Insure and Certain — the Contracts of Insurance Bill

The submission period for the Contracts of Insurance Bill closes on 3 June 2024.

The Bill has been a long time coming. It is set to make welcome consolidations to insurance law and bring New Zealand into line with other jurisdictions, as well as rebalance duties between insurers and insureds. Some of the legislation it will replace has been around for nearly 100 years.

The new position will be generally favourable to policyholders and there will be increased pre-contractual obligations on insurers. However, policyholders will need to continue to be careful to ensure they meet disclosure obligations and are aware of increased risk exclusions within their policies.

We draw attention to some of the key changes in the Bill that you might want to submit on. Also note the Finance and Expenditure Committee is particularly interested in receiving submissions on:

• What is a ‘reasonable’ timeframe for resolving claims (cl 70)
• Whether the policyholder disclosure duty is sufficiently clear, and plain language (Part 2, subpart 1)
• Provisions around surrender values for life insurance policies (cl 141 – 142)

Consumer vs Non-consumer

The Bill treats consumer insurance contracts (i.e. for personal, domestic, or household purposes) and non-consumer insurance contracts (i.e. all other insurance contracts) differently.

An insurance contract will be presumed to be a consumer insurance contract unless proved by the insurer that it is not. The Bill provides for insureds to certify that a contract is a non-consumer insurance contract. We anticipate that insurers and insureds will benefit from the certainty that a certificate will provide in determining status at the date of contracting.

As with Financial Markets (Conduct of Institutions) Amendment Act 2022, an insured will be able to withdraw a certificate but the effect of that withdrawal will not be retrospective.

Re-balancing the burden of disclosure duties

A key focus of the Bill is on policyholders' precontractual disclosure obligations and insurers' remedies if a policyholder breaches of those obligations.

Currently, policyholders are required to disclose all facts they know or ought to know and which are material to the formation of the contract. This means all facts that would influence the judgment of a prudent insurer in determining whether to accept the risk and in fixing the premium. They also must avoid making misrepresentations.

The disclosure duty will be significantly changed by the Bill, which reduces the burden on insureds. The duties differ between consumer and non-consumer insurance contracts:

• Consumer insurance contracts — policyholders will simply have to take reasonable care not to make a misrepresentation to an insurer. This substantially shifts the burden for determining what is material onto insurers, who will now need to ask much more targeted questions and closely scrutinise the answers. The policyholder will need to answer those questions honestly and accurately.
• Non-consumer insurance contracts — policyholders will need to make a 'fair presentation of the risk'. This requires providing to the insurer every material circumstance that the policyholder knows or ought to know. Material circumstances are those that would influence the insurer in deciding whether to enter the insurance contract. Every representation must be 'reasonably clear and accessible' to an insurer, substantially correct and made in good faith.

The Finance and Expenditure Committee has specifically asked submitters whether the policyholder disclosure obligations in the Act 'are sufficiently clear, and plain language'. We consider that these obligations as currently drafted are not particularly accessible.

The duty of good faith is codified but amended so the pre-contractual disclosure obligations are limited to those contained in the Bill.

More reasonable remedies

The Bill provides that no party may avoid an insurance contract on the basis that another party has not observed utmost good faith. It provides limited remedies to insurers where a policyholder breaches their disclosure duties and aims to ensure those remedies are proportionate.

The remedy will depend on the timing, nature and effect of the misrepresentation (for consumer contracts) or breach of duty (for non-consumer contracts). Where the insurer proves that, without the misrepresentation or breach, they would not have agreed the contract/variation or would only have agreed on different terms, then it will be a 'qualifying misrepresentation' or 'qualifying breach', entitling the insurer to remedies under the Bill.

The Explanatory Note for the Bill provides useful summary tables of the remedies, clarified and consolidated below:

New duties on insurers

Pre-contractual duties

There will be new statutory duties on insurers:

• To inform policyholders about their disclosure duty and consequences of breaching that duty. Members of the Insurance Council of New Zealand are required to do this presently and other insurers observe this requirement. However, insurers will want to ensure they update their policy wording to reflect the new duties and consequences of a breach.
• Before a contract or variation, to inform policyholders that the insurer intends to access and take into account information held by a third party (for which the policyholder has consented that the insurer access) including the nature of the information they intend to take into account and how the information affects the importance that the policyholder answer questions asked by the insurer.

Failure to comply with these duties will be a breach of market services licensee obligations under the FMCA.

Breaching these duties may impact on insurers' remedies for policyholder non-disclosure or misrepresentation. In the context of non-consumer insurance contracts there will be expressly no remedy unless the policyholder knew their own breach was a breach.

