Insurers and their lawyers are urging the government not to scrap the industry’s exemption from the unfair contract terms provisions of the Fair Trading Act 1986, warning of a higher litigation risk, higher premiums and “significant” uncertainty for both insurers and policyholders if the exemption is removed.
In its submissions on the draft Insurance Contracts Bill, released by the government in late February, Bell Gully says removing the existing exemption would open insurance policies to legal challenge, particularly in the area of exclusions. Even the ability of an insurer to exclude pre-existing medical conditions from cover could be jeopardised, the firm says.
“The terms that are currently carved out were considered by Parliament to be critical to insurers’ assessment of risk and reflect the unique nature of the operation of insurance contracts,” Bell Gully says.
“Insurance contracts differ from other types of contracts in that in order to operate, insurers need to have a clear understanding of the extent of the risk they are taking on.”
This includes exclusions which can be used to ensure insurance covers only unforeseeable claims. “Exclusion clauses are fundamental to the operation of insurance policies because they are critical in determining the scope of the risk that is being covered.”
At present, insurance contract terms which cannot be considered unfair include the subject matter of the policy, the risk, the sum insured, excluded or limited liabilities and the payment of premiums.
If government makes thing too hard and the uncertainty becomes too great, this is likely to be reflected in higher premiums and some insurance products being withdrawn from the market, Bell Gully says. The evidence base for change is weak and MBIE’s own assessment of the proposed options is that they are no better than the status quo. Ultimately, the change will be to the detriment of policyholders.
The government has yet to respond to submissions on the bill which modernises New Zealand’s insurance law, some of it drafted in the early part of the 20th century. The new regime will apply to all licensed insurers – life, health, general and travel.
The new bill turns insurance law on its head by reversing the onus of disclosure from the consumer to the insurer – a fundamental shift in policy. As Lloyd Kavanagh, a financial services partner at MinterEllisonRuddWatts observes, “It shifts the power from the insurer to the insured.”
Most of the principles and policy underpinning the bill were hammered out in 2019 in a Cabinet paper in the name of then Commerce and Consumer Affairs Minister Kris Faafoi. As far as the government is concerned, the fundamental changes are non-negotiable.
The only big issue still up for grabs is the unfair contract terms exemption for insurers. MBIE has offered the sector two options, neither of which insurers find acceptable.
And while the underlying principles and policy are set in stone, this hasn’t prevented insurers and their lawyers from submitting on sections of the bill where they believe tweaks are needed.
Duty to disclose
Along with the exemption from unfair contract terms, the other big change is around disclosure. Currently, policyholders are required to disclose all information that might influence the judgment and risk assessment of a prudent underwriter. Failure to do this – even if the omission is inadvertent – means an insurer can avoid the policy if a claim is made, even if the non-disclosure is irrelevant to the claim.
The new bill requires the insurer to ask the ‘right’ questions to get the information it needs to accurately assess and price risk. Consumers are required only to take reasonable care not to make misrepresentations. Remedies are available to the insurer if consumers misrepresent their position but only if the misrepresentation is deliberate, reckless or fraudulent. If that can be proven, the insurer can avoid the contract and keep the premium.
The question of reasonableness is likely to become one of the main battle areas in the new regime.
The insurer is also required to inform consumers about their disclosure duty and its consequences before they enter into an insurance contract. Failing to do this means the insurer loses its access to remedies for misrepresentation. If the insurer is seeking permission to access a consumer’s medical (or other third party) records, it must tell the consumer what it is looking for.
Bell Gully says while it generally welcomes many of the changes – particularly the move to consolidate a raft of outdated statutes and modernise important insurance principles – other parts of the draft bill, including the disclosure regime, are potentially problematic. “They have the potential to create significant uncertainty to the detriment of both insurers and the insured,” it says.
For example, the new duty of consumers not to make misrepresentations puts insurers at a disadvantage when compared with contracting parties generally. Under general contract law, parties can be liable for innocent misrepresentations but not under the new Insurance Contracts Bill.
“We remain concerned about this inconsistency,” Bell Gully says. It also points to “ambiguity and gaps” in the drafting, saying a broader range of issues need to be considered when assessing whether a policyholder has taken reasonable care. “The bill should more directly address the relevance of silence in assessing whether a misrepresentation has been made.”
Hesketh Henry raises concerns about provisions that impose a duty of disclosure on specific intermediaries such as brokers to pass on information or representations to the insurer, regardless of whether the broker is an agent of the insurer.
Cost and complexity
Chapman Tripp says the bill is long overdue but adds another layer of pressure to a sector that is already facing significant cost and compliance obligations under COFI (Financial Market (Conduct of Institutions) Bill) and a review of the Insurance (Prudential Supervision) Act.
However, the bill reflects the government’s decision that insurance contracts need to be rebalanced in policyholders’ favour to better align New Zealand’s law with that of Australia and the UK.
In its current form, the bill will have a “very significant impact on the insurance sector”, Chapman Tripp says. Insurers will need to review their entire businesses – their application and underwriting processes, their contract terms and their policy documentation and collateral. Many have already begun this job.
Chapman Tripp says insurers have raised concerns with MBIE about brokers being able to hold onto premiums for long periods, pocketing any profits made via investments. MBIE is seeking feedback as to whether there should be express limits on brokers’ ability to invest premium payments and keep the returns, such as including financial penalties in the bill for brokers who fail to pass on premiums promptly to insurers.
Another bone of contention is a requirement that insurance contracts be written and presented in a clear, concise and understandable form.
Again, many insurers have already taken this on board and are offering plain-English contracts to consumers. The problem is the level of prescription that may be required, even down to the font size used in the documentation.
The Bill amends the Financial Markets Conduct Act 2013 to create a new power for the Governor-General to issue regulations mandating the form and presentation of insurance contracts.
Insurers who have already upgraded their documentation are concerned about the extra cost they will incur when – or if – regulations are made. However, the government’s consultation paper says there is no intention “presently” to make regulations “that contain detailed requirements of how each aspect of an insurance contract is to be presented …. or prescribed standard forms”.
Bell Gully says any such regulation “should be framed at a higher level of generality” and questions the need for specifics such as font size to be included.
Dentons Kensington Swan has another concern. “Overly restrictive requirements have reduced product disclosure statements in the managed fund word to a bland sameness,” it says. “Prescription also removes providers’ ability to easily develop bespoke and innovative products in response to evolving customer needs.” ■