A little over 20 years ago, the Law Commission published a paper with a title that hinted only vaguely at its contents: “Some Insurance Law Problems”.
It examined five unrelated aspects of insurance law that were generally accepted as problematic, with the potential to produce unfair outcomes.
The first issue discussed was the most problematic and contentious: an insured’s duty to disclose material circumstances to an insurer. Then, as now, under New Zealand law an insured owed an insurer a duty to disclose circumstances that a reasonable insurer would regard as material to its decision to accept the risk insured.
The Law Commission identified four problems with this approach:
• what the insured is obliged to disclose is uncertain
• an insured’s honest ignorance of what it must disclose will not assist if it fails to make the necessary disclosure
• where an insurer asks specific questions of an insured, the insured still has a general duty of disclosure in addition to answering the insurer’s questions
A breach of the duty may have disproportionately harsh consequences for an insured, as the insurer is entitled to treat the policy as void from the outset even if it would have accepted the policy had it known the relevant facts (albeit on different terms, such as a higher premium).
The Law Commission observed that non-disclosure issues were one of the main reasons for complaints to the Insurance Ombudsman (now the Insurance and Financial Services Ombudsman). Reference was made to judgments in which the courts had remarked upon the unfairness that resulted where insureds innocently failed to appreciate that circumstances outside the questions asked by the insurer, such as prior criminal convictions, were considered material by insurers.
The Law Commission discussed a number of possible reforms, including the following:
• limiting the duty of disclosure or changing what was considered material
• warning insureds of their duty more clearly
• requiring insurers to set out expressly what they required to know in questions (in effect, abolishing the duty and replacing it with an obligation to answer specific questions truthfully)
• limiting the consequences for insureds of getting it wrong
The proposals made were, in short, the following:
• insurers would have 10 working days in which to pose specific questions to the insured and have them answered – within thistime period the insurer could cancel the policy from the outset if it did not find the answers acceptable
• only an inaccurate answer or “blameworthy” conduct would entitle an insurer to cancel a policy from the outset. “Blameworthy” was intended to mean circumstances where the insured knew, or a reasonable person in their position would have known, that the undisclosed circumstances would be material to an insurer
How the issue has been dealt with in the UK and Australia
In the intervening years, both the UK and Australia have passed legislation to amend the duty of disclosure.
In Australia, the insured’s duty is limited to disclosing circumstances that the insured knew or a reasonable person in their position would have known were relevant to the insurer’s assessment of the risk. The insurer must inform the insured of this obligation.
Furthermore, the insurer may cancel the policy for innocent non-disclosure only if it can prove (for instance by using examples of its refusals in other cases) that it would have refused cover had the circumstances been disclosed. In other cases, it may reduce the payment instead, for instance, by deducting the amount of a higher premium that it would have charged if disclosure had been made. Where a claim is fraudulent, a court may order that the insurer pay what is “just and reasonable”, which may be ordered where, for instance, the fraud related to an insignificant part of the claim.
In the UK, the duty of disclosure has been abolished for consumers, who instead owe a duty to take reasonable care not to make a misrepresentation when answering an insurer’s questions. Insurers are obliged to ask questions upon all circumstances that they wish to consider when deciding whether to offer cover.
Insurers may cancel consumer policies only for a deliberate or reckless misrepresentation by an insured (in which case they may keep the premiums unless it would be unfair to the consumer to retain them) or a careless misrepresentation where the insurer would not have accepted the policy if it had known the relevant circumstances. Where, however, the insured made a careless misrepresentation but the insurer would have offered cover on different terms (such as limited cover or a higher premium) then the policy will be treated as if it was entered into on those terms.
With business policies, the duty of disclosure is amended to a duty of “fair presentation”, in which the insured must provide enough information to enable the insurer to make a fair assessment of the risk or identify a need to investigate further.
On May 2018, exactly 20 years after the Law Commission’s paper was published, the Ministry of Business, Innovation and Employment issued a paper inviting comment on (among other insurance issues) essentially the same issues with respect to insureds’ non-disclosure that the Law Commission had discussed. While observing that reform of insurance law generally was well overdue, no explanation for the lengthy delay was given.
That was followed, in late April, by an options paper.
It considers key issues within the insurance law framework. Any reforms that come out of this review may have a considerable impact on the insurance sector, so this will be of interest to anybody that provides or makes use of insurance.
What does it cover?
The options paper considers (among other things) the following:
1. Options in relation to disclosure by consumers
The options paper considers concerns regarding the existing duty for consumers to disclose material information to their insurer, presenting the following options:
(a) Option 1: Duty to take reasonable care not to make a misrepresentation
This option would abolish the duty of disclosure for consumer insureds and replace it with a duty to take reasonable care to not make a misrepresentation. Insurers will be required to identify, through questions, the information they need to underwrite the risk.
