As of publication, the Bill passed its second reading adopting the Select Committee’s recommendations set out below. It is now in the Committee of the Whole House stage, in line with the Government’s intention for the Bill to pass its third ready and receive the Royal assent by the end of the year. Once passed, the Act is intended to come into force on a date or dates set by Order in Council with a longstop of three years from Royal assent.

We have previously reported on the significant changes to New Zealand insurance law that will come into effect when the Contracts of Insurance Bill is passed into law.

To recap, the Bill has been introduced to address longstanding issues with the law as it presently stands, and to modernise and consolidate existing insurance legislation and some common law principles. Among other things, it will make fundamental changes to insureds’ duty of good faith and to the consequences of failures to comply with the duty of disclosure. The Finance and Expenditure Committee has now released its report on the Bill, following receipt of over 50 submissions from the public sector, insurance market participants, law firms and individuals.

This article collates key insights from the Committee’s report and highlights the implications of the proposed revisions to the Bill for insurers and brokers.

Key themes of the Bill

We discussed the changes proposed in the Bill in our previous article here. The key proposed changes are: 

• Changes to a policyholder’s duty of disclosure to remove the common law duty to disclose matters that a reasonable insurer would find material and replace it with new duties, with different standards applying to consumer and non-consumer policyholders.
• A limited extension of the application of the unfair contract regime in the Fair Trading Act to contracts of insurance.
• Proportionate remedies for nondisclosure rather than the singular remedy of ‘avoidance’ of the policy in its entirety.
• Replacement of the statutory charge upon insurance policy proceeds in favour of claimants under the Law Reform Act 1936 with direct third party claims against insurers.
• Introduction of an implied term in insurance contracts that an insurer will pay claims within a reasonable time.

Since our previous article, the Committee has received submissions on the Bill and reported back. While some submissions supported the reforms as a positive step towards increased transparency and consumer protection, others raised concerns about practical challenges, costs associated with compliance and implications on operational efficiency. A number of submissions pointed out that additional costs would likely be borne by policyholders through increased premiums or reduced scope of cover.

Key takeaways from the Select Committee’s report

The Committee has recommended that the Bill is passed with amendments. Most of the amendments were unanimously agreed by the Committee. However, three were not:

• An amendment of the standard by which an insured will be judged to have lacked reasonable care not to engage in misrepresentations from “fraudulently” to “dishonestly”. This amendment was made following submissions from the industry and to better align with the equivalent UK provision. Some committee members did not agree with this amendment on the basis that “dishonestly” was too broad, weak and vague.
• Extending the requirement for insurers to pay any sums due in respect of a claim within a reasonable time to acknowledge that this includes a reasonable time to gather information for the investigation and assessment of claims. Some committee members opposed this amendment as a significant step back from the consumer protection focus of the Bill.
• Introduction of a provision that allows for regulations to prohibit or regulate insurers’ use of genetic information when underwriting life and health insurance. This was an issue raised in submissions but had not been included in the Bill at its first reading. It is intended to allow a flexible response to issues of genetic discrimination. Some Committee members opposed this amendment and submitted an amendment paper with proscriptive requirements for the provision and use of genetic testing.

Other key amendments at the Committee stage include:

• Extension of the definition of “specified intermediaries” to include financial advisers who indirectly receive commission from insurers through their financial advice provider. These specified intermediaries must comply with duties introduced by the Bill. 
• Clarification of what knowledge will be imputed to an insurer from a specified intermediary. Knowledge of specified intermediaries’ employees will not be imputed to the insurer where the relevant employee’s work is unrelated to the insurance contract at issue.
• Modification of brokers’ obligations to pass on money to insurers and policyholders.
• Identification of certain terms relating to life and health insurance that may be excluded from the unfair contract terms regime under the Fair Trading Act.
• Exclusion of reinsurance contracts from the ambit of the Bill – reinsurance contracts will not now be “contracts of insurance” as defined. 

