[OPINION] Insurance overhaul long overdue, yet consumer benefits by no means assured

By Olly Peers

If the events of the past two years have taught consumers and businesses anything, it is the importance of being financially resilient when unexpected events happen. In times of uncertainty, insurance plays a critical role in helping people get back on their feet. While climate change and its potential impact on insurers continues to garner attention, there are other equally important changes in the pipeline.

This includes MBIE’s consultation on a draft Insurance Contracts Bill that closed earlier this month.

The crux of the Bill is that it will repeal, replace, and consolidate several different piecemeal Acts governing aspects of New Zealand’s insurance law, some of which predate World War 1.

While long overdue, the drafting of any significant reform like this must walk a precarious tightrope between flexibility and meaningful practical guidance.  There are some aspects of the current drafting where arguably that balance has not been struck, particularly for consumers seeking to understand the extent of their obligation in any given circumstance (but also for insurers).   

What’s the problem?
The Bill’s purpose is reflective of the Government’s desire to rebalance insurance contract law back in policyholders’ favour. One key, and arguably overdue facet of the proposed reform, is the abolition and replacement of the duty of disclosure for policyholders or applicants.

The current legal duty placed on policyholders to volunteer information is viewed as too harsh. For instance, and as noted in MBIE’s summary of key issues, an insurer can refuse all claims under an insurance policy if a ‘material fact’ is not shared by the consumer. This can occur even if the undisclosed fact is unrelated to the claim made, the non-disclosure did not cause any loss to the insurer, and the non-disclosure was innocent.

Olly Peers is a partner at Buddle Findlay who specialises in commercial litigation and dispute resolution.

An oft-heard reason is failing to disclose pre-existing health conditions unrelated to a claim. 

For example, a claim under a life insurance policy following a fatal car accident might have been declined because the consumer failed to disclose an earlier brush with cancer.  In other cases, a failure to disclose historical anxiety or depression, for example, has resulted in claims for physical injury occurring many years down the track being declined. 

What’s the Bill seeking to do?
As it relates to consumer insurance contracts, the Bill proposes replacing the common law duty of disclosure with a new statutory duty. Consumers would be required to take reasonable care not to make a misrepresentation to the insurer.  In effect, an applicant for insurance will need to answer any questions put by the insurer truthfully and accurately but will no longer need to determine for themselves what information may be material to the judgment of the insurer.  No longer will there be an obligation to volunteer information not requested. 

The Bill also proposes altering the consequences of non-disclosure and misrepresentation to try to achieve proportionate consequences.  An insurer will only have a right to relief if it can prove it would not have entered the contract or would have done so on different terms but for the breach of duty.  Further, the type of relief available will depend on the seriousness of the breach. 

Our observations
The wording of the Bill is closely based on similar legislation enacted in the UK and Australia. Clause 15 of the Bill sets out various factors that might be taken into account when determining if a policyholder has taken reasonable care, which factors again are essentially an adoption of the UK and Australian provisions. 

One of the specific matters to be considered in determining whether the policyholder has taken reasonable care is the questions asked of the policyholder, namely were they clear and specific? If an insurer has asked vague questions, they will have less cause to complain about vague or general answers.  In addition, an insurer will have a general obligation to communicate to the policyholder the importance of answering questions in a fair and accurate way. 

For the legislation enacted in the UK, industry participants were concerned that the new statutory standard might promote excessively detailed questions and application forms, as insurers try to mitigate their risks.  While the UK market appears to have regulated itself against the excesses of this practice, it is always worth bearing in mind the wider commercial impacts of legislative and regulatory reform.  The unexpected consequences of recent changes to bank lending rules are a timely example of how well-meaning reform can have adverse rebound consequences.  

Another point of interest lies with the Bill’s reformulation of time-hallowed duties.

Indeed, how will the courts interpret and apply the new statutory standard of disclosure, which is essentially a hybrid of two distinct concepts with common law roots – those of reasonable care and misrepresentation.  The experience from the UK and Australian regimes so far does not provide any real guidance for the New Zealand courts. While we expect that the wording of the current duty will remain as drafted, we see scope for the tension between these two concepts to be tested in particular factual circumstances. 

Clause 17 of the Bill proposes that a failure to answer a question or the provision of an incomplete or irrelevant answer is not of itself to be considered a misrepresentation. 

This is one provision which differs slightly from the UK and Australian regimes.  At common law an omission or a failure to provide a complete answer – i.e., a "half-truth"- has long been recognised as actionable.  We consider this clause needs further thought as, while probably not intended, the pendulum should not swing so far as to unfairly limit a right to relief where a misleading omission has occurred. 

While not addressed in this comment, the Bill also proposes a different disclosure obligation for non-consumer insurance contracts, which will also be an area of significant interest for market participants and observers. 

Consultation on the draft Bill closed on 4 May 2022, at which point MBIE will consider the feedback and determine what (if any) changes might be required to the current drafting. 
While the policy rationale for change is clear, there are several loose ends in need of tying.

With the UK and Australian regimes still relatively fresh, care needs to be taken to ensure that this well-intentioned Bill does not make the insurance process more difficult for customers to navigate.