Select Committee report on Contracts of Insurance Bill

In Brief

• The latest version of the Bill includes power to make regulations regarding the use of genetic testing by insurers
• The Bill clarifies that premiums payable are excluded from unfair contract terms in respect of life and health insurance policies
• Reinsurance contracts are also clearly carved out from the scope of the regime
• The threshold for misrepresentation has been reframed as 'dishonest' rather than 'fraudulent' with dishonest misrepresentation being taken as showing lack of reasonable care
• Timing for the implementation of the Bill is still to be confirmed.

Introduction

The Finance and Expenditure Committee has reported back on submissions received on the Contracts of Insurance Bill. In this Financial Law Insight we break down some of the key issues identified by submitters, how the Committee responded, and its recommendations for the Bill.

The story so far

The Contracts of Insurance Bill (Bill), introduced to Parliament on 29 April 2024 by Hon Andrew Bayly (after a rebrand of the previous Insurance Contracts Bill), signifies a long awaited reform to New Zealand's insurance contracts law.

To recap, the proposed changes set out in the Bill include:

• A new duty of disclosure: for consumer insurance contracts - those wholly or predominantly for personal, domestic, or household purposes - policyholders will have a duty to take reasonable care not to make a misrepresentation to the insurer. For non-consumer insurance contracts, policyholders will have a duty to make a fair presentation of the risk.
• Proportionate remedies: rather than wholly avoid a contract for the policyholder's failure to disclose, insurers will instead need to respond proportionately, based on the how they would have acted had the information been known at the time of entry into the contract.
• Codified and modified duty of good faith: the Bill modifies the duty of utmost good faith so that a consumer insurance policyholder is only under a duty to take reasonable care not to make a misrepresentation (or a duty to make a fair presentation of risk in respect of non-consumer insurance contracts). Insurers will no longer be able to avoid a contract on the basis utmost good faith has not been observed.
• Clear, concise, and effective: insurers will be required to ensure insurance contracts are worded and presented in a clear, concise, and effective manner.
• Claims paid within a reasonable time: a new implied term included in insurance contracts that insurers must pay claims 'within a reasonable time'.
• Unfair contract terms: a narrowing of existing exemptions from the Fair Trading Act unfair contract terms for insurance contracts.

Key issues identified by Select Committee

The Finance and Expenditure Committee (Committee) has now released its report on the Bill. Initially, the Committee expressed particular interest in receiving written submissions on:

• what is a 'reasonable' timeframe for resolving claims
• whether the policyholder disclosure duty is sufficiently clear and plain language
• provisions around surrender values for life insurance policies.

Submitters also called for greater consideration of several other matters in the Bill. These issues, which the Committee responded to, were in relation to:

• genetic discrimination in life and health insurance
• the definition of 'specified intermediary'
• disclosure duties for consumer and non-consumer insurance contracts
• duties of brokers in relation to premiums and payments due to the policyholder
• the need to exclude premiums payable from 'unfair contract terms'.

Genetic discrimination in life and health insurance

Several submitters brought to the Committee's attention the issue of 'genetic discrimination' in the context of life and health insurance - being instances where insurers treat consumers differently based on genetic testing results. The Bill (as introduced) was silent on this issue, and it is not addressed by either existing law or government policy.

The Committee agreed on the importance of the issue, noting that a cautionary approach to genetic testing is needed to avoid undue genetic discrimination.

The Committee recommended inserting new regulation-making powers that could prohibit or regulate the conduct of insurers in connection with genetic testing. The Bill provides a non-exhaustive list of conduct that could be regulated, including:

• whether an insurer can require a person to undergo or consent to, or disclose the results of, a genetic test or answer a question about whether they have undergone any genetic test
• whether an insurer can refuse to engage with a person due to the above factors
• what may be taken into account by an insurer.

