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Fishhooks for insurers in draft Insurance Contracts Bill

Insurers, advisers and policyholders are being urged to have their say on draft legislation, released late last week, which rewrites the rule book on disclosure and risk in insurance contracts if passed in its present form.

Wednesday, March 2nd 2022, 8:29AM 7 Comments

Market-watchers describe the Insurance Contracts Bill as a game-changer, warning of potential premium hikes and less availability of consumer insurance cover as insurers try to figure out what the changes will mean so they can recalculate their risk.

Lloyd Kavanagh, a partner at law firm MinterEllison Rudd Watts and a financial services specialist, describes the draft Bill as a ‘big deal’, saying it will have a profound impact on the entire insurance sector.

“If it’s passed largely in its current form, which we have every belief it will be, it’s going to make fundamental changes to duties of disclosure, it will introduce unfair contracts terms and regulation to insurance for the first time, it’s going to have a whole lot of requirements about the way consumer insurance contracts are presented and it will consolidate a raft of itsy bitsy legal reform going back to the 1930s,” Kavanagh says. “It shifts the power away from the insurer to the insured.”

The legislation will cover the entire licensed insurance industry – life, health, general and travel. It repeals five statutes, pulling New Zealand’s fragmented insurance law together into one Bill and bringing our insurance contract law into line with Australia and the United Kingdom.

For insurers and advisers, Kavanagh notes that the insurance contracts legislation is being introduced in tandem with the Financial Markets (Conduct and Institutions) Amendment Bill, both of which are likely to come into effect in 2025.

“So, there will be a fundamental shift in the regulatory environment which will make quite a big difference to insurers and to insureds.”

However, given the government’s outright majority and its apparent determination to reform insurance law, the opportunities for further industry input will be limited. As MinterEllison notes on its website: “…it is likely changes made during the parliamentary process, including at the select committee stage, will be more in the nature of implementation detail, rather than underlying policy.”

Only one aspect of the Bill – the proposal to remove the insurance industry’s exemption from the Fair Trading Act’s ban on unfair contractual terms (UTC) – is up for further discussion.

Along with the government’s proposed changes to the duties of disclosure for consumers, the plan to scrap or severely limit the UTC exemption has drawn the most ire from the industry.

Interested parties have until 4 May to make submissions on two options being proposed by the government - see here

The draft legislation has been two years in the making but there are still some significant loose ends. Bell Gully partner David Friar points to the introduction of a statutory duty of good faith in the Bill, with no attempt to codify it or otherwise address its scope.

“It is unclear whether this new statutory duty is intended only to restate the position at common law or whether it is intended to go further,” he says.

Kavanagh says much of the detail around policyholders’ disclosure obligations is still unclear. “These will be significant but the detail will be in regulations which we haven’t yet seen. So that means even after the Bill is finalised and perhaps introduced into Parliament, a lot of the key detail and requirements will still be a work in progress, so that will be a challenge.”

The Bill had its genesis in a Cabinet paper prepared by MBIE in 2019 for then Commerce and Consumer Affairs Minister, Kris Faafoi.

One of the most significant changes is an about-turn on the duty of disclosure. Under the current law, those seeking insurance cover are required to disclosure all information that would influence the judgment and risk assessment of a prudent underwriter. Failure to do so means the insurer is entitled to avoid the policy when a claim is made, even though the non-disclosure might have nothing to do with the claim.

The Bill puts the onus back on the insurer who will no longer be able to avoid a consumer insurance policy when there is non-disclosure by a policyholder. The insurer will be required to ask questions which the prospective policyholder must take reasonable care to answer honestly and correctly. 

If this duty of care is breached, the insurer will have proportionate remedies which will depend on whether the misrepresentation was innocent, fraudulent or reckless. But insurers say it will be costly and difficult to prove a customer has acted unreasonably.

Another controversial change is the requirement for insurance policies to be written and presented clearly so consumers can understand them. Many larger insurers have already moved in this direction, but others face the time-consuming and costly job of reviewing and editing their policies, with these costs likely to be passed on to policyholders in the form of higher premiums. Insurers will need to comply with a specific presentation and publishing format which is intended to help consumers compare products from different insurers.

If the Bill is passed, the Financial Markets Authority (FMA) will share responsibility with the Commerce Commission for enforcing the unfair contractual terms provisions in relation to contracts for financial services and financial advice products.

Industry opinion differ widely on whether this change, along with the plan to exempt insurance from unfair contract terms provisions of the Fair Trading Act, will achieve the intended result. In a note on its website, Bell Gully says a highly prescriptive approach is likely to come at a high cost, with little benefit to the insureds. It notes: “It is inherently challenging to accurately translate complex insurance terms into plain language and there is a risk that doing so may dilute the clarity and effectiveness of insurance policies.”

On the prospect of unintended consequences from the Bill, Kavanagh says it’s too early to tell. “Earlier consultation has all be hypothetical. Now the words are on paper, people will really focus on that, in conjunction with their likely responsibilities on the conduct of financial institutions amendment bill.”

It is important, he says, that the minister listens carefully to what the insurance industry tells him. The government might then avoid the debacle surrounding the pre-Christmas changes to the Credit Control & Consumer Finance Act.

Tags: Insurance Contracts

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Comments from our readers

On 2 March 2022 at 11:30 am EC said:
I have to agree with the Insurers stance re Nondisclosure.

I cannot think of a mechanism where Insurers will be able to accurately determine whether or not an incidence of non-disclosure was innocent, reckless or fradulent.

Yes - there will be cases where fraud is easily established, but there will be also be a myriad of opportunities for a client to claim the disclosure was innocent without any recourse for the Insurer.

If this bill passes in this form, claim costs will climb steeply and premiums will follow
On 4 March 2022 at 1:02 pm DannyT said:
@EC, that's not my reading of the proposals. If non-disclosure is discovered, the Bill provides insurers with a remedy. That remedy is to apply retrospective terms to the policy, which could mean applying loadings, exclusions, or avoiding the policy from inception (where no terms would have been offered). This already happens today.

A bit of a technical point but the remedy in cases of loadings don't make sense. MBIE has proposed that the full claim is paid less the under-paid premium. This isn't the correct approach because under-paid premiums will only be collected from customers who claim. A more equitable approach is to reduce the claim payment to correspond with the premium.

The change that I find more interesting is around the Unfair Contact Terms. There are some potentially significant operational implications for insurers depending on where this lands.
On 6 March 2022 at 4:47 pm r murray said:
Danny T - agree regard the remedy but the bar for being able to determine non-disclosure will potentially change so claims previously deemed non disclosure may no longer be able to be classified and in these cases there will be no remedy stage just extra claims costs which someone has to bear.
On 8 March 2022 at 9:01 am DannyT said:
@Murray - I haven't seen anything in the proposals that would change the threshold for applying non-disclosure in practice. In fact, this threshold already applies for life claims today.

The table on page 14 of the consultation document is helpful - it shows that insurers can still avoid policies for "qualifying misrepresentations" where the insurer would not have offered terms (second row).

It's possible that the change in the law might lead to some more legal challenges on non-life claims where customers don't accept these retrospective terms - but I would be surprised if this were significant.

If I'm missing something or you have an example, please let me know.
On 9 March 2022 at 5:16 pm r murray said:
Thank you Danny and good points but I think we are talking at cross purposes. Thanks also for the link and you make good points.

The table on page 14 is good and I agree the remedies is as you outline.

The point I am making is the change before a remedy kicks in and I refer you to page 12. Which outlines the following:

Currently, before a contract of insurance is entered into or renewed, a policyholder has to disclose to the insurer all material information that would influence the judgment of the insurer, regardless of whether the insurer explicitly asked for the information or not. Material information can include any information that would influence how the insurer sets the premium or decides whether to insure the risk. Clause 14 of the Bill replaces this duty and instead requires policyholders under consumer insurance contracts to “take reasonable care not to make a misrepresentation to the insurer” having regard to all the relevant circumstances. This effectively means a consumer must answer any questions asked by the insurer (or its specified intermediaries) truthfully and accurately.

So I think we are at cross purposes. You rightly point out the issue around remedies but I am referring to the change to disclosure duties which is separate and may lead more claims

Here is an example to make my point. A customer may have had a traumatic event in the past well before applying for insurance. If they have an Disability Income policy and do not disclose when it is taken out because there is no specific question then under the current regime the insurer could argue this is something that could have influenced the underwriting. As such the insurer could currently say here is non-disclosure and apply remedies.

Under the new regime the customer must answer any questions asked by the insurer (or its specified intermediaries) truthfully and accurately. If nothing is asked about this past traumatic event then potentially the new regime means there is no failure of customer duty.

So we could have cases where the new regime means there is no breach of consumer duty but in the old regime there was. The remedy rules do not matter in such cases as there, in the new rules, is no breach of consumer duty.

Such cases mean there are more claims.

In general I support such a change and it is more customer focused but it could lead to increased claims.
On 10 March 2022 at 7:04 am NatalieS said:
Like the drafting of the CCCFA, the drafting of the Insurance Contracts Bill, despite significant effort from insurers to provide thoughtful feedback, is still not quite right.

As with the CCCFA we will see unintended consequences both for insurers and for insured customers. Unintended consequences confuse and frustrate customers, and add stress and sometimes unnecessary costs, which are extremely difficult to bear for some customers (if not impossible).

Ultimately the drafters need to be closer to the submitters on draft legislation. A round table meeting would do the trick, perhaps a teams of zoom meeting in the current covid world.
On 10 March 2022 at 9:40 am DannyT said:
Thanks for that example, R Murray. Apologies for the confusion there.

I agree that the approach is more customer centric. I'd be surprised if insurers were relying on these "other disclosure" questions at the moment but I do agree that there is the potential for increased claims risk if the underwriting questions aren't robust.

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