The much anticipated Contracts of Insurance Act received Royal Assent late last year. It helpfully consolidates New Zealand’s disparate and in some cases antiquated insurance legislation [1]. Its “modernisation” of much of the previous law will have the most significant impact on the insurance industry. The Act better aligns New Zealand with insurance legislation in the United Kingdom and Australia.

We expect that many insurers and insurance intermediaries will have to make wide-ranging changes to their processes and procedures. Staff training, process changes and IT transformation projects will need to be implemented within a relatively short timeframe – with the Act coming into force in November 2027 at the latest.

We touch on the key changes brought about by the Act and our predictions for the industry, including the likely effect on insurance disputes.

Key changes 

Consumer focus

The Act elevates the importance of consumer protection to bring insurance legislation into line with many other recent legislative changes. It does this in part by introducing a new distinction between consumer insurance contracts and non-consumer insurance contracts. The focus of the distinction is the purpose of the insurance policy rather, than the policyholder’s identity. A contract of insurance is a consumer contract where it is “ordinarily entered into by a policyholder wholly or predominantly for personal, domestic or household purposes”. It mirrors the test for a consumer credit contract under the Credit Contract and Consumer Finance Act 2003.

As reflected in submissions at the Select Committee stage, there will likely be practical issues with this distinction that will require insurers and insurance intermediaries to recategorise policies previously treated as commercial. The position may be unclear in some instances, such as insurance for a residential apartment block where the policyholder is a body corporate. This is likely to be addressed through regulations declaring certain types of policies consumer or non-consumer insurance contracts.

Fundamental change to duty of disclosure for consumer insurance contracts

A consumer insurance policyholder will have a much diluted disclosure obligation at entry into, renewal, or variation of the policy. They must “take reasonable care not to make a misrepresentation to the insurer”. As well as lowering the required standard, the Act effectively shifts the burden of ensuring adequate disclosure to insurers by requiring insureds only to answer questions asked of them. 

The duty may be breached where a policyholder fails to disclose information in response to a direct and specific request from an insurer, or incorrectly answers a question put to them by an insurer, where there was a lack of reasonable care by the policyholder in the relevant answer or omission.

Insurers will no longer be able to rely on generic requests for information, such as those asking the prospective policyholder to disclose “anything else material to the risk”. They will also need to ensure that questions asked are sufficiently detailed, specific and clear so that policyholders cannot say their response was reasonable.

Reworking the duty of disclosure for non-consumer insurance contracts

Non-consumer insurance policyholders will have a duty to make a “fair presentation of the risk”. A prospective policyholder must disclose every material circumstance that it know or ought to know, or give the insurer sufficient information to put a prudent insurer on notice of the need to make further enquiries.

The Act will clarify the knowledge element of the test. A policyholder’s knowledge will include that of its senior management and/or its personnel responsible for placing insurance, which includes brokers and their employees. Both corporate and non-corporate policyholders ought to know what could be revealed by a reasonable search for information available to the policyholder, including information held by their broker.

Although the language is different, we expect that in practice this will largely reflect the previous disclosure obligations under the common law. The New Zealand courts will take guidance from English cases under its equivalent regime. However, there are still likely to be disputes over the sufficiency of information disclosed, and whether a prudent insurer was or ought to have made further enquiries.

Proportionate remedies for non-disclosure 

The Act introduces alternatives to the “all or nothing” approach for non-disclosure under the current law. Where there has been a misrepresentation before the contract is entered into and the insurer proves that: 

• the misrepresentation was deliberate or reckless, it may avoid the contract, refuse all claims and retain the premium;
• without the misrepresentation it would not have entered into the contract at all, it may avoid the contract and refuse all claims, but return the premium;
• without the misrepresentation, it would only have entered into the contract on different terms,  either:
  • treat the policy as if it had been placed on those different terms e.g., with certain exclusions/limits; or
  • reduce proportionately the amount paid on a claim.

Similar remedies apply to misrepresentations made before a policy is varied.

Broadly speaking, these new remedies bring New Zealand into line with the regimes in Australia and the United Kingdom.

Despite assistance from cases in the United Kingdom and Australia, there will still be disputes in New Zealand relating to the extent of remedies available to insurers where misrepresentation is alleged.

