The long awaited reform to New Zealand’s insurance contract law has taken another step forward with the release of the draft Insurance Contracts Bill in late February. The Bill, in seeking to consolidate and modernise New Zealand’s insurance contract law, gives form to changes raised as far back as 1998.

In this Financial Law Insight we pluck out some of the more interesting aspects of the proposal, and discuss some of the key issues insurers will need to grapple with as a new playing field for insurance contracts takes shape.

Policy decided

Having been through the issues and options paper phases of the insurance contract law review we now arrive at the drafting phase of the consultation process, over two years after Cabinet made its policy decisions.

As MBIE notes in the Consultation Paper - Exposure draft Insurance Contracts Bill, the policy behind the new Bill has been decided. In theory, that means the latest round of feedback sought by Ministry of Business, Innovation and Enterprise (MBIE) is largely limited to points of drafting and whether the form of the proposed Bill achieves the policy objectives. As is often the case, however, the devil is in the detail. Even minor changes to the wording in this often contentious area of law can have major implications.

Duty to identify

The draft Bill changes the longstanding duty of disclosure. Rather than consumers being required to disclose all information that would influence an insurer’s decision to cover the risk, the Bill places the onus on insurers to ask the right questions.

That means insurers will need to review their existing application documentation and processes to ensure they get all the information they need to accurately underwrite policies. Relying on general, catch-all questions won’t be an option, with some carefully crafted adjustments required to applications to pose the right questions without drowning applicants in paperwork.

There will still be some place for broader questions to tease out additional information, but these will need to be framed in terms relevant to the specific policy. The clarity and specificity of questions will be taken into account when assessing whether a consumer has failed to take reasonable care in their application.

Proportionate remedies

With the shift to a consumer duty to take reasonable care, the old world of a relatively binary ‘avoid or don’t avoid’ decision contemplated by the law is gone. Instead, the Bill sets out proportionate actions insurers can take in response to a consumer’s breach of the duty. The nature of the insurer’s response will be guided by whether the breach was deliberate or reckless or neither.

In practice this may not really alter the playing field much. Most policies already build in proportionate responses, including the ability to reduce the claim amount paid or seek additional premiums. And reputationally, insurers have always been reluctant to avoid contracts except in the most extreme non disclosure circumstances.

There is likely to be some inconsistency in the practical application of proportionate remedies by insurers when confronted by non-disclosure. But that is largely the status quo. The only real change is that there will now be a statutory framework for insurers to work within. The Consultation Paper provides insurers with an option to provide feedback on the adequacy of the proposed framework.

Transitional arrangements

The new disclosure duties apply to contracts, renewals, and variations entered into after the Bill comes into force. What that means is that insurers will need to consider whether additional information needs to be obtained at the time a policy is renewed or varied.

It may be that insurers will need to develop additional sets of questions to accompany renewal documentation during the transitional phase, particularly where the cover or sum insured is changing, complicating the annual renewal process.

Consumer or commercial

The Bill will shift the boundary between consumer and commercial policies. Some smaller business contracts will be classified as consumer or personal insurance contract, with a corresponding shift of duties for insurers.

For commercial or business to business insurance contracts, a duty on the insured to make a ‘fair presentation of the risk’ will replace the existing duty of disclosure.

Spectre of prescribed form

The Bill provides for the possibility of regulations prescribing the form of insurance contracts, including layout, length, and font size. At present MBIE state there is no intention of getting overly prescriptive. We hope this remains the case. Overly restrictive requirements have reduced product disclosure statements in the managed fund world to a bland sameness. Prescription also removes providers’ ability to easily develop bespoke and innovative products in response to evolving customer needs.

Disclosure of Insurers' duties

One area where prescription would be beneficial would be to provide standardised wording for insurers to use when describing the consumer’s duty of disclosure. All insurers will have a duty imposed on them to inform consumers of their disclosure duty before they enter into an insurance contract.

