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Game-changing Contracts of Insurance bill heads to select committee

21 Jun 2024

| Author: Neil Sands

The government’s Contracts of Insurance Bill has been hailed as a “once-in-a-generation” reform of insurance law, but critics say the long-awaited changes – slated to pass through Parliament by the end of the year – do not go far enough.

The bill covers the entire insurance industry – life, health, general and travel – repealing five statutes and replacing them with a single piece of legislation.

As with its predecessor, the former government’s Insurance Contracts Bill, the new bill shifts the burden of disclosure from policyholders onto insurers, makes insurers pay out claims within a reasonable time and requires consumer insurance contracts to be written in plain English.

However, the government has rejected one key plank of Labour’s bill – scrapping the insurance industry’s exemption from the unfair contracts provisions of the Fair Trading Act 1986, which allows exclusion clauses that help ensure insurance contracts cover only unforeseeable events.

The new bill also removes wording from an earlier draft explicitly stating that a core purpose of the bill was “protection of the interests of consumers”.

Commerce and Consumer Affairs Minister Andrew Bayly says the Bill modernises ad hoc insurance laws dating back more than a century, giving customers and insurers clarity about their obligations.

“I think we’ve struck a good balance, making sure that insurers are held accountable and can’t hide behind legalistic contracts,” he says.

“The existing legislation is complicated and dated. Some of it is over 100 years old. It’s difficult for consumers to know their obligations and the system can operate harshly.”


The history

The bill is the culmination of a review process that began in 2017 and resulted in Labour’s draft statute, the Insurance Contracts Bill. That bill never made it to Parliament because of a legislative logjam.

The draft resurfaced in March this year as a member’s bill submitted by former Commerce and Consumer Affairs Minister Duncan Webb, with the government then unveiling its own Contracts of Insurance Bill two months later.

Commenting on the difference between Webb and Bayly’s bills, MinterEllisonRuddWatts senior partner and financial services co-leader Lloyd Kavanagh says: “First, that overarching purpose of protecting consumer interests has gone.

“Second, the government has deleted some of the more controversial consumer protection provisions, in particular the application of the unfair contracts terms regime.

“Otherwise, most of the other changes are still there, so I think it’s a once-in-a-generation, possibly once-in-three-generations, renovation of New Zealand insurance.”


Disclosure duties

The Finance and Expenditure Select Committee will hold a public hearing on the bill on June 26 and is due to report back to Parliament by September 3, with Bayly aiming to get the legislation through the House by year’s end.

One of the bill’s major reforms is to disclosure rules, which currently require anyone seeking insurance to give the insurer any information that would influence the judgment and risk assessment of a prudent underwriter.

Failure to do so allows the insurer to void the policy, even if the non-disclosure is unrelated to the claim.

Bayly says a real-life example was a woman who made a life insurance claim when her husband died in a traffic accident but was denied because a previous bankruptcy had not been disclosed.

“There will be no more guesswork for consumers about what they need to disclose. Instead, it will be the insurer’s responsibility to ask the right questions,” he says.

If policyholders breach the disclosure rules or make misrepresentations, the bill introduces a range of proportionate responses instead of simply allowing the contract to be declared void.

While placing the onus for disclosure on insurers is expected to result in fairer outcomes for consumers, it also means they can expect a grilling when applying for, or renewing, insurance contracts.

“Rather than insurers telling policyholders ‘you need to tell me everything I need to know about your risk’, the insurer is going to have to ask a series of questions to make sure it winkles out any information it requires,” says MinterEllisonRuddWatts partner and senior litigator Andrew Horne.

“Policyholders will need to get used to answering more questions. They’ll be more detailed and more comprehensive.”


‘Free pass’ on unfair contracts?

Webb, a former law professor at the University of Canterbury, says the most glaring difference between his member’s bill and the government version relates to unfair contracts terms.

“I’ve never understood why insurers get a free pass on unfair contract terms,” he says.

“The law, as it stands today, basically says that insurers can have unfair terms in their contracts that can’t be subject to Commerce Commission scrutiny. I can’t believe there was a Parliament that thought that was a legitimate carve-out.

“Banks are in, retailers are in, finance companies are in, other major corporates are in, but not insurers.

“I accept that exclusions are risk-relevant, but to say they can’t be unfair because of that doesn’t make sense.”

Kavanagh says the insurance industry is a special case and needs the exemption so insurers can clearly define what they are prepared to cover without the risk of a court second-guessing them.

“It’s essential insurers have confidence that if they choose to extend cover to particular circumstances or events, that will be respected because they decide upon their reserves and they accept risks on that basis,” he said.

“The very essence of a policy is that you are paying a premium that the insurer has calculated by reference to the risks that the insurer is providing cover for, so they exclude particular topics or areas and then set the premium.

“If you’ve already paid the premium and the coverage is unexpectedly extended to coverage of things that are excluded because a judge thinks that’s unfair in a particular case, it undermines the fundamental business model of the sector.”

Bayly says ending the unfair contracts exemption would have left insurance contracts open to legal challenge and risked driving up premiums.

“The previous draft bill was creating new terms that did not have any case law and were going to lead to uncertainty. Ultimately I was concerned that premiums were going to go up unnecessarily,” he said.


Small businesses

In other changes, the bill makes a distinction between consumer and non-consumer policyholders for the first time, with different disclosure requirements.

Consumer policyholders – whose contracts are for personal, domestic or household purposes – will have a duty to take reasonable care not to make any misrepresentations to the insurer.

Non-consumers, such as businesses, will have a duty to make fair presentation of their risk.

The Insurance & Financial Services Ombudsman said in a submission to Parliament that this could create issues for small business owners.

“Our experience has underscored that the level of knowledge for small business owners is similar to consumers. We therefore reiterate our concern about the non-consumer distinction and suggest that small businesses be treated the same as consumers,” it said.

The legislation requires insurers to pay out claims “in a reasonable time”, although Webb’s bill had a 12-month guideline for payments which has been dropped.

It maintains the current penalties for brokers who fail to pay premiums to insurers at $5,000 for individuals and $10,000 for others, dropping Webb’s proposal to increase the amounts to $200,000 and $500,000 respectively.

Horne says insurers have already moved towards plain language in material for consumers.

“In relation to consumer policies, most insurers have amended their policies in an effort to make them as accessible and plain-English as possible in any event, so I doubt that is likely to be a significant change.”


Boring but necessary

The bill consolidated insurance law into a single statute.

“In New Zealand, unlike jurisdictions like the UK and Australia which have enacted comprehensive insurance statutes, we have a number of statutes that are like encrustations on the common law, some dating back to 1908 and even earlier,” Horne says.

“One of the purposes of the bill is to have a comprehensive statute that covers most areas of insurance law, rather than requiring people to look in lots of different places for related provisions.”

Webb says his draft was far more pro-consumer than Bayly’s, but everyone recognises the existing law needed to change, even if the government’s reforms are “far from perfect”..

“In a nutshell, this will make insurance law less shit than it has been,” he says. “Large tracts of the bill are boring but necessary. It’s what’s called in the parliamentary game ‘good stewardship’. The rules are a mess, they’re all higgledy-piggledy, they’re not well expressed, let’s tidy them up. “For that reason alone, it’s necessary.” ■

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