Plain language policies

The Bill amends the Financial Markets Conduct Act 2013 (FMCA) — imposing duties on licensed insurers to ensure consumer insurance contracts and insurance contracts for life and health insurance are worded and presented in a 'clear, concise, and effective manner'. This will become a market services licensee obligation.

'Clear, concise, and effective' is a statutory standard prescribed under the FMCA – for example, for product disclosure statements. The FMA's 2014 Effective Disclosure guidance is likely helpful and relevant for understanding what this new requirement means for insurers. The FMA has broken down the standard for each limb of the standard:

• Clear: Plain language, navigable, logically ordered and important information highlighted.
• Concise: Disclosures are expressed in a succinct manner. The Bill specifies that 'concise' refers to wording and presentation of particular terms, not overall length.
• Effective: Give adequate and accurate information to assist a decision to acquire a product.

This may cause a significant change in insurance contract drafting. 'Plain language' can have a very different impact in insurance documents, which set out key legal rights between the parties (as opposed to explaining how an investment product works). In simplifying any language insurers will want to ensure that key legal rights and obligations are not diluted.

Public disclosure obligations

It is proposed that there will be a new obligation on insurers to make certain information publicly available to assist consumers in making decisions. This information will be specified in regulations and might include claim acceptance rates, length of time to settle claims, contract cancellations, complaints and disputes.

Increased risk exclusions

The Bill amends the Insurance Law Reform Act 1977 restriction on provisions that exclude or limit an insurer's liability in certain risk-increasing events or circumstances irrespective of whether they contribute to the insured's loss. There will be express carve outs for 'increased risk exclusions' based on:

• age, identity, qualifications, or experience of a driver of a vehicle, a pilot of an aircraft, an operator of goods, or a master, pilot, or crew member of a ship; or
• the geographical area in which the loss occurs; or
• loss that occurs while a vehicle, an aircraft, a ship, or any goods is or are being used for commercial purposes other than those permitted by the contract of insurance.

This means that there are now some exclusions which might apply even if an insured is able to prove that the defining event or circumstance did not cause or contribute to the loss.

Third party claims against insurers

The Bill repeals the old statutory charge scheme and replaces it with a new, simpler scheme. Third parties will be able to recover from insurers directly, standing in the shoes of the insured. It will be easier for parties who are wronged by policyholders to recover from insurers.

Intermediaries / Brokers

Insurance intermediaries are also affected by the changes. Most of the changes are small adjustments and reorganisations of the Insurance Intermediaries Act 1994 provisions and do not affect the substance of most intermediaries' duties. The duty to notify an insurer if a premium has not been paid is now removed.

The existing rule that information provided to an insurer's agent (a 'specified intermediary' in the Bill) during negotiation of the insurance contract is deemed to be information provided to the insurer remains. However, there is a new obligation on specified intermediaries to pass this representation on to the insurer. If the specified intermediary fails to do so, they may be liable to the insurer for any loss or damage the insurer has suffered as a result.

FTA Unfair Contract Terms

The Bill proposes to amend the unfair contract terms (UCT) provisions of the Fair Trading Act 1986 applying to standard form insurance contracts (which are not yet operative in respect of small trade contracts).

The annual trading relationship threshold under which an insurance contract will be a small trade contract is reduced to NZD20,000.

It removes some exemptions from insurance contract terms being considered UCT, namely terms that:

• Provide for the payment of the premium;
• Relate to the duty of utmost good faith; and
• Specify requirements for policyholder disclosure or relate to the effect of non-disclosure or misrepresentation.

Insurers will need to carefully consider how these changes might impact policy wordings and the risk of terms being declared UCTs.

The Bill extends the statutory default commencement date for the application of the UCT provisions to insurance small trade contracts to 1 April 2028.

Reasonable timeframe for resolving claims

The Bill further codifies elements of the duty of utmost good faith by making it an implied term in every contract of insurance that the insurer must pay claims within a reasonable time. The Bill allows for a reasonable time to investigate and assess the claim.

The Bill does not specify an insured's remedy when an insurer breaches duty. It provides:

• any remedy is in addition to the insured's right to enforce payment of the claim by the insurer plus interest (where available); and
• damages are provided as an example of a remedy that may be available.

Currently, where delay in settlement is the fault of an insurer the appropriate remedy is in general damages. The Bill anticipates other remedies. It will be interesting to see where the law relating to these remedies develops.

The Finance and Expenditure Committee have explicitly asked submitters 'What is a "reasonable" timeframe for resolving claims?' This may indicate that a timeframe will be proposed in legislation, regulations or guidance.

Get in touch with us if you have any questions about the Bill and what it means for your business.