The Contracts of Insurance Act is a new consumer protection law that repeals five Acts currently in force and increases the obligations on brokers and insurers.
Speaking to a recent professional development seminar for members of the Insurance Brokers Association of New Zealand (IBANZ), Fee Langstone Partner Craig Langstone said he believes the Act will likely require every single insurance policy in
New Zealand to be rewritten and observed that he’s not yet seeing much evidence of policy wordings being updated to comply.
The new Act takes effect from 14 November 2027, although the Ministry of Business, Innovation and Employment (MBIE) is currently consulting on whether that date should be brought forward.
Consumer or non-consumer?
One of the biggest changes is that every insurance policy will need to be categorised as either consumer or non-consumer, with different rules applying to each.
Consumer policies are wholly or predominantly for personal, domestic, or household purposes, and the onus is placed clearly on the insurer to ask the right questions at disclosure time. The ‘duty of good faith’ at disclosure time has been abolished entirely.
A consumer has to take reasonable care not to make misrepresentations and must answer questions correctly, but they are not required to offer up any information.
Craig says insurers will have to think carefully about making sure they are asking the right questions of policy holders, but he also suggests that’s not straightforward under the wording of the Act. “The test is what would a reasonable policy holder do, which is a reasonably low bar.”
In contrast, the insurer is expected to know matters without being told. “For example, if the consumer is seeking cover for a cliff top home the insurer might be expected to know that the location has been subject to recent subsidence, without the policy holder volunteering that information.”
Craig warns that insurers will no longer be able to rely on catch all style questions such as, “Have you told us everything we need to know?” He says insurers will need to update online portals and application forms and warns that proposal forms are likely to get longer and more detailed.
For brokers, it’s worth noting that one of the factors to be taken into account under the Act when determining whether a policy holder has taken reasonable care or not is whether they had broker assistance, although the effect of this is not specified.
Non-consumer (business or commercial)
Non-consumer policy holders have to make a fair representation of the risk, which is a higher level of obligation than consumer policy holders, but lower than the currently ‘duty of good faith.’
In practice, this means disclosing every material circumstance the policy holder knows or ought to have known and providing sufficient information to put a prudent insurer on notice. The risk has to be reasonably clear and accessible and the facts substantially correct.
It’s worth noting that good faith will apply to policy holders only after the contract is entered into. For example, a policy holder still has an obligation to tell the insurer about a change in use of the insured premises during the period of cover. However, the good faith obligation applies to insurers pre-contract. This means that insurers will need to continue to advise policy holders of their disclosure obligations, and the possible consequences of failing to comply, in proposals, application forms and the like.
What does this mean for brokers?
Under the Contracts of Insurance Act, intermediaries, including brokers and financial advisers, have a statutory obligation to pass on all representations made by the policyholder during the negotiation of the contract of insurance.
This has the potential to be problematic and potentially create conflicts of interest and privacy issues for brokers.
On the one hand, brokers have a duty to their insured clients to get them the best possible rates and terms, but this will need to be balanced with their statutory duty to pass on all information to the insurer.
There is a provision within the new Act which says a broker is not in breach of contract or liable for a civil wrong if it passes on information provided by an insured. However, this doesn’t stop a disgruntled client from making a complaint to a professional body or using social media to negatively impact the broker.
Insurers can also seek compensation from brokers for not passing information on, however, brokers can’t seek indemnities from policyholders for this potential breach.
Other things to note
The Act contains an implied obligation on insurers to pay claims promptly. What’s reasonable depends on the circumstances, but this could be potentially helpful to brokers and their clients. Factors that would influence this include the time needed to investigate and assess the claim, the type of insurance, and the size and complexity of the claim.
Increased risk exclusions continue – that means an excluded risk must cause or have contributed to the loss suffered. Insurers will be able to apply some exclusions regardless of causation/contribution, such as age, identity, qualifications and loss location.
Both claims made and claims made and notified policies will have a firm late notice cut-off period of 90 days.
There is also a requirement for insurance contracts to be worded and presented in a clear, concise and effective manner.
IN SUMMARY
• The insurance industry has much to do to be ready for when the Contracts of Insurance Act takes effect from 14 November 2027 (at the latest). Almost all policies will need re-writing in a short time frame.
• All policies will need to be categorised as either consumer or non-consumer, with different rules applying to each category.
• Concerns remain for the broking community regarding a potential conflict between their duty to their clients and their statutory duty to pass on information to insurers.
• There’s a lot to be tested and clarified in the courts over time.
