The Ministry of Business, Innovation and Employment (MBIE) released a consultation draft of the Insurance Contracts Bill (Bill) for public feedback on February 24. The Bill reforms and updates New Zealand’s insurance contract law – the Bill proposes fundamental changes to the duty of disclosure, introduces regulation of unfair contract terms and the presentation of consumer insurance contracts, and is intended to roll up New Zealand’s disparate insurance legislative regime. The Bill follows a public consultation on how to reform insurance contract law in late 2019. The Bill aims to address shortcomings in insurance contract regulation identified in MBIE’s 2019 consultation.
The current consultation focuses on whether the Bill appropriately addresses these shortcomings. Submissions on the consultation close 4 May 2022.
Who needs to read it? Why?
The Bill will apply to a “contract of insurance” (as defined in the Insurance (Prudential Supervision) Act 2010). Accordingly, the Bill will have broad reach over the insurance industry – affecting both general and life insurance providers as well as reinsurers, and providing greater protections for policyholders.
The Bill should be considered by all insurers, their advisers, and individuals and businesses who are policyholders.
What does it cover?
Background to the Bill
Following consultation in 2019, the Government agreed to reform insurance contract law, including:
• Placing the responsibility on insurers to ask consumers the right questions when processing new insurance policies, rather than leaving it to consumers to know what to tell their insurer.
• Ensuring insurers respond proportionately when consumers don’t disclose something they should have, or misrepresent themselves.
• Requiring insurance policies to be written and presented clearly, so that consumers can easily understand them.
• Strengthening protections for consumers against unfair terms in insurance contracts.
• Extending powers to the Financial Markets Authority to monitor and enforce compliance with new requirements.
The Bill is intended to give effect to these reforms. The purpose of the Bill is to promote the confident and informed participation of insurers, policyholders and participants in the New Zealand insurance market and ensure that provisions in contracts of insurance, and the practices of insurers in relation to those contracts, operate fairly.
We have outlined the key aspects of the Bill below.
Disclosure duties
Part 2 of the Bill reforms the current duty of disclosure placed on policyholders that enter into insurance contracts. Currently, before a contract of insurance is entered into or renewed, a policyholder has to disclose to the insurer all information that could influence the judgement of the insurer in assessing the risk they are assuming by providing the insurance, regardless of whether the insurer explicitly asked for the information or not. This must be done in accordance with the common law principle of “utmost good faith” which is a very high standard.
The Bill replaces the current duty with separate levels of disclosure duty for consumers and non-consumers.
Duty on consumer policyholders to “take reasonable care”
Under clause 14 of the Bill policyholders under “consumer insurance contracts” must “take reasonable care not to make a misrepresentation to the insurer” taking into account all relevant circumstances.
A “consumer insurance contract” is defined as a contract of insurance entered into by a policyholder wholly or predominantly for personal, domestic, or household purposes. We consider that private home, motor, life, health and travel insurance policies are likely to be considered “consumer insurance contracts”.
The relevant circumstances that determine whether an insured took reasonable care (set out in clauses 15 – 19 of the Bill) include the type of insurance product, how clear and specific the questions asked by the insurer were, how clearly the insurer communicated the importance of disclosure and whether the consumer received financial advice.
Consequences for a breach of duty by consumers
An insurer will no longer have the absolute right to avoid an insurance contract where there is material non-disclosure by the policyholder. The new Bill provides that where the policyholder has breached the duty to take reasonable care, the insurer will have proportional remedies available based on how the insurer would have responded to the information and whether the policyholder’s nondisclosure was intentional or reckless.
For general (i.e. non-life) contracts of insurance, these remedies escalate from reducing an amount paid on the claim to avoiding the contract, depending on the severity and circumstances of the nondisclosure.
For life insurance contracts, the Bill carries over the prohibition on life insurers in the Insurance Law Reform Act 1977 – which prohibits life insurers from avoiding a life insurance contract for a misrepresentation unless it was made fraudulently, or within three years before the date on which the policy is sought to be avoided or the death of the policyholder.
Duty for non-consumer policyholders to make a “fair representation of the risk”
In relation to non-consumer insurance contracts (being contracts that are not consumer insurance contracts, e.g. insurance taken out for business purposes), clause 31 of the Bill replaces the disclosure duty with a duty to make a fair representation of the risk. The Bill details what a “fair representation” of risk means. Briefly, the non-consumer policyholder must make a disclosure of material circumstances that they know or ought to have known, in which every representation made is substantially correct.