Specified intermediaries

The Bill subjects 'specified intermediaries' to certain duties - for example, in relation to consumer insurance contracts, specified intermediaries must take reasonable steps to pass on a policyholder's representation to the insurer before the insurer enters into or agrees to vary the contract.

Submitters argued, and the Committee agreed, that the narrow definition of 'specified intermediary' would only capture those who receive a commission or other incentive directly from an insurer. It would not capture financial advisers engaged by financial advice providers (FAP) (in cases where FAPs receive commissions from insurers, and then pay their financial advisers).

The Committee recommended broadening this definition to include intermediaries who receive a commission or consideration directly or indirectly from an insurer. This ensures financial advisers are also covered by the duties imposed on specified intermediaries.

Are the disclosure duties clear enough?

'Reasonable care' duty for consumer insurance contracts

The Bill proposes a new disclosure duty on policyholders of consumer insurance contracts to take 'reasonable care' not to make a misrepresentation to the insurer before the consumer insurance contract is entered into or varied.

Submitters were generally supportive of the amended duty that requires policyholders to take reasonable care not to make a misrepresentation.

A common sentiment among industry submitters was that the Bill's 'weighing up exercise' to determine reasonable care creates uncertainty. Greater clarity is required for insurers to ascertain the appropriate questions to ask before entering into a contract. The Committee disagreed with this and considered that the Bill uses appropriate language for a statutory duty, and that the duty on insurers to inform a policyholder of the general nature and effect of the policyholder's disclosure duty could include 'explaining what this means in practical terms'.

More significantly, the Committee recommended replacing 'fraudulent' misrepresentation (which is always taken to mean lack of reasonable care) with 'dishonest' misrepresentation.

Submitters argued that a broadening of the threshold is necessary to refer to actions that are not honest or lack integrity, without always involving deliberate deception with the intent to secure an unfair or unlawful gain. The Committee agreed on the basis that the term 'dishonest' is appropriate, consistent with the approach in the United Kingdom, and avoids associations with criminal standards.

The Bill also tidies up what matters may be taken into account by an insurer when determining whether a policyholder has taken reasonable care not to make a misrepresentation.

The Bill includes a clause that provides where a policyholder fails to answer a question or gives an obviously incomplete or irrelevant answer, then any steps the insurer took in response to that failure or inadequate answer will be taken into account. This clearly places the onus on the insurer to take additional steps if a non-answer is given or an answer is obviously incomplete or irrelevant.

'Fair presentation of the risk' duty for non-consumer insurance contracts

The Bill sets out a different disclosure duty for policyholders of non-consumer insurance contracts. In this case, policyholders must make a 'fair presentation of the risk' before entering into the non-consumer insurance contract. However, a policyholder is not required to disclose a circumstance if the insurer knows, ought to know, or is presumed to know the circumstance.

Submitters argued for the removal (or, at least, the narrowing) of the presumption that an insurer is taken to 'know' something if it is known to any individual who participates in the decision whether to take the risk on behalf of the insurer, or any individual who is, or works for, a specified intermediary 'in relation to the contract of insurance'.

Some submitters argued that the insurer should only be deemed to know what has been disclosed to them (or the specified intermediary) by the policyholder. The Committee disagreed on this specific point, but proposed to amend the clause to make clear it is intended to apply to individuals who are or who work for a specified intermediary in relation to that insurance contract (and not to other employees whose work is unrelated to that specific contract).

'Reasonable' timeframe to resolve claims

The Bill proposes to introduce an implied term into every insurance contract that an insurer must pay out a claim within a 'reasonable time'. The previous Insurance Contracts Bill provided a specified 12-month reasonableness period which, if not met, would have resulted in interest payable on any outstanding claims from that date.

Submitters supported removal of a specified time period, and were of the view that an open-ended reasonableness standard would allow insurers to take into account a range of factors specific to their context. The Committee recommended expanding the ambit of 'reasonable time' to include reasonable time to gather information needed to investigate and assess the claim.

