill will remove this exclusion, and instead move the excluded matters largely unchanged to the list of matters which define the main subject matter of a contract, meaning they cannot be declared unfair.

This is a lawyers’ distinction. For practical purposes it retains the current position, which will be a relief to insurers. It alleviates most of the concern that elements of an insurance contract (such as exclusions) could be declared unfair, making it difficult to price cover. However, it would be best (particularly for life and health insurance) if the current exclusion for terms providing for the payment of premiums was carried over.

Making insurance policies easier to understand

The Bill will introduce a general duty for insurers to write and present consumer insurance policies clearly. The purpose is to assist consumers’ understanding of their rights and obligations under the policy. Regulations may also impose specific presentation and wording requirements and may require the publication of other information. This could extend to information about the insurer’s business – such as claims acceptance rates.

We think these proposals are generally sensible. They are consistent with fair treatment of customers, and disclosure obligations are common across the wider financial services industry. However, there is the potential for a lot of time and cost to be spent in redrafting materials, and we reserve judgement on the disclosure of information about an insurer’s business until we know exactly what is proposed.

Other changes

A range of more minor and technical changes are included in the Bill. Many of these are specific to life insurance, and have been refined as the Bill has progressed through consultation. For example, as drafted, the Bill requires life insurers to pay interest if a life claim is not paid within 30 days of notification of death. This is an improvement on the current position (where interest can be payable even if the insurer is not aware of death), but could be further improved by only imposing interest when the insurer has received all information required to process the claim. Anecdotally, we are aware of situations where customers have delayed providing information because the rate of interest the insurer is required to pay is more than they could earn from a settled claim.

The existing piecemeal insurance legislation dating back to 1908 will also be consolidated. In some cases this results in vastly simplified and improved drafting without any substantive change to the actual law. However, one bugbear is that the current rules for insurance broking client accounts have been retained. These are an outlier, and in our view, there is an opportunity to simplify the rules by bringing these into line with the broader Financial Markets Conduct Act rules for client money.

Next steps

Public submissions are being sought on the Bill by 3 June 2024. The Finance and Expenditure Select Committee expect public hearings on the Bill to take place on 26 June and is due to report back in September. The timing from then will depend on the Government’s priorities, but it would be good to see the Bill progress fairly quickly. The Bill contemplates a lead-in period of up to three years before commencement.

Get in touch

Anthony Harper has extensive experience in all areas of insurance, including policy drafting (where we are known for our plain-English drafting skills), claims work, and regulatory matters. We also regularly assist clients across all sectors with law reform issues. If you have any questions, or need assistance in your business, please get in touch.