Consequences for a breach of duty by non-consumers
Where there is a breach of this duty, the Bill provides (similarly to that for consumer policyholders) that an insurer has a proportional remedy available.
Duties on Insurers in relation to disclosure duties of policyholders
Subpart 6 of Part 2 of the Bill requires insurers to:
• inform all policyholders of the disclosure duty and its consequences before they enter into a contract; and
• where an insurer seeks permission to access medical or other third-party records, the insurer must inform consumer policyholders of the information the insurer will likely access.
Presentation of consumer insurance policies
The Bill introduces the requirement for consumer insurance contracts to be written and presented clearly. This involves complying with specific presentation requirements and publishing certain information in a prescribed format to assist consumers with choosing and comparing insurers.
These obligations will apply to contracts entered into by licensed insurers that are consumer insurance contracts, or contracts of insurance that provide for life and/or health insurance.
The requirements are set out in Part 7 of the Bill. Subpart 6B of Part 7 of the Bill proposes to amend the Financial Markets Conduct Act 2013 (FMCA) to introduce a duty for licensed insurers to ensure consumer insurance contracts are worded and presented in a clear, concise and effective manner.
It is expected that further regulations will be issued providing more detail on the form and presentation of consumer insurance contracts as well as what information must be presented to policyholders.
Unfair contract terms in insurance contracts
The Bill proposes to remove the insurance specific exemptions from the unfair contract term (UCT) provisions in the Fair Trading Act 1986 (FTA) and clarify how the generic exemptions apply to insurance contracts (clauses 171 – 175 in Part 7 of the Bill).
The current UCT regime applies to standard form consumer contracts generally but includes exceptions for insurance contract terms, including the subject or risk insured against, the sum insured, exclusions to liability, the basis on when claims may be settled, payment of premiums, the duty of utmost good faith, disclosure requirements (Exceptions).
The UCT regime will increase its coverage from 16 August 2022 to also apply to standard form small trade contracts generally, but still subject to the Exceptions for insurance. If the Bill comes into force in its current form, insurance contracts that are consumer contracts or small trade contracts will need to comply with the UCT regime. We consider that insurance contracts with an annual premium (including any fees payable) of below $250,000 annually will be caught by the UCT regime.
The original rationale for the Exceptions was to apply the generic “main subject matter” and “upfront price” exceptions (the terms which relate to these aspects of a contract are not subject to the unfair contract terms regime). However, the effect of the Exceptions is to generally remove insurance contracts from the unfair contract terms regime in the FTA altogether.
How the UCT regime will apply to insurers after the Bill is enacted is not yet decided – the Bill sets out two options for consultation:
Option A: Option A is to define the main subject matter of insurance contracts in narrow terms (clause 171 of the Bill). This means that the main subject matter exception would apply only to the thing insured, the terms that set out the sum insured, and terms that set the quantum of the excess.
Option B: Option B is to define the main subject matter of the insurance contracts (clause 172 of the Bill). This would mean that the policy limitations and exclusions that affect the scope of cover would be considered part of the main subject matter and therefore excluded from being declared unfair.
Consolidation of insurance legislation
The Bill will also consolidate and replace a number of pieces of existing insurance legislation. Generally, insurance law is spread across a range of piecemeal legislation including:
• the Marine Insurance Act 1908;
• the Life Insurance Act 1908;
• Part 3 of the Law Reform Act 1936;
• the Insurance Law Reform Act 1977;
• the Insurance Law Reform Act 1985; and
• the Insurance Intermediaries Act 1994.
Parts 3, 4 and 5 of the Bill carry over and update provisions of these Acts. Part 4 carries over and updates the provisions of the Insurance Intermediaries Act 1994. Part 5 of the Bill carries over and updates provisions of the Life Insurance Act 1908.
Part 3 of the Bill carries over and updates the provisions from Part 3 of the Law Reform Act 1936 (which relates to third party claims to liability insurance contracts), Insurance Law Reform Act 1977 (which sets restrictions on avoiding policies or denying claims), and the Insurance Law Reform Act 1985 (which sets out technical matters for life insurance policies). However, the Bill introduces some changes to those provisions in relation to:
• time limits for making claims under claims-made liability policies;
• increased risk exclusions; and
• third party claims for liability insurance money.
What is next for the insurance contract law reform
Consultation on the draft Bill closes on 4 May 2022. Once consultation closes, MBIE will analyse the feedback and consider any changes that may be required to the Bill. Once the drafting of the Bill is complete, the Bill will be introduced to Parliament. MBIE have not indicated when they expect the Government will introduce the Bill, let alone when the Bill will be enacted and receive the Royal assent. However, our expectation is that the Government would like that to occur before the next election, which needs to be before the end of 2023.
