Insurance & Financial Services Ombudsman Karen Stevens said proposed changes to insurance contract law would make contracts “fairer and easier to understand” for consumers.

Stevens described the Contracts of Insurance Bill as a long-awaited piece of legislation. She has called for a law change since taking on her role in 1998 when the first recommendation to change insurance contract law was made by the Law Commission.

“I’m pleased that it’s finally on the table, as it’s been 26 years of waiting for the law to be changed. New Zealand is way behind Australia and the UK in this area, so these changes are really overdue,” she said.

One of the Bill’s changes relates to non-disclosure of information by a consumer, something that Stevens says is a very common issue seen in complaints to the IFSO Scheme.

“We see claims declined due to innocent mistakes. Many consumers don’t understand what information they are supposed to tell their insurer, and the consequences if they don’t disclose this information,” says Stevens.

“Forgetting to tell the insurer something regarded as being material to the risk of providing a consumer with insurance (i.e. whether the insurer would have provided cover or not, and on what terms) can be fatal,” she says.

Stevens says this often means no insurance paid out on a claim and no ability to obtain insurance in the future.

“I’m pleased that this law change will require insurers to ask clear and relevant questions, making it easier for consumers to know what information they have to provide,” says Stevens.

“At the same time, there is no option for a consumer to misrepresent the information to an insurer thinking they will get paid – any deliberately wrong information will mean an insurer does not have to pay a claim and can cancel the policy.”

Stevens also welcomes the changes that will mean insurers have to respond 'proportionally' if customers forget to disclose information.

“There are cases we’ve seen where a consumer has been treated for a health condition, like a one-off torn muscle treated by a physio, and then they’ve forgotten all about it. In this situation, as the law currently stands, if the insurer would have done something differently when the policy was arranged – like adding an exclusion or increasing the premium - the claim can be declined and the policy cancelled. This is the case even in circumstances where the health condition has nothing to do with what has been claimed for,” Stevens said.

“With the proposed law changes, the insurer would instead have to respond ‘proportionally’. This means the insurer might charge a higher premium or exclude the particular torn muscle, but pay a claim for a knee replacement. This is a much fairer response in the circumstances,” she says.

Stevens also welcomed changes to force insurers to use simpler language but called on consumers to read their contracts before signing. 

“However, consumers still need to read the policy to know what cover it provides. There is cover and there are exclusions,” says Stevens.

A growing number of complaints to the IFSO Scheme are about gradual damage, the Ombudsman said. 

Stevens said it was important to note that while there may be cover for accidental damage if it is not also sudden, there will be no cover under the policy.

“We are looking forward to consumers having a fairer set of laws when it comes to insurance, and we hope this Bill gets passed swiftly. Having Minister Bayly introduce this Bill with the intention of passing it into law by the end of the year is great news for consumers and fully supported by the IFSO Scheme,” Stevens added.

June 2024