The Insurance Contracts Bill (Bill) released for consultation on 24 February 2022, proposes to make insurance contracts subject to the unfair contract terms regime under the Fair Trading Act 1986 (FTA) (UCT regime). If introduced, this will have a profound impact on the insurance industry.
How the Bill will do this, however, is not yet finalised. The Ministry of Business, Innovation and Employment (MBIE), having consulted on how best to apply the regime to insurance contracts, is yet to confirm how insurance contracts will be subject to the regime.
In this article, we outline the Bill’s proposal for making insurance contracts subject to the UCT regime, and what this means for insurers.
UCT regime basics
The Commerce Commission may apply to the Court for a declaration that a term in a contract is unfair.
If a Court makes such a declaration, from that time the business must not include the term (unless done in a way that complies with the Court’s decision) or attempt to apply, enforce or rely on it.
Which contracts are affected?
The UCT regime applies to standard form, consumer contracts and small trade contracts.
Standard form
Standard form contracts are typically contracts with standard terms and conditions that are presented to customers with little real opportunity for negotiation or consideration. We expect that many insurance contracts are standard form.
Consumer contract
In the context of insurance, consumer contract means a policy with a person who enters into the policy for personal, domestic or household use.
Small trade contract
A contract will be a small trade contract if:
- each party is engaged in trade;
- it is not a consumer contract; and
- it does not comprise part of a ‘trading relationship’ that exceeds the ‘annual value threshold’ of NZD250,000 (including GST, if applicable) per annum for goods, services or an interest in land when the relationship first arises. In the context of an insurance policy, that’s potentially the case if the annual premium is NZD250,000 or less.
We also note that small trade contracts will not be subject to the regime if entered into before 16 August 2022 (unless renewed or varied on or after that date).
When is a term unfair?
A term can be declared to be unfair where:
- reliance on the term would cause a significant imbalance in rights between each of the parties;
- the term is not necessary to protect the legitimate interests of the party who is relying on it; and
- one party would suffer detriment if the term was to be relied upon.
The extent to which the term is transparent and the context of the contract as a whole must also be taken into account.
Certain terms are exempt from the UCT regime. These are terms that:
- define the main subject matter of the contract;
- set the upfront price payable under the contract, to the extent that the price term is transparent; or
- are required or expressly permitted by any enactment.
The carve out for insurers
The UCT regime currently includes exceptions for insurance contract terms, including the subject or risk insured against, the sum insured, exclusions to liability, the basis on which claims may be settled, payment of premiums, the duty of utmost good faith, and disclosure requirements.
The original rationale for these insurance-specific exceptions was to apply the generic “main subject matter” and “upfront price” exceptions, meaning that the terms which relate to these aspects of an insurance contract are not subject to the UCT regime. However, the insurance-specific exceptions effectively carve out insurance contracts from the UCT regime.
What does the Bill propose?
The Bill proposes to make insurance contracts subject to the UCT regime by removing the insurance specific exemptions in the FTA and clarifying how the generic exemptions apply to insurance contracts.
MBIE has not yet decided how the UCT regime will apply to insurers. The Bill sets out two options for consultation, which we have set out in the table to the right.
Two options for consultation
Option A: The Narrow Interpretation
Defines the main subject matter of insurance contracts in narrow terms (clause 171 of the Bill). This means that the main subject matter exception would apply only to the thing insured, the terms that set out the sum insured, and terms that set the quantum of the excess.
Option B: The Broad Interpretation
Defines the main subject matter of insurance contracts in broad terms (clause 172 of the Bill). This would mean that the policy limitations and exclusions that affect the scope of cover would be considered part of the main subject matter and therefore excluded from being declared unfair.
Our view
We understand that the inclusion of insurance contracts within the UCT regime has been the subject of great opposition in the industry. However, MBIE, in the consultation for the Bill, presented two options which both make insurance contracts subject to the UCT regime. Further, in its submission in the consultation process, the Commerce Commission (the regulator for the UCT regime) advocated for insurance contracts to be subject to the regime.
In addition, it should not be ignored that other jurisdictions (including Australia and the United Kingdom) have introduced amendments to make insurance contracts subject to their unfair contract regimes.
Insurers should, therefore, prepare themselves for a Bill to be introduced which contains either the Narrow Interpretation or the Broad Interpretation. It is difficult to predict which option MBIE will opt for, at this stage. It is clear that the Narrow Interpretation provides greater protection for consumers.
However, the Broad Interpretation provides greater certainty for insurers. If we look to overseas jurisdictions, however, the legislation favours consumer protection. For example, the Australian UCT regime uses the Narrow Interpretation; the United Kingdom UCT regime does not provide for any special treatment of insurance contracts at all – they are simply subject to the UCT regime.
MBIE is currently considering submissions on the draft Bill. Ideally, we would like to see a Bill that accommodates the insurance industry’s need for certainty – in particular the need for certainty of any exclusions from the scope of cover. There will be significant costs and disadvantages for insurers arising from inclusion within the regime, in particular if exclusion clauses are brought within the regime. Further, the Bill needs to take into account the raft of incoming legislation affecting insurers (such as the Financial Markets (Conduct of Institutions) Amendment Act 2022). Therefore, a large lead-in period should be built into the commencement of the proposed Bill so that insurers have adequate time to prepare for these substantial changes.
This article was co-authored by Sarah Jones, a Solicitor in our Financial Services team.
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