Duties of brokers in relation to premiums and payments due to the policyholder

Premiums

The Bill imposes a duty on brokers to pass on to the insurer any premiums that they receive from a policyholder within a 'relevant period'. The Bill clarifies that this does not prevent insurers from making a contract or an arrangement with a broker to vary this period.

Submitters queried whether this would retrospectively allow for variations to be agreed to existing arrangements, to save existing arrangements from being renegotiated. The Committee agreed that any existing agreements that vary the timeframe for payment should continue to apply. A 'grandfathering provision' is now set out in the Bill to make clear that existing contracts or arrangements of this kind will continue in effect after commencement of the Bill.

Separately, the Committee also recommended removing the criminal offence for failure to pass on premiums as outlined above, and instead providing that the relevant insurer may recover in Court as a debt due any amounts not passed on by a broker under the duty.

Payments due to the policyholder

The Bill imposes a further duty on brokers to pass on to the policyholder any payments made by the insurer within seven days of the broker receiving the money. The Committee recommended a limited amendment to now require brokers to pay policyholders of non consumer insurance contracts 'as soon as reasonably practicable' rather than within seven days. This permits a degree of flexibility for commercial insurance arrangements that can be more complex than consumer ones.

Excluding premiums from unfair contract terms

The Bill will amend the Fair Trading Act to remove some exemptions from the unfair contract terms provisions of that Act that currently apply to insurance contracts.

Submitters argued, and the Committee agreed, that the list of terms to be excluded from being unfair contract terms should also include a term relating to the amount of a premium payable in the context of life and health insurance contracts. This aligns insurers of life and health policies, which adjust premiums on annual policy anniversaries, with general insurers whose contracts renew (and are repriced) on an annual basis.

Surrender values for life insurance policies

The Bill carries over existing provisions in relation to surrender values, allowing a life insurer to apply the surrender value of a life policy in payment of overdue premiums and interest. As long as overdue amounts do not exceed that value, the policy is not void because of the non-payment.

The Committee expressly requested feedback for this area, however the submitters that provided feedback were supportive of these provisions and did not suggest any changes be made. The Committee considered it appropriate to retain these provisions unchanged.

Other amendments recommended

In addition to technical changes, the Committee recommended several other useful amendments to the Bill. These include:

• excluding contracts of reinsurance from the Bill (by expressly excluding such contracts from the definition of contract of insurance)
• removing the presumption that an insurance contract is a consumer insurance contract
• amending the 'conflict of laws' provision to allow for parties to a non-consumer insurance contract to have the autonomy to choose which law governs their contracts (not limited to New Zealand law)
• changing 'all reasonable steps' to 'reasonable steps' regarding an insurer's need to ensure that policyholders are informed of certain matters such as the duty of disclosure and accessing third party information
• clarifying that compliance with the duties in the Bill does not place specified intermediaries in breach of any contract
• clarifying that life insurers may charge a higher premium for the remainder of the contract if the insurer would have entered into a contract on different terms but for a qualifying misrepresentation or breach by the policyholder.

Next steps

The Bill is currently at the second reading stage. The House will now debate and vote on any changes suggested by the Committee. This will determine its fate, as the House will be asked to adopt the Bill before it 'in principle'.

With the Bill being close to final form, a key consideration now will be planning for its implementation. This includes timing of key obligations.

We had suggested a two year transition period at a minimum. Officials have noted that more than 12 months' lead time will be needed for the significant set up work required for many of the substantive changes in the Bill, including the new disclosure duties. However, the determination of the commencement dates has been left to a later phase after the Bill is in the final legislative stages. Helpfully, further engagement with 'stakeholders' will be undertaken on timing.

Start a conversation

If you would like to discuss any aspect of the insurance law reforms or any other financial services matter, please contact David Ireland on +64 4 498 0840, Catriona Grover on +64 4 498 0816, Tom McLaughlin on +64 9 892 5215, or Mark Schroder on +64 9 375 1120 or email the team at [email protected].

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