Abolition of third party statutory charge

Under current law, a plaintiff seeking to recover funds from a defendant’s insurance policy has a statutory charge over the policy proceeds up to the defendant’s alleged liability [2]. The purpose of the charge is to “overcome the unfairness that ensued when insurance proceeds were paid to the general pool of creditors of an insolvent insured rather than to the party who had suffered the loss to which the policy responded” [3]. It brought about a need for separate defence costs cover for directors and officers insurance because the statutory charge would otherwise prevent them accessing insurance funds to defend an action.

The Act does away with this concept and instead provides a claimant with a direct right against the insurer of “specified policyholders”, essentially insolvent or deceased [4] policyholders. As with the current regime, a claim will be limited to the policyholder claimant’s alleged liability. The Act will also clarify the extent of an insurer’s liability to the third party, the defences an insurer can raise in defence of claims against it, and the information third parties are entitled to access about insurance policies and from whom.

The changes should do away with the need for separate defence costs cover required following the famous decision in Steigrad. 

It may be that the direct claim concept incentivises insurers to settle claims early to reduce defence costs. Directors and officers will want to pay specific attention to clauses in their liability policies that address insurer control of litigation, to avoid disputes over whether claims should be settled or defended. 

Other changes

• Notification - insurers will be required to notify policyholders of their duty of disclosure and the potential consequences of failure to comply at entry into a new policy or variation of an existing one.
• Premium payments –an insurer will be able to recover premiums held by a broker for more than the 50-day period as a due debt.
• Claim payments – claims must be paid within a reasonable time, with guidance that what is reasonable includes time for the insurer to gather information and investigate and assess the claim.
• Payments to policyholders – a broker must pay funds received from an insurer to a policyholder within specified periods, including within 7 days of receipt for non-consumer policyholders.

FTA unfair contract terms regime in the FTA applies to some insurance contracts

The Contracts of Insurance (Repeals and Amendments) Act, split from the predecessor to the Act following the Select Committee stage, amends the Fair Trading Act to extend its unfair contract terms regime to consumer insurance contracts and non-consumer insurance contracts with an annual value of less than $20,000. However, some key terms of insurance contracts are not subject to the regime, including terms that relate to the amount of premium payable under a life policy, specifying the subject matter insured, specifying the sums insured and setting out exclusions or limits on indemnity.

Timeframes for implementation of policies and procedures to address the Act

The Act comes into effect upon Orders in Council. Where no orders are made for any part of the Act, it come into force on 15 November 2027. We expect the most significant aspects of the Act to come into force on or close to this date.

Transitional provisions will apply to many of the new obligations. The new disclosure duties will apply to new contracts of insurance, including renewals, or variations of existing contracts of insurance that occur after the commencement date. 

Our predictions

In the short term, we expect the primary industry focus to be on ensuring compliance with the provisions of the Act and necessary changes to products, policy wordings and processes. In doing so, insurers and insurance intermediaries will need to address tricky issues such as the application of the definitions of consumer and non-consumer insurance contracts to those policies that do not neatly fit within either, and where to draw the line between being thorough in information requests in consumer insurance proposal forms to gather necessary information and reduce the prospect of arguments over breach of the duty of disclosure. Insurers will also be mindful of not overburdening prospective insureds and risking losing market share.

These steps and the general shift towards consumer rights may have an impact on premiums in the short term.

In the medium term, we expect to see disputes testing the efficacy and procedure of the Act, most likely in relation to:

• insurers’ decisions to act on deliberate or reckless misrepresentations, including allegations that insurers’ proposal forms are insufficiently clear or prescriptive;
• how insurers are able to apply the ability to treat policies as if they contained provisions that they consider would have been applied had proper disclosure been made, and the content of those terms;
• whether business insureds have made fair risk presentations and, if not, the outcomes available to insurers including the proper quantification of proportionate claim reductions;
• direct third party claims on insurance policies held by insolvent companies, particularly given the current volume of company liquidations and recessionary conditions.

Long term litigation will likely provide greater guidance regarding the duty of consumer policyholders to take reasonable steps not to make a misrepresentation, including what constitutes reasonable steps. Insurers will be able to learn from this to implement pre-contract and pre-renewal forms that put them in the best position when non-disclosure occurs.

Footnotes:

1. Life Insurance Act 1908, Part 2 of the Law Reform Act 1936, Insurance Law Reform Act 1977, Insurance Law Reform Act 1985 and Insurance Intermediaries Act 1994.
2. Law Reform Act 1936, s 9.
3. Livingstone v CBL Corporation Ltd (in liq) [2021] NZHC 755.
4. In both the natural and corporate senses.