When the duty is the same for all, this is perhaps one area where there is nothing to be gained by leaving scope for drafting creativity. Besides, failure to inform consumers of their duties will result in insurers losing access to proportionate remedies. Prescribing standardised wording would ensure the duty is explained in a consistent manner across insurers and insurance types, whilst removing doubt as to whether a proportionate remedy is available to an insurer. That prescription could be provided in the form of a safe harbour – use a different wording formula at your peril.

Utmost good faith

The Bill seeks to codify the duty of utmost good faith. In practice this codification modifies the current duty so that an insurer must act in good faith (as is currently the case) but a consumer will only need to take reasonable care not to make a misrepresentation.

Somewhat oddly for a codification, flexibility to develop the law is reserved to the Courts.

Intermediaries

The reforms included in the Bill extend to replacing the Insurance Intermediaries Act, bringing this fringe aspect of insurance law within its scope. The biggest surprise is that MBIE didn’t just try to tack this onto the Financial Markets Conduct Act where everything else seems to be housed these days.

The terms ‘insurance intermediary’ and ‘specified intermediary’ are used in the Bill, as well as ‘broker’. When placed alongside the Financial Markets (Conduct of Institutions) Amendment Bill and existing everyday use of the terms, as well as the established concept of agency, it is all getting a bit muddled. MBIE suggests this complexity is unavoidable, but perhaps now is the time to grasp that thorny nettle and align at least some of the terms and obligations across the board.

Reforms to the existing law regarding payments of monies to insurance intermediaries are largely superficial, with MBIE presumably seeing no need to make changes in this space. We think that is a mistake, and a lost opportunity to streamline the law.

Intermediaries dealing with client money could be brought under the client money and client property requirements contained in the Financial Markets Conduct Act with relative ease. This would remove the risk of inconsistent practices and conflicting regulatory obligations, especially where many intermediaries operate in more than just the insurance space.

Unfair contract terms

The Bill will amend the Fair Trading Act by removing insurance specific exceptions from the unfair contract term provisions. At present a number of insurance contract terms cannot be declared to be unfair. That includes the subject or risk insured, sum insured, excluded or limited liabilities, and payment of premiums. In one of the few areas were submitters can still influence policy decisions, MBIE propose two options for amending the Fair Trading Act.

Option A essentially removes all exceptions, aside from sum insured and excess. We believe adoption of option A would create an undesirable level of uncertainty by opening insurance contracts up to the possibility of challenge on numerous fronts.

In contrast, option B retains a broader list of exceptions – event, subject, or risk insured; sum insured; excess; and exclusions or limited liability in certain circumstances. In essence, option B allows the terms of the contract to define the insurance cover. This preserves the ability of insurers to develop polices and provide cover as they see fit. Ideally, in our view option B would also include payment of premium within the exception (or clarify that the premium payable is excepted as part of the ‘upfront price payable under the contract’).

Clear, concise, and effective

The new prescribed standard for insurance policy writing looks like becoming the ubiquitous requirement of being ‘clear, concise, and effective’. We would be concerned if regulations were overly prescriptive with regard to the form and content of that standard. A large number of insurers have worked or are working to ‘plain English’ polices at the behest of the Financial Markets Authority. It would be an unfortunate consequence of these reforms if insurers had to yet again go through the costly and time consuming exercise of revisiting documentation to align with anything other than a high level drafting principle.

Conclusion

The release of the draft Bill provides further clarity on the form of the new insurance contracts regime. Whilst there are not too many surprises in the Bill, some of the detail remains to be worked through. There are some clear battle lines where effective feedback in response to the Consultation Paper may make a real difference, particularly in relation to unfair contract terms relief and prescribed content.

MBIE is seeking written submissions on the issues raised in its Consultation Paper and the draft Insurance Contracts Bill by 5pm on Wednesday 4 May 2022. We encourage all insurers and other stakeholders to take the opportunity to have their say.

Start a conversation

If you would like a briefing on any aspect of the insurance contracts law reforms, or would like assistance in making a submission in response to the Consultation Paper - Exposure draft Insurance Contracts Bill, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Mark Schroder on +64 9 375 1120, or email the team at bankingandfinancialmarkets.nz@dentons.com.