A review of insurance contract law is under way and an options paper has been released.
The Ministry of Business, Innovation and Employment said it had noticed a problem with non-disclosure in the insurance sector. It was a significant source of complaints and dissatisfaction from clients who discovered their policies would not pay out as expected.
“At the moment, individuals must tell insurers everything that could affect their decision to offer insurance or how much they charge in premiums,” said Commerce and Consumer Affairs Minister Kris Faafoi.
“The review has found that people often do not understand the kind of information that must be disclosed and that the consequences for not disclosing the information can be very harsh.
“This paper proposes options to change the rules about disclosure to better reflect the information known by consumers and businesses. It is proposing several options to deal with that.”
MBIE said ordinary consumers could not reasonably be expected to know what an insurer might consider material, and therefore what facts must be disclosed.
“Consumers usually know that they must disclose official medical diagnoses, but not necessarily signs or symptoms which have not been diagnosed.”
An option it proposes to tackle the problem is to change the law so that clients would only have to answer insurer questions truthfully and accurately.
“It would be easier to know what you have to tell insurer but getting insurance might take longer because there would be more questions to answer,” MBIE said.
The second option proposed is to change the law so that clients have to disclose only what a reasonable person would know to be relevant.
MBIE said this could still be hard to understand precisely what was expected.
Another option in addition to those was to require life and health insurers to use third-party records in their underwriting.
That would take the burden of disclosure from clients but could lead to higher costs for insurers which would be passed to clients, MBIE said. There could also be problems if the non-disclosed issue was not in the consumer’s records.
It also said remedies could be introduced including allowing insurers to avoid contracts only if the nondisclosure was deliberate or reckless and misrepresentations material.
Advisers and information
The options paper flags as an issue that insures are deemed to know matters known by their representatives.
It said this was introduced because insurers were seen as better placed to bear the risk of default or lack of adviser skill than consumers; and insurers should only pay commissions to those advisers they trusted.
But MBIE said it had been told this was unreasonable.
Advisers were often selected by the client and paid commission even when they were not under direct insurer control.
Some advice businesses were also substantial entities with PI insurance.
“The New Zealand position is unique in common law jurisdictions, where brokers are not deemed agents of the insurer. We have also heard that it is problematic that consumers may not always be aware whose agent an insurance intermediary is, and may not know that they will be responsible for an intermediary’s failures if the intermediary is not entitled to commission from the insurer. However, this seems unlikely to be a major issue if in practice almost all intermediaries are paid commission by the insurer.”
An option proposed was to provide for some brokers and advisers to be agents of the insurer, in situations such as when the intermediary was collecting information under the insurer’s express authority – or provide that an adviser was the agent of the client unless indicated otherwise. Someone who held themselves out as a provider of impartial advice about a range of products across the industry would deem not to be under direct control of the insurer.
A statutory obligation could also be introduced to require advisers to pass information on to insurers.
Other issues
MBIE wants policies to be easier to read and compare.
Options it is considering to facilitate this include requiring plain language insurance policies, requiring core policy wording to be clearly defined, requiring a summary statement, requiring insurers to work with third-party comparison platforms and requiring insurers to disclose key information. It was suggested there could be a government-run insurance website.
How the Fair Trading Act deals with insurance-specific exemptions to unfair contract terms requirements is also being considered.
Terms such as those that allow an insurer to unilaterally change an insurance contract would not be permitted without those exemptions.
Submissions close on June 28.
