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It now seems there is at least the possibility 2024 will be the year New Zealand finally sees the reform of insurance law with the Government’s own bill, the Contracts of Insurance Bill, now before the Finance and Expenditure Committee. After the Member’s Insurance Contracts Bill emerged from the biscuit tin in March, the Government moved quickly to present its own bill and the Member’s Bill has been withdrawn. Nonetheless, the Opposition will be pressing for some of the reforms in the Member’s Bill to be incorporated into the proposed legislation at the Select Committee stage.
Submissions are being received until 3 June 2024 and the Select Committee is due to report back in September.
The Opposition has highlighted two aspects of the Member’s Bill which it wants to see incorporated into the Government Bill at the Select Committee stage. The first is the explanation in the Member’s Bill of the duty of good faith. The second is the extent to which insurance contracts are subject to the unfair contract terms provisions of the Fair Trading Act 1986. The Government Bill has retained the carve-out for exclusion clauses which the Member’s Bill did not.
In a recent article we set out the key differences between the Member’s Bill and the exposure Draft Bill released by the Ministry of Business, Innovation and Employment (MBIE) in 2022 (Exposure Draft). In this article we refer to some differences between the Government’s Bill and Exposure Draft, as well as between the Government Bill and the Member’s Bill. Our comparison table now shows the substantive differences between all three draft bills. We also note important amendments to marine insurance law which first emerged in the Exposure Draft and which would cause New Zealand to be out of step with every other comparable jurisdiction.
Key Changes
Amendments to Fair Trading Act 1986
The Fair Trading Act 1986 (FTA) prohibits unfair terms in standard form consumer contracts, but it currently carves out exceptions for certain insurance contract terms.
The Exposure Draft set out two options for bringing insurance contracts within the unfair contract terms framework by amending the scope of the subject matter exclusion. Under Option A the subject matter carve-out was restricted narrowly with the effect that much of the insurance contract would be subject to the unfair terms provisions (i.e. exclusion clauses would be scrutinised for unfairness). Under Option B the subject matter exclusion was broader and included exclusion clauses.
The Member’s Bill included Option A, however the Government Bill has Option B.
When a Contract of Insurance counts as a Standard Form Trade Contract
The FTA’s unfair contract terms regime applies to standard form consumer contracts and standard form trade contracts. For standard form trade contracts (not being a grocery supply contract) to be subject to the relevant sections, the annual value of the trading relationship between the contracting parties must not exceed $250,000.
The Government Bill proposes an amendment to the FTA so that a contract of insurance will be a standard form trade contract if the annual premium payable does not exceed $20,000. Neither the Exposure Draft nor Member’s Bill contained an equivalent clause.
Utmost Good Faith
Clause 63 of the Government Bill provides that the utmost good faith rule does not have the effect of imposing any additional duty in relation to disclosure or representation by a policyholder before the contract of insurance is entered into or varied beyond the requirements set out in the Bill.
A New Formula for Calculating Proportionate Remedies
Like the Exposure Draft and the Member’s Bill, the Government Bill proposes “proportionate” remedies in any instance in which the insured breaches its duty and the insurer proves that without the misrepresentation it would not have entered into the contract or would have done so only on different terms.
When the contract would have been entered into on different terms, the Government Bill allows insurers to reduce the claim payout by a percentage figure which is calculated by dividing the premium paid by the higher premium that would have been payable, rather than simply reducing the claim payout by whatever premium dollar value the insurer has been shortchanged.
Addressing Third Party Claims Against Insurers with an Overseas Element
The Government Bill introduces a new section applying the provisions relating to third party claims against insurers regardless of:
- whether or not the insured liability was incurred in, or under the law of, New Zealand;
- where any of the parties are domiciled or living;
- whether or not the contract of insurance (or a part of it) is governed by the law of New Zealand; and
- the place where sums due under the contract of insurance are payable.
Expansion on the Implied Term to Assess and Settle a Claim within a Reasonable Time
Although both the Exposure Draft and Member’s Bill address the need to assess and settle claims within a reasonable time, the Government Bill takes a different approach by making this an implied term instead of bundling it in with the duty of good faith.
The Government Bill specifies a number of factors to determine what is ‘reasonable’ in terms of the time an insurer takes. The factors include: the type of insurance, the complexity of the claim, and any factors outside the insurer’s control. However, unlike the Member’s Bill, the Government Bill does not include a presumptive 12 month period bright line test after which the insurer would have to show that they were being reasonable in not paying out a claim. The Government Bill also articulates remedies for a breach of this implied term.
Insurers’ Duties Crystalised
The Government Bill has introduced a new clause which provides certainty for insurers by deeming that ‘all reasonable steps to inform policyholder of certain information’ has been taken where an insurer provides that information:
- in writing; and
- complies with any relevant requirements provided by the regulations.
Softened Duties on Brokers
The Government Bill does not include the provision which appeared in the Member’s Bill and imposed a duty on brokers to:
- notify the insurer if the premium is not paid; and
- pay interest where the broker failed to notify the insurer.
The existing timeframe for brokers to pass on premiums is carried through in the Bill.
Amendments to Marine Insurance
The Government Bill significantly alters the Marine Insurance Act 1908. If enacted in its current form, the Bill would:
- modify the warranty as to seaworthiness;
- repeal provisions associated with non-disclosure, representations, formation and marine warranties; and
- due to the conflict of laws clause, impose the Bill’s requirements on contracts which would be governed by the law of New Zealand but for a choice of law provision in the contract.
The effect of the last point is that when, for instance, parties contract on internationally standard terms such as the English law Institute Clauses and one of the parties is resident in New Zealand, the disclosure duties in the Act would apply. This would put New Zealand out of step with all comparable jurisdictions. While there is a provision in the Bill which allows regulations to declare a contract of insurance to be a contract of a different kind, thereby removing it from the purview of the Act (as it would then be), in our view the Bill should be amended to ensure parties to contracts using internationally standard terms are not impacted by the changes New Zealand wishes to adopt domestically.
Submissions
Submissions on the Government Bill are now open and close on 11.59pm on 3 June 2024. If you would like to make a submission and require assistance, please get in touch with us. Our table showing a clause-by-clause comparison of the current Government Bill, the Exposure Draft and the Member’s Bill may be of assistance when preparing a submission.
The Finance and Expenditure Committee has indicated that any public hearings for the bill are likely to take place on the morning of 26 June 2024. Members of the Committee have expressed a particular interest in receiving written submissions focused on:
- What is a ‘reasonable’ timeframe for resolving claims (cl 70);
- Whether the policyholder disclosure duty is sufficiently clear and plain language (Part 2, subpart 1); and
- Provisions around surrender values for life insurance policies (cl 141 – 142).
If you have any questions about the Contracts of Insurance Bill, please get in touch with our Insurance Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