Changes relevant to all insurers

Consumers must take reasonable care not to make a misrepresentation

• The Bill would impose a duty on consumer policyholders to take reasonable care to not make a misrepresentation to an insurer when entering into an insurance contract. At its first reading the Bill provided that misrepresentations made fraudulently would be taken as showing a lack of reasonable care. The Committee has replaced “fraudulent” with “dishonest” in response to submissions, to more closely align with the equivalent provision in the UK Consumer Insurance (Disclosure and Representations) Act 2012 and to avoid associations with criminal fraudulent misrepresentations.
• To address concerns that the term “dishonestly” is less clear and could arguably cover any kind of misrepresentation, the onus will be on the insurer to undertake further steps if a consumer provides an answer to a question which is unsatisfactory or incomplete. When determining whether a consumer has taken reasonable care not to make a misrepresentation, the Bill now proposes to take into account any steps the insurer took in responding to a consumer who failed to answer a question or gave an obviously incomplete or irrelevant answer.

Insurers have a “reasonable time” to pay claims

• The revised Bill introduces an implied term to every insurance contract that an insurer must pay any sums due in respect of a claim within a “reasonable time”. Previously, the Bill specified 12 months as the reasonableness period and provided that if a claim was not paid out within that period, interest would become payable by the insurer for unreasonably withholding payment.
• The submissions supported removal of the specified reasonableness period, as it would place undue operational pressures on insurers. The Committee has recommended a clarification that “reasonable time” includes time to gather information to investigate and assess the claim. This is intended to ensure that, while delays in claims handling are minimised, insurers do not face undue pressure to expedite claims handling to comply with a reasonableness period. The amendment recognises the reality often faced by insurers seeking to obtain information from policyholders and does not unduly punish insurers for delays outside their control.
• Some committee members disagreed with this change and submitted an amendment paper which proposes that insurers be required to pay interest, calculated in accordance with the Interest on Money Claims Act 2016, from the date on which it becomes unreasonable for an insurer to withhold payment. They would specify that it will become unreasonable 12 months after the date on which the claim was made, unless, in the circumstances, it is reasonable for the insurer to withhold payment until a later date. The proposed amendment is aimed at enhancing consumer protection but introduces a rebuttable presumption and an element of subjectivity and uncertainty.

Imputed knowledge of specified intermediaries

• The Bill proposed a new duty on nonconsumer policyholders to make a “fair presentation of the risk” prior to entering into insurance contracts. However, policyholders are not expected to disclose what an insurer knows, or ought to know, including something that is known to any individual who is, or who works for, a specified intermediary in relation to the insurance contract.
• Some submissions proposed that insurers should only be deemed to know what the policyholder or specified intermediary actually disclosed to them. The Committee disagreed, and while it did not think the presumption should be removed, recommended making it clear that the presumption only applies to those who are or who work for a specified intermediary, not employees whose work is unrelated to the relevant insurance contract.
• The Bill provides for remedies for insurers in circumstances where a nonconsumer policyholder breaches the duty of fair presentation (or any other misrepresentation qualifying a remedy). The Committee proposed amendments to these remedies so that an insurer may charge a higher premium for the remainder of the contract but be prohibited from also disproportionately reducing the amount to be paid on a claim.

Reinsurance contracts are not “contracts of insurance”

Previously, the Bill included reinsurance contracts as contracts of insurance, but they were excluded from specific parts of the Bill. Many submitters expressed the view that the Bill should not apply to reinsurance contracts at all. The Committee agreed, proposing that reinsurance contracts should generally be excluded from New Zealand insurance law as they are typically arrangements between insurers and large overseas based reinsurers. For this reason, they narrowed the definition of “contract of insurance” in the Bill by excluding contracts of reinsurance.

Changes relevant to brokers and other intermediaries

Wider definition of “specified intermediary”

Some submitters were concerned that the definition of a “specified intermediary” under the Bill was limited to intermediaries who received commission or other consideration directly from insurers. The Committee has broadened the definition to intermediaries who receive commission indirectly from insurers. The change is intended to capture financial advisers who structure payments through financial advice providers. These specified intermediaries are then subject to certain duties introduced by the Bill, including the duty to take reasonable steps to pass on a consumer’s representation to the insurer before the insurer enters into or varies the contract of insurance.

