The Insurance Contracts Bill (Bill) is a Member's Bill that was drawn from ballot on 21 March 2024. The new Bill proposes significant changes to insurance law in New Zealand, with its primary focus being on consumer protection.
The Bill in its current form is directed at strengthening consumer rights. The Bill is still in its early stages but it provides an opportunity for Parliament to consider the long awaited reforms to insurance law in New Zealand. We outline some of the key proposed changes below.
Key proposed changes
A short summary of the key proposed changes as currently contained in the Bill are as follows:
Specific purpose to protect consumers
The new Bill focuses on the protection of consumer interests throughout the life of insurance contracts. This focus is additional to the purpose included in the exposure draft of the Bill released in 2022 by the Ministry of Business, Innovation and Employment that insurance policies and insurers operate fairly.
Codification of duty of utmost good faith
The insurer's duty of good faith is highly valued in the Bill. The Bill codifies that duty, including the common law duty that the insurer progress and settle claims within a reasonable period of time. However, the Bill is not clear on the extent of application or the full scope of the duty.
Interest on claimed sums
The Bill proposes to impose an obligation on an insurer to pay interest on claimed sums, from the day "it becomes unreasonable for the insurer to withhold payment", and contains a default rule that withholding payment beyond 12 months from the date on which the claim was made would be unreasonable (subject to circumstantial considerations).
No misrepresentation unless material facts withheld
Currently, before an insurance contract is entered into or renewed, a policyholder must disclose all information that could influence the judgement of a reasonable insurer in assessing the risk the insurer is assuming, regardless of whether the insurer explicitly asks for the information or not. The common law duty of "utmost good faith" is imposed on the policyholder.
The Bill seeks to rebalance the duty of disclosure by requiring a policyholder to "take reasonable care not to make a misrepresentation to the insurer", taking into account all relevant circumstances. If enacted, the insurer would no longer have an absolute right to avoid an insurance contract for material non-disclosure. Rather, if the policyholder breaches the duty to take reasonable care, the insurer will have proportionate remedies available. These remedies range from reducing the amount paid on a claim, to avoidance of the insurance contract. The appropriate remedy will depend on the seriousness of the non-disclosure, and how the insurer would have responded had the information been provided.
Life insurance policies - clarification of insurer's duties in event of breach
If an insured makes a misrepresentation in respect of a life insurance policy, the Bill requires insurers to provide the cover which a reasonable insurer would have provided if the true position had been disclosed, unless the representation was fraudulent or made within three years before the death of the insured or the date on which the policy is sought to be avoided.
Unfair contract terms under the Fair Trading Act 1986 (FTA) apply
The Bill proposes to apply the unfair contract terms regime in the FTA to all terms of an insurance contract, other than the subject matter of the insurance contract and the terms regarding the sum insured and excess. This is significant, as currently the unfair contract terms regime in