Third reading of "once in a generation reform"

The Contracts of Insurance Bill has had its third reading in Parliament, with the Government signalling it will be law before the end of 2024. The Bill represents an overhaul of New Zealand's insurance law, consolidating multiple pieces of legislation.

The intention of the Bill is to provide clarity and transparency to both the insurer and policyholder on the duties each owe when entering, or varying, an insurance contract as well as appropriate responses and remedies should those duties be breached.

The Bill treats consumer insurance contracts (i.e. for personal, domestic or household purposes) differently from non-consumer contracts. Reinsurance contracts have been excluded from the scope of the Bill. See our previous overviews at the time of the Bill's introduction and following the release of the Finance and Expenditure Committee's review of the Bill for further background. Below is a summary of the key amendments to the law and the implications for the insurance sector.

 

Disclosure obligations

The Bill modifies the current laws relating to disclosure duties when entering a contract of insurance. A consumer must take reasonable care not to make a misrepresentation to the insurer. A non-consumer must make a "fair presentation of the risk" to the insurer.

This shifts the burden of what disclosure is material onto insurers, who will need to ask targeted questions of insureds and closely evaluate their responses. The onus will be on the insurer to follow up if a disclosure question has not been answered, is obviously incomplete or an irrelevant answer is given.

In debating the Bill, the opposition requested a clause that "fraudulent" misrepresentations must always be taken as showing a lack of reasonable care. The relevant clause has instead been amended to a standard of misrepresentation made "dishonestly". While the opposition maintained the fraudulent standard better protected consumers, the Government assured the Act still advanced consumer protections with the reference to "misrepresentation made dishonestly" aligning with equivalent UK provisions and ensuring there was not an association with criminal law.

 

Reasonable remedies

The Bill provides that no party may void an insurance contract solely on the basis that another party has not observed utmost good faith. Rather than being able to avoid a contract for failure to disclose, insurers will be required to respond proportionately and have limited options for breaches of disclosure obligations. Consideration of how the insurer would have responded if the information had been known at the time the contract was entered into or varied will be relevant. Where an insurer proves that, without the misrepresentation or breach, they would not have agreed to the contract or 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 Bill has introduced a new remedy for insurers if a policyholder has committed a "qualifying misrepresentation" (i.e., an insurer would have entered into a contract with different terms). An insurer may now charge a higher premium for the remainder of the contract to reflect the actual risk covered and /or reduce proportionately the amount to be paid on a claim made.

 

New insurer duties

The Bill introduces a range of new responsibilities for insurers, aligning their regulation more closely with that of lenders and financial product issuers. Among these responsibilities is the requirement for 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". The requirement of plain English supports policyholders to understand contracts and compare insurance products. Additionally, insurers will need to make specific information publicly available, such as claims acceptance rates and settlement timelines.

 

Intermediaries

Specified Intermediaries (including intermediaries who receive a commission or consideration directly/indirectly from an insurer) now have a duty to inform insurers about representations made during contract negotiations. Intermediaries who fulfil their duties to pass information to insurers will now not breach any contract, including their contract with the policyholder. Additionally, any compensation a court may order for breaching these duties is now subject to agreements between the insurer and intermediary, allowing intermediaries to limit or cap their liability under these duties.

 

Reasonable time to pay claims

The Bill introduces an implied term mandating that insurers process claims within a "reasonable time". Reasonable time considers time to investigate and assess the claim, including time to gather information for those purposes.

 

Genetic testing

The issue of genetic testing and the risk of discrimination was raised and debated throughout the progress of the Bill. A new subpart on genetic testing has been included in the Bill but no determination on the use of genetic testing by insurers has been finalised. The Bill adopts a "flexible" approach providing that "Regulators may prohibit or regulate conduct concerning genetic testing". Minister recommendations to regulators on genetic testing can only be made following a consultation process and consideration of the impact of regulation associated with genetic testing taking into consideration various factors, including overseas laws and practices the Minister considers to be relevant.

Australia has recently issued an intention to ban the use of genetic testing in life insurance underwriting to ensure Australians are not discouraged from undertaking testing out of fear it may impact their ability to get life insurance. It is intended that consumers will still be able to voluntarily disclose favourable genetic test results. To ensure there are no unintended consequences, the total ban will be subject to a five yearly review.

We will continue to provide updates on the debate of the use of genetic testing by insurers as the New Zealand and global landscapes evolve.

 

Next steps for businesses

The new disclosure duties are intended to apply to contracts, variations and renewals entered into after the Bill comes into force. Businesses in the insurance sector should start preparing for the changes including:

• Reviewing existing insurance contracts to ensure compliance with new consumer protection standards at the time of variation and renewal.
• Updating compliance frameworks to address new disclosure requirements and the potential regulation of genetic data.
• Streamlining claims handling processes to meet the new "reasonable time" requirements for processing claims.

For more detailed advice on how the Contracts of Insurance Bill may affect your business, contact our team at DLA.