Insurance Regulation Update: Insurance Contracts Bill – Exposure Draft

The recently released exposure draft of the Insurance Contracts Bill and a Consultation Paper highlights the increasing role that the Financial Markets Authority (FMA) will have in respect of the insurance sector. 

The reforms in the Insurance Contract Bill are due to sit alongside (and to some extent intersect with) provisions in the Financial Markets Conduct Act (FMCA) and the Financial Markets (Conduct of institutions) Amendment Bill (COFI). Key areas within the Insurance Contracts Bill that will fall within the FMA's remit include oversight in relation to:

• a new duty in the Bill on licensed insurers to (i) inform policyholders of the disclosure duty and its consequences before they enter the contract; and (ii) if an insurer seeks permission to access medical or other third party records about a consumer, inform consumers of the information the insurer will likely access.
• a new FMCA duty on licensed insurers to ensure contracts are worded and presented in a clear, concise and effective manner.
• any new regulations made (under the FMCA) prescribing form and presentation requirements in respect of contracts of insurance.

The Consultation Paper also refers to the continued plan for the FMA to take on primary responsibility for enforcement in relation to unfair contract terms in contracts for financial services or financial advice products (other than consumer credit contracts), including insurance contracts. That amendment is planned to occur via a Regulatory Systems Amendment Bill to be introduced later this year. In the interim, the Insurance Contract Bill itself contains amendments to be made to the Fair Trading Act in respect of the unfair contracts provisions for insurance contracts.

A more fulsome summary of the various changes within the Insurance Contracts Bill is set out below. Noting that the Bill reflects policy decisions that were made by Cabinet at the end of 2019 (our insights on those decisions are available here).

Submissions are due on 4 May 2022. Please do contact one of our experts if you wish to discuss further.

Insurance Contracts Bill – Exposure Draft

As foreshadowed by the Cabinet policy decisions, the Bill represents a marked departure from the status quo for insurance contract law in New Zealand with a clear focus on consumer protection. Key changes include:

Changes to a policyholder's duty of disclosure:

Currently, a policyholder is required to disclose to an insurer all information that would influence the judgment of a prudent insurer in setting the premium or deciding whether to insure the risk. The Bill departs from this approach by introducing different duties for both consumer and non-consumer policyholders: 

• A consumer policyholder is required to take reasonable care not to make a misrepresentation to the insurer.¹ 
• A non-consumer policyholder is required to make a fair presentation of risk to the insurer.² 
   

Interestingly, the distinction between consumer and non-consumer policyholders takes a similar approach to that under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) in that it focuses on whether the contract of insurance is entered into wholly or predominantly for personal, domestic, or household purposes (rather than the wholesale versus retail distinction that is more commonly used in other pieces of financial markets legislation, such as the Financial Markets Conduct Act 2013 (FMCA)).³ 

Proportionality of insurer remedies:

An insurer is currently entitled to avoid a contract of insurance where the policyholder has failed to comply with the duty of disclosure described above. The Bill narrows the circumstances where an insurer can avoid a contract of insurance and provides for three possible remedies where a material breach of the applicable duty of disclosure has occurred. At a high level, these are:⁴ 

• if the breach of duty was deliberate or reckless by the policyholder, the insurer may avoid the contract of insurance and need not return any premiums paid;
• if the breach of duty was not deliberate or reckless but the insurer would not have entered into the contract of insurance on any terms, the insurer may avoid the contract of insurance but must return the premiums paid; and
• if the breach of duty was not deliberate or reckless but the policyholder would only have entered into the contract of insurance on different terms, the contract of insurance will be deemed to be amended to reflect those terms.

Insurer obligations:

Insurers, as providers of a financial service, are currently subject to the general fair dealing provisions in Part 2 of the FMCA. The Bill creates a number of new obligations for insurers, some of which will sit in the new Part 6B of the FMCA, bringing the regulation of insurers closer to that of financial advice providers and issuers of financial products. This is accomplished by introducing specific duties and prescriptive disclosure requirements which, if not complied with, could give rise to civil liability under the FMCA (including accessory liability). The new obligations include:

• A duty for an insurer to inform an insured of the general nature and effect of the applicable duty of disclosure and the potential consequences of a failure to comply with that duty.⁵ 
• A duty for an insurer to inform the insured of the extent to which the insurer may rely on third party information (eg, access to medical records).⁶ 
• Duties for an insurer to assist policyholders to understand insurance contracts. These duties are to be set out as a new Part 6B of the FMCA and, broadly, require an insurer to:⁷ 
  • ensure contracts of insurance are worded and presented in a clear, concise and effective manner;
  • comply with prescribed form and presentation requirements in respect of contracts of insurance (the regulations for these requirements are not yet available but will presumably be recorded in a schedule to the Financial Markets Conduct Regulations 2014); and
  • make certain information (to be prescribed) publicly available.
• A duty of utmost good faith, which requires an insurer (and policyholder) to act with the utmost good faith at inception of the contract of insurance and throughout the term of the contract, will be codified in the Bill.⁸  While this duty currently exists at common law, its codification is likely to mean that there will be increased policyholder awareness and scrutiny of insurer compliance with it.

Unfair contract terms: 

The Fair Trading Act 1986 unfair contracts regime currently includes insurance-specific exceptions for terms that cannot be declared unfair. The Bill removes these exceptions and instead insurers are intended to rely on the general "main subject matter" and "upfront price" exceptions. The Bill will also add a provision to the FTA which would clarify how the subject matter exception would apply to contracts of insurance. Two options (one narrow and one broad) have been provided for consideration.⁹  

Role of the FMA:

The Bill has been drafted to complement the Conduct of Financial Institutions Bill and will support the COFI Bill in giving the FMA a greater role in regulating insurers. The increase in the FMA's role is achieved by: 

• A number of provisions in the Bill tying into the FMCA. For example, the COFI Bill will require licensed insurers to obtain a market services licence and the new insurer's duties (as discussed above) will be market services licensee obligations for the purposes of the FMCA.¹⁰ This means that, as noted above, if an insurer contravenes the new duties, it could face civil liability under the FMCA or be issued a stop order.
• The addition of the highly prescribed disclosure duties into the FMCA will mean that the FMA has a more significant role in regulating the conduct of insurers. 

In addition to the changes to the status quo that are summarised above, there are some other notable points in relation to the Bill:

• The territoriality provision in the Bill¹¹ follows the approach of the CCCFA (ie, to apply to contracts of insurance that are or should be governed by New Zealand law) rather than that of other pieces of financial services legislation (which focus on whether the financial service is received by persons in New Zealand or not). This is of particular note in the context of the Insurance (Prudential Supervision) Act 2010, which requires an insurer to be licensed if it carries on insurance business in New Zealand. It is possible that the territoriality provisions for of these two regimes will not squarely line up.
• As noted above, the Bill is clearly focused on consumer protection and it appears that a number of provisions in the Bill have been based on similar provisions in the CCCFA. This may mean that jurisprudence in relation to the CCCFA will be relevant or helpful in interpreting the Bill once enacted.

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.