(b) Option 2: Duty to disclose what a reasonable person would know to be relevant
This duty would be to disclose information that the consumer knows, and that a reasonable person in the circumstances would be expected to know, to be a relevant matter to the insurer in making a decision to accept risk.
(c) Option 3: Require life and health insurers to use medical records to underwrite
This duty would remain similar to the status quo, however there would be an obligation on life and health insurers to seek permission to access consumer medical records and use those records to underwrite the risk.
Also being considered as “design options” that would apply to all the above listed options is a statutory requirement that insurers (i) warn insureds of the duty in writing before any contract is entered into and (ii) inform consumers about whether and when they will access third-party records (including whether this would relieve the insured of the duty to disclose particular matters).
2. Options in relation to disclosure by businesses
(a) Option 1: Duty to disclose what a reasonable person would know to be relevant
This option is similar to Option 1(b) above for consumers, however applies a higher standard.
Under this option, businesses would be required to disclose what a reasonable person would know to be a material fact.
(b) Option 2: Duty to make fair presentation of risk
This duty will require businesses to disclose every material circumstance which they know or ought to know, or if they are unable to, to make disclosures that gives the insurer sufficient information to put a prudent insurer on notice that it should ask further questions to reveal those material circumstances.
(c) Option 3: Duty to take reasonable care not to make a misrepresentation
As per option 1(a) above for consumers.
3. Other disclosure considerations
The options paper also considers:
• the question of whether the business disclosure duties should apply to small business (including proposing how “small businesses” should be defined); and
• options in relation to disclosure remedies (i.e. options to provide remedies based on intention and materiality, or on materiality only).
4. Options in relation to unfair contract terms
The options paper also looks at how to respond to unfair contract terms (UCT) in insurance contracts, presenting the following options:
(a) Option 1: Tailor generic UCT provisions to insurance
This option would remove the insurance-specific exceptions but amend the generic UCT exceptions to accommodate specific features of insurance contracts.
(b) Option 2: Rely on generic unfair contract term provisions
This option would remove all insurance-specific exceptions from the Fair Trading Act. The generic UCT provisions would apply to insurance contracts unconditionally.
(c) Option 3: Completely exempt insurance contracts from UCT provisions and rely on conduct regulation
Under this option, insurance contracts would be largely or completely exempted from the UCT provisions in the Fair Trading Act. The costs and benefits of this option would rely on the outcome of the separate review being carried out by MBIE into the way that conduct is regulated in the insurance industry.
5. Options in relation to understanding and comparing policies
The paper lastly looks at the difficulties consumers face in trying to understand and compare policies, presenting the following options:
(a) a requirement for insurers to present their policies in plain language;
(b) a requirement for core policy wording to be clearly defined;
(c) a requirement for policies to highlight core policy terms or include a summary statement to draw consumers’ attention to the key aspects of the policy;
(d) a requirement for insurers to work with third-party comparison platforms; and
(e) a requirement for insurers to disclose key information to clients in a clear, concise and effective manner, using plain language.
We still expect the end result to include some change (likely a reduction) in the duty of disclosure.
It will be important for insurance companies to engage in the law reform process at this stage to ensure any law changes are fit for purpose.
We view the Australian approach as problematic, as it only partially answers the main problem with the present duty, which is that many insureds do not know that they must disclose circumstances that an insurer would consider material and they do not know what those circumstances are. There is also considerable uncertainty as to what a reasonable person should know about insurers’ views. If the
obligation is amended to a “reasonable person” test, this will leave insureds at risk.
The UK regime may be preferable, at least insofar as it relates to consumers, as a requirement that insurers ask questions that identify what circumstances they consider relevant should be easier for insureds to follow and should help them make full and honest disclosures. There is, however, a significant disadvantage from an insurer’s perspective, which is the risk that an insured may be aware of a circumstance that is clearly relevant to the risk but is so unusual that it is not within any of the insurer’s specific questions. There is also a risk that insurers may feel obliged to ask a large number of questions about matters that will be irrelevant for the great majority of insureds, which will produce inefficiencies. The Law Commission did not regard either of these factors as insurmountable, giving examples of general questions that insurers could ask such as “Do you know of any reason particular to you why you may not attain your normal life expectancy?”, while not going so far as becoming a general question about any risks, which would reintroduce the common law duty by the back door. However, it is too early to say how requiring insurers to ask questions about every matter about which they expect disclosure will play out.
It is less clear why there should be a different approach to consumer and business insurance, as in the UK. Many businesses are no more sophisticated than consumers when it comes to placing insurance and if a regime is considered fair and effective for consumers it is not easy to see why it should not be applied consistently to all insureds.
The UK approach to remedies in consumer insurance, where policies may be avoided only where the insured has been deliberate or reckless or where the insurer would not have accepted cover, but the policy in other cases is amended to reflect the arrangement that the insurer would have accepted, also seems fair and practical in principle. There may be difficulties, however, in drawing the line between conduct that is reckless and that which is merely careless.
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