The review of New Zealand's insurance contract law has reached a new phase with policy decisions now having been agreed by Cabinet. An exposure copy of the bill is due to be released for consultation in 2020 with the intention being for the bill to be introduced into the House by the end of 2020.
In addition to amending key aspects of insurance contracts law relating to disclosure by policyholders and information requirements on insurers, the policy decisions include a further shift of jurisdiction to the Financial Markets Authority (FMA). This includes new jurisdiction in respect of (i) unfair contract terms in contracts for financial products and financial advice services, including insurance; and (ii) overseeing and enforcing a new codified "duty of utmost good faith" on insurers.
The Ministry of Business, Innovation and Employment (MBIE) released an issues paper and subsequently an options paper in relation to the insurance contracts review earlier this year, which you can read more about in our previous publication here. Cabinet papers now released, and available on the MBIE website, set out the Government's decisions. The key changes agreed by Cabinet include:
• Amend duties of disclosure for both consumers and non-consumers:
Consumers' disclosure duties will be reformed to require consumers to “take reasonable care not to make a misrepresentation” (effectively to answer any questions asked by the insurer truthfully and accurately). While non-consumer policyholders' disclosure duties will be limited to making a "fair representation of risk".
• Require that insurers' remedies be "proportionate":
The remedies for non-disclosure and misrepresentation will be changed for both consumers and non-consumers to provide for proportionate consequences based on the materiality of the non-disclosure and whether the policyholder was deliberate or reckless.
If the non-disclosure was both material and deliberate or reckless, the insurer would be able to avoid contracts, reject all claims and retain premiums. If the non-disclosure was not deliberate or reckless, the insurer could avoid the contract and reject the claim but it would have to return the premium, vary the policy terms or make a reduction to the claim amount, based on what it would have done had it known the non-disclosed information when it entered the contract.
Insurers will be required to inform policyholders of their disclosure obligations and the consequences of breaching these before insurance contracts are entered into.
• Amend unfair contract terms provisions relating to insurance:
Presently, there are provisions in the Fair Trading Act 1986 (FTA) protecting consumers against unfair contract terms. However, there are also insurance-specific exceptions for terms that cannot be declared to be unfair, including terms that exclude or limit insurers' liability.
These insurance-specific exceptions to the unfair contract terms prohibition in the FTA are to be removed and replaced with a process of only excluding terms that define the main subject matter of the contract, or upfront price. The paper acknowledges that how the "main subject matter" is defined is likely to be controversial. Accordingly, the proposal is to instruct Parliamentary Counsel to draft two options into the bill to seek further stakeholder feedback.
Option one will define the "main subject matter" in narrow terms (ie including only the thing being insured, such as the house or the car, but not the terms comprising exclusions to cover). This is the current approach in the United Kingdom and is what is presently proposed in Australia. Option two will broadly extend the term to include both the risk insured and insurer's liability. Option two would mean that policy limitations and exclusions would not be open to review for unfairness.
• Introduce a new unfair contract terms jurisdiction for the FMA:
The reforms will also provide for shared responsibility between the Commerce Commission and the FMA in relation to enforcing compliance with unfair contract terms provisions in insurance contracts. In this regard, the intention is to update the Financial Markets Conduct Act 2013 (FMCA) to include unfair contract provisions in relation to financial services and financial advice products, including insurance.
While there would be an overlap in jurisdiction between the FMA and Commerce Commission, the Cabinet Paper notes the new obligations would fit in with the FMA's new role in enforcing conduct regulation for banks and insurers and will provide other enforcement tools when investigating conduct breaches. The intersection is also similar to the existing shared responsibility for enforcement of "fair dealing" provisions relating to misleading and deceptive conduct, with dual regimes in both the FTA and FMCA.
• Require that insurers' remedies be "proportionate":
An obligation will be introduced requiring insurers to write and present insurance policies clearly so that they can be easily understood by consumers. The proposal requires clear, concise and effective drafting, rather than to prescribing the details of how insurance policies must be laid out.
However, it is intended that regulations will also be passed that will require insurers to publish and present certain information in a certain format in relation to consumer insurance policies. This is intended to promote transparency and allow consumers to best choose an insurance provider.
• Codify the duty of utmost good faith:
While there is presently a duty of utmost good faith owed by the insurer at common law, many policyholders are unaware of its existence. In addition, there is little judicial precedent on the conduct that constitutes a breach of that duty. If enacted, the reforms will codify that duty and allow the FMA to take court action in respect of breaches of that duty by the insurer. Such actions would provide more certainty for consumers as to whether they are entitled to seek redress for breaches.
• Technical issues:
Cabinet has also agreed to address a number of technical issues affecting procedural aspects of policy and claims management, including:
- the introduction of a legislative requirement for intermediaries to pass onto the insurer all relevant material information to allow insurers to recover losses against the intermediary if they fail to do so;
- introducing a provision that certain policy exclusions are not subject to section 11 of the Insurance Law Reform Act 1977, which limits the insurers' ability to exclude certain risks or charge higher prices for them;
- replacing s 9 of the Law Reform Act 1936 (which gives a third party who has been wronged by a policyholder a statutory charge over the policyholder's insurance) with provisions that allow third parties to claim directly against the insurer and which facilitate the provision of necessary information to those third parties to support those rights;
- for certain types of liabilities policies, introducing a longstop date for the application of s 9 of the Insurance Law Reform Act 1977 (which precludes insurers from declining general insurance claims on the basis of late notification unless they can show prejudice);
- amending current prescriptive form requirements in relation to the transfer of life insurance policies; and
- changing the life insurance limit for minors under 10 years old from $2,000 to $10,000.
Please contact one of our experts if you wish to discuss any aspect of this reform.
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