The Insurance Contracts Bill was released for consultation on 24 February 2022, signalling the Government’s intention to make fundamental revisions to insurance law in New Zealand, including significant changes to the duties of brokers and their ability to use premiums.
The key changes for brokers are:
- changes to the existing duties in the Insurance Law Reform Act 1977 to introduce a new duty on intermediaries to pass on information to the insurer;
- changes to the ability to use premiums, currently permitted under the Insurance Intermediaries Act 1994; and
- fundamental changes to the policyholders’ duty of disclosure, introducing new duties for policyholders to disclose information to an insurer.
Brokers should also note the changes to require insurers to present consumer insurance contracts in a clear, concise and effective manner, which may result in a number of insurance policies being substantially re-drafted.
Am I a broker, specified intermediary or insurance intermediary?
The Bill aims to consolidate the many pieces of insurance legislation, but has had little success in consolidating the various terminology used to describe brokers and intermediaries. Brokers, specified intermediaries and insurance intermediaries are all defined in the Bill, and each carry separate obligations. The terminology is further complicated by the use of “intermediary” in the Financial Markets (Conduct of Institutions) Amendment Bill.
MBIE has acknowledged that the Bill contains these three separate concepts, however, considers that this is “unavoidable as all these concepts capture different groups of people”. We encourage MBIE to analyse and consolidate these piecemeal definitions, rather than grandfather them into the Bill from the current piecemeal legislation. We consider that including all three separate concepts within the Bill is confusing and counterintuitive to the aim of the Bill to consolidate and simplify insurance law.
Means a person:
a. who carries on the business of arranging contracts of insurance (whether or not the business is the person’s principal business or is carried on in connection with any other business); and
b. who is not the employee of the insurer; and
c. who is not appointed under a signed agreement as the agent for the insurer for the purposes of receiving:
- money due to the insurer from the policyholder; and
- money due to the policyholder from the insurer.
In relation to a contract of insurance:
a. means a person entitled to receive from the insurer commission or other valuable consideration in consideration for the person’s arranging, negotiating, soliciting, or procuring the contract of insurance b. between a person other than that person and the insurer; but
b. does not include an employee of the insurer.
Means a person:
a. who for reward, arranges contracts of insurance in New Zealand or elsewhere; and
b. who does so as the employee of or agent for one or more insurers or as the agent for the policyholder,
and includes a broker.
New duties when passing on information
The Bill places additional obligations on “specified intermediaries” in relation to passing on information to the insurer. Currently, under s 10(2) and (3) of the ILRA 1977, insurers are deemed to know information known to “representatives of insurers” (which generally includes brokers). Where a representative fails to pass on information from the policyholder, the insurer is still deemed to know that information.
These sections of the ILRA 1977 have been carried over to Part 2 of the Bill, which also includes a new obligation on “specified intermediaries” (a term which replaces “representative” in the ILRA 1977) to:
- in relation to consumer insurance contracts*: take all reasonable steps to pass onto the insurer all material representations a policyholder made to the intermediary in relation to a consumer insurance contract unless the intermediary believes on reasonable grounds that a representation was a misrepresentation (clause 63); and
- in relation to non-consumer insurance contracts: take all reasonable steps to disclose to the insurer every material circumstance known to the intermediary (clause 64),
in each case before the insurer enters into the contract or agrees to a variation.
*Consumer insurance contract is a contract entered into by a policyholder wholly or predominantly for personal, domestic, or household purposes.
The effect of the proposed change is to provide an insurer with an avenue of redress against the specified intermediary in the event a specified intermediary fails to pass on the relevant information. Where information is not passed on to the insurer, the loss may be borne by the specified intermediary. The intention of this change is to protect policyholders from loss.
MBIE considers that the obligations placed on specified intermediaries are “not unreasonable”. However, the term “specified intermediary” (as defined above) includes persons who are not agents of the insurer. Imposing such a duty on intermediaries effectively requires the intermediary to act as if it were an agent of the insurer, passing on information it has received. However, unlike an agent, where the insurer fails to acquire the relevant information from the policyholder, unlike an agency relationship, liability will sit with the intermediary.
This new duty represents a departure from the requirements in the Australian and UK jurisdictions, which only deem insurers to know information disclosed to an intermediary if that intermediary is an agent of the insurer.
We expect that brokers may require insurers to increase their commission to reflect this new requirement.
Passing on premiums
The IIA provides protections for clients of “insurance intermediaries” (which includes brokers). The IIA is mainly concerned with premium payments made by a policyholder through an intermediary. The IIA provides protection for policyholders where a premium is paid by the policyholder, but is never passed on to the insurer by the intermediary. The Bill carries over the provisions of the IIA into the proposed Act (see Part 4 of the Bill) and updates the provisions (e.g., to remove references to cheques). A number of further changes are also proposed, as discussed below.
Restriction on use of premiums
The consultation paper released by MBIE asked for submissions on whether changes should be made to the current s 8 of the IIA (allowing intermediaries to hold onto premiums for up to 50 days) and s 15 of the IIA (allowing intermediaries to invest premiums and keep profits on such investments). At present, those sections are carried over in the Bill in respect of brokers, however MBIE could add in certain restrictions (for example, limiting the ability for brokers to invest premiums and keep returns on investment) before the Bill is presented to Parliament.