Generally, the provisions in the Bill are proposed to come into force by Order in Council, with all provisions coming into force by the third anniversary of when the Bill receives Royal assent at the latest. The commencement date for the Bill will likely be scheduled after the Bill is in its final legislative stages. It follows that the core reforms in the Bill are likely to be in force some time in 2025 or 2026 (although the Government could move more quickly if it regards the regime as a priority).
Our view
Like many of the participants in the insurance industry, we have watched and waited (and waited some more) for the consultation draft of the Insurance Contracts Bill to be released. As the consultation for the Bill points out, similar reforms have already been made in other jurisdictions such as Australia and the UK. This has left New Zealand out of step with overseas markets for some time. The impact of the Bill, especially how they will interact with other reforms currently in the pipeline, will be complex however, and will require careful consideration.
The Bill will sit alongside the Financial Markets (Conduct of Institutions) Amendment Bill (COFI Bill) which aims to ensure that financial institutions (including insurers) comply with the principle of fair conduct, and provides for conduct licensing for the first time for retail insurance.. The COFI regime is expected to be enacted later this year, with licenses to be applied for, before the full regime comes into force currently expected to be in 2025.
We welcome and support MBIE’s efforts in the Bill to conduct a structured and considered review of insurance contracts law. We consider that a consolidation of legislation will provide clarity, transparency and accessibility for the industry. We also agree that it is important to provide more certainty as to consumer rights. However, it will be important that careful consideration is given to such a profound change to insurance contracts law, as is proposed by the two bills, plus the potential impact of the UCT regime.
For example, in setting the terms of a contract, presenting a contract to a policyholder and responding to a nondisclosure or misrepresentation by a policyholder, insurers will need to have regard of their obligations in the Bill, whether their actions are consistent with the principle of fair conduct under COFI, and also the potential application of the FTA UTC regime.
Duty of disclosure
The changes to the duty of disclosure for consumer policyholders reflect industry sentiment that this rule unfairly penalises them. We understand that a number of insurers already have put in place policies on a voluntary basis that provide for a proportional response where the policyholder has breached the duty of disclosure.
Presentation requirements
The new duties in relation to presentation of insurance policies will bring the insurance industry in line with similar obligations for consumer credit providers (with obligations under the Credit Contracts and Consumer Finance Act 2003) and issuers of financial products (with disclosure obligations under the FMCA). As has been seen with the disclosure obligations on credit providers and issuers, information provided to consumers of these products has been of a higher quality, more readily understandable and provides for greater transparency between products. We consider that the requirements introduced in the Bill represent the same potential benefit for consumer policyholders.
However, care will need to be taken in considering the Bill to understand the potential for consequences in terms of the cost and availability of consumer insurance, of increased risks assumed by insurers, just as has occurred as a result of the consumer credit reforms.
The new presentation requirements will require insurers to review and substantially edit their insurance policies. We encourage MBIE to prepare regulations that prescribe presentation requirements in good time during the legislative process of the Bill so that insurers can prepare for these substantial changes.
Unfair contract terms
We understand that the inclusion of insurance contracts within the UCT regime has been the subject of opposition from the industry. However, it seems clear that MBIE is proposing coverage both for consumers and those in business whose policies fall within the small trade contracts definition.
MBIE will need to ensure that the unfair contract terms regime can provide protection to policyholders while allowing insurers to adequately calculate the risk of a policy. This is also in the interests of policyholders as it will ensure that their policies are accurately priced and that availability is not unduly affected.
It is therefore critical that the final Bill takes these considerations into account. We query whether Option B would be of any great benefit to consumers given that it would exclude clauses that set out the scope of cover (exclusion clauses) from being subject to the unfair contract term regime. In its initial consultation, MBIE highlighted a number of terms in insurance contracts related to exclusions from the scope of cover – Option B would do little to remedy such terms. However, Option A opens insurance contracts (and the risk they cover) to review by the Courts – which provides significant uncertainty for insurance underwriters.
What next?
Given the profound impacts the reforms will have on all engaged in the insurance sector, whether as insurers, advisers or policyholders, it is important that readers take the time to consider the impacts, and make submissions to MBIE on the draft Bill, ahead of it being introduced into Parliament.
The reality is that with the Government having an absolute majority in Parliament, it is likely changes made during the Parliamentary process, including at the Select Committee stage, be more in the nature of implementation detail, rather than underlying policy.