Competing obligations addressed

Submissions by insurance brokers opposed the duties and penalties introduced by the Bill, particularly disclosure requirements. They feared that the Bill exposed them to excessive risk and could conflict with duties to their clients. In response to these arguments, the Committee proposed amendments which would ensure that specified intermediaries complying with the Bill’s duties would not be in breach of any contract, including their contract with the policyholder. Additionally, the Committee recommended that any compensation a court orders for breaches of duties be subject to any position agreed between the insurer and the specified intermediary, such as agreed limitations of liability.

Duty to pass on premiums to insurers and payments to policyholders

• The Bill will introduce a duty on brokers to pass on to the insurer any premiums they receive from policyholders within a specified “relevant period” of time. The Bill does not prevent an insurer and broker varying the “relevant period”. Submitters queried whether existing variation agreements will continue to apply, as it would be costly and inconvenient for parties to renegotiate. The Committee accepts that they should and proposed a “grandfathering provision” which would allow this.
• Previously, the Bill would have made it an offence for a broker to fail to pass on premium to an insurer within a reasonable time with a fine not exceeding $5,000 for individuals and $10,000 for companies. The Committee has removed the offence provision from the Bill and introduced a new provision that would allow insurers to recover amounts payable by the broker as a debt.
• The Bill would also have introduced a duty on brokers to pass on money to, or on behalf of, the policyholder within seven days after receiving payment. Following receipt of submissions, the Committee acknowledged that many complex insurance arrangements mean that it will take longer than seven days to forward payments to the policyholder. They accordingly recommended that brokers be required to pay the money to policyholders of non-consumer insurance contracts as soon as reasonably practicable. The seven-day period still applies where payments are to consumer policyholders.

Changes relevant to health and life insurers

Terms relating to life and health insurance may be excluded from being unfair contract terms.

The Bill now provides for a new provision to be inserted into the Fair Trading Act providing that specified terms that define the main subject matter of an insurance contract cannot be declared unfair contract terms. The Committee proposed to include in that list a term that relates to the amount of premium payable under a life policy or health insurance contract. This is to align life and health insurers, who adjust their premiums on annual policy anniversaries, with general insurers who renew and reprice contracts on an annual basis.

No prohibition (yet) on insurers using genetic data

• In perhaps the most significant amendment to the Bill, it now provides for regulations to control life and health insurers’ ability to use genetic data. A number of submitters raised concerns about the use of genetic information by insurers in life and health insurance and the potential for genetic discrimination. The law is currently silent on this issue. The Committee acknowledged the value of such data for insurers in assessing risk but also recognised the need to protect consumers from potential misuse. While several submissions sought an outright ban, the Committee ultimately preferred a flexible regulatory approach to manage the use of genetic data.
• Under the revised Bill, the Government will be empowered to prohibit or regulate insurers’ use of genetic information through regulations. This could result in transparency and disclosure requirements on insurers to ensure that genetic data is used in a non-discriminatory manner. Insurers will need to keep abreast of any developments in this area and ensure that their use of genetic data complies with any regulations.
• Some Committee members disagreed with the Committee’s approach. They have submitted an Amendment Paper that would proscribe insurers from requiring genetic testing and bar most uses of genetic testing, unless the use is beneficial to a policyholder.

What next?

The Bill is now at its second reading, meaning the House will debate and vote on any changes to the Bill, including the Committee’s recommended amendments.

Government officials expect the Bill to be passed by the end of 2024. Once passed, the Bill is likely to impact various aspects of the insurance market, including pricing, underwriting, claims management and competition. Insurers should closely monitor the Bill’s progress through the legislative process and prepare to align their practices and policies with new requirtements. In particular, insurers should review existing contracts and procedures and implement more rigorous documentation and communication practices to ensure compliance with new consumer protection measures, including any potential regulations on the use of genetic data and the new “reasonable time” requirement for claims.