In the consultation paper, MBIE stated that it had received submissions from insurers suggesting that the current sections create an incentive for brokers to hold onto premiums for as long as possible. MBIE also stated its concern that this could increase the risk associated with brokers defaulting on payment obligations, and that such an ability is unusual given the restrictions on using such monies for intermediaries of financial products under the client money or property rules in the Financial Markets Conduct Act 2013.
MBIE is currently considering whether such restrictions will be introduced. We have concerns about whether such restrictions would benefit policyholders. If MBIE decided to impose restrictions on the use of insurance monies, this would remove a source of income for brokers. This would be an unsatisfactory outcome, as brokers may seek higher commissions as a result, raising the cost of insurance for policyholders. Further, there is no risk to policyholders if the premium is not paid on to the insurer because the broker is liable to the insurer for the money once the policyholder has paid the money to the broker. Therefore, a restriction on the use of premiums, as there is for client money and property services under the FMCA, is not warranted.
Increased penalties for failure to pass on premiums
The Bill also proposes to substantially increase the penalties for failures by brokers to pass on premiums, to bring the penalties in line with similar provisions in the FMCA (in particular, the penalties match those for client money and property service providers). A contravention in this respect will give rise to civil liability under s 449(4) of the FMCA, including a penalty not exceeding NZD200,000 in the case of an individual or NZD600,000 in any other case (compared to, respectively, NZD5,000 and NZD10,000 under the IIA).
Additionally, a new section has been included to provide that where a broker fails to notify the insurer that a premium has not been received within the relevant period, the broker must pay interest to the insurer on the amount of the premium that has not been received. This has been added as MBIE considers it is best practice to have a consequence for non-compliance of a duty (noting that the equivalent s 10 of the IIA did not appear to have a consequence).
Supporting clients to meet their new duty of disclosure
Part 2 of the Bill reforms the current duty of disclosure placed on policyholders. Currently, before a contract of insurance is entered into or renewed, a policyholder must disclose to the insurer all information that could influence the judgement of a reasonable insurer in assessing the risk they are assuming by providing the insurance, regardless of whether the insurer explicitly asked for the information or not.
The Bill replaces the current duty with separate levels of disclosure duty for consumers and non-consumers
Brokers should note the changes to the duty of disclosure and consider how they can best support their clients to meet their obligations under the proposed Act. There is a duty on insurers to notify the policyholder of their duty of disclosure. In practice, however, it will fall to brokers to explain the duty, the consequences of a breach of duty, and provide assistance to the policyholder to disclose information to the insurer in accordance with their respective duties.
Brokers will need to be familiar with the applicable disclosure duties for their clients when passing on information from the policyholder. In particular, specified intermediaries dealing with consumer policyholders will need to assess whether the policyholder is taking reasonable care not to make a misrepresentation or if there are otherwise reasonable grounds to believe that that policyholder is making a misrepresentation (in which case, the specified intermediary is not required by the Bill to pass on that information to the insurer).
A policyholder under a “consumer insurance contract” – a contract of insurance entered into by a policyholder wholly or predominantly for personal, domestic, or household purposes.
Policyholders must “take reasonable care not to make a misrepresentation to the insurer” (determined by taking into account all the relevant circumstances).
Relevant circumstances include (among other things): type of consumer insurance product, how clear and specific the questions asked by the insurer were, how clearly the insurer communicated the importance of disclosure and whether the consumer received financial advice. Any particular characteristics or circumstances of the policyholder of which the insurer is aware, or ought reasonably to have been aware, must also be had regard to.
Consequence of breach
Where the policyholder has breached the duty to take reasonable care, the insurer will have proportionate remedies available if:
- they can prove that, without the misrepresentation, they would not have entered into the contract (or agreed to the variation), or would have done so on different terms; and
- whether the policyholder’s nondisclosure was deliberate and/or reckless.
Note that the Bill carries on the prohibition on life insurers in the Insurance Law Reform Act 1977 from avoiding a contract of insurance for misrepresentation, unless it was made in certain circumstances.
A policyholder to a contract that is not a “consumer insurance contract” (i.e. a contract taken out for business purposes).
Policyholders must make a “fair presentation of the risk” of the contract.
A “fair presentation” of the risk is, in brief, one that makes a disclosure of every material circumstance that the policyholder knows or ought to know, in which every representation made is substantially correct.
Consequence of breach
Where there is a breach of this duty, the Bill provides (similarly to that for consumer policyholders) that an insurer has a proportionate remedy available.
When will these changes happen?
Consultation on the draft Bill closed on 4 May 2022. MBIE is in the process of analysing the feedback and considering any changes that may be required to the Bill. Once finalised, the Bill will be introduced to Parliament. MBIE have not indicated when they expect the Government will introduce the Bill, let alone when the Bill will be enacted and receive Royal assent. However, our expectation is that the Government would like that to occur before the next election, which must take place before the end of 2023.
Generally, the provisions in the Bill are proposed to come into force by Order in Council, with all provisions coming into force by the third anniversary of the Bill receiving Royal assent. The commencement date for the Bill will likely be scheduled after the Bill is in its final legislative stages. It follows that the core reforms in the Bill are likely to be in force some time in 2025 or 2026, although the Government could move more quickly if it regards the regime as a priority.
This article was co-authored by Sarah Jones, a Solicitor in our Financial Services team.
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