It represents the most wide-ranging changes ever proposed for New Zealand’s insurance contract law.
Now, the much-anticipated reform is another step closer with the release of the draft Insurance Contracts Bill.
In February, the Ministry of Business, Innovation and Employment (MBIE) released the Bill, following a public consultation on how to reform insurance contract law in late 2019.
The Bill aims to address shortcomings in insurance contract regulation that was identified in MBIE’s 2019 consultation and foreshadows the most fundamental revisions to insurance law in New Zealand since the reforms in the late 1970s.
The Bill proposes to:
Make fundamental changes to the duty of disclosure.
• Open up insurance contracts to the unfair contract terms (UCT) regime in the Fair Trading Act 1986.
• Introduce new obligations upon insurers in relation to the presentation of consumer insurance contracts.
• Modernise the ability of third parties to make claims upon the liability insurance of persons they are suing, including providing broad powers to request information.
• Consolidate New Zealand’s disparate insurance legislative regime into (nearly) a single statute.
Submissions on the draft Bill closed in May and it is expected the Government will move to have the legislation passed before the next election in 2023.
David Ireland, a partner at Dentons Kensington Swan, says the Bill is well overdue.
“To say the Insurance Contracts Bill has been a long time coming is a bit of an understatement,” he says.
“Some of the legislation now up for repeal dates back to 1908, with a series of patchwork law reforms and targeted pieces of legislation leaving us with a jumble of statutory and common law rules founded in history that are no longer fit for purpose in a modern world.”
There are a few cornerstone issues the draft Bill aims to address, says Ireland, including the often criticised right for an insurer to avoid a contract of insurance for non-disclosure by the insured.
“The Bill also aims to address concerns with the extent to which insurance contracts are exempt from being able to be declared “unfair” under the Fair Trading Act, and no prescribed requirements regarding the way insurance policies are drafted and disclosed, meaning consumers have no regulatory protections to help them understand and compare policies.”
The Bill itself has fairly wide support within the insurance industry, albeit with reservations about some of the details and concerns over the risk of unintended consequences, says Ireland.
“With the draft law’s focus on consumer protection, in the current climate, it would be a brave insurer who speaks out too loudly against the reform’s objectives, and it is really just a case of getting on with it. The industry is well aware that reform to the law is long overdue, and there has been some frustration with the delays, impacting on the rollouts of a few policy documentation update projects (with the regulators already pushing the for the ‘plain-Englishing’ of policies ahead of any legislative mandate).
“If nothing else, the draft Bill provides greater certainty as to what some of the new rules are likely to look like. Of course, the bulk of the policy decisions involved have been made so the focus of the consultation is on the way those policy decisions have translated into draft law.”
“The biggie” - duty of disclosure
Of all the changes proposed by the Bill, the most significant involves the proposed change to the law relating to the policyholder’s duty of disclosure.
“This is the biggie,” says Ireland. “This has been well-signalled as a key problem area for many years, and we are looking at a major shake-up in the way insurers need to go about getting clarity as to the risks they are underwriting. The changes put the onus on the insurers to ask the right questions.
“To be fair, insurers have already come a long way in ensuring actions taken in response to non-disclosure are generally proportionate, with consumers already in a considerably better position than they were in the last century. Practices in that regard have varied, however, based on general good conduct and fair treatment principles as opposed to black letter law.”
A concern is that the disclosure playing field may have tilted too far in the other direction, with insurers taking on an undue burden of undisclosed risk, says Ireland.
“A consequence of this is that we may see longer and more invasive application forms under the new law, with the possibility of insurers needing to price in undisclosed risks that they might previously have been comfortable excluding, or offering more restrictive covers. This may not necessarily produce a good outcome for policyholders who had nothing to disclose in the first place.
“It is going to take a while for things to settle down, and the detail of the rules, when passed will play a significant part in the outcome. But it seems likely that insurance is going to become more expensive and potentially with more obstacles in the way of taking out cover for all but the simplest of insurance needs.”
What about the brokers?
One way or another, insurance brokers will feel the effects with the Bill is signed into law, says Ireland.
“I think the law change will inevitably result in an additional layer of work and responsibility being placed on brokers,” he says.
“On the upside, they are likely to have more consistent and easy to read policy documentation to deal with, and greater ease of comparing policies from one insurer to another. If the law works as intended, they should also have fewer instances of needing to deal with policyholders disappointed with claims being declined for non-disclosure.”
But the flip side is that brokers can expect to see insurers placing greater onus on them to extract all the required information from policyholders, he adds.
“As with many of the reforms we have seen hitting the financial services industry of late, the price of increased consumer protectionism is that everyone involved on the supply and distribution side will probably have to work harder for their money. This inevitably impacts on the cost of supply: cheaper premiums is not an expected outcome of these reforms,” Ireland adds.
The Insurance Council (ICNZ) – Te Kāhui Inihua o Aotearoa - says it supports the move to update and consolidate insurance contract law, but believes there are a few areas where they think further work is required and what it is proposed “doesn’t seem quite right”.
“Examples of this include codification of the duty of utmost good faith and form and publication requirements in regulations, which we say both are unnecessary and problematic,” says chief executive Tim Grafton.
Overall, however, the changes would mean an “updated and modernised regime”, says Grafton.
“There will be a lot of detail to work through to implement these changes, and this includes changes to insurers and their distribution partners in terms of systems and processes, changes to insurance products and their distribution arrangements.”
Because of this, it is important that sufficient time is allowed for implementation, with a reasonable date being set for when changes are to come into effect. Two years minimum seems reasonable working backwards once all the changes (including under both the Bill and regulations) are known, he says.
“It will also be important that the implementation of this Bill, regulations under it and other reforms the industry is confronted with over the next few years, is co-ordinated so that insurers and their partners can do things in a coordinated and integrated way once, rather than revisiting things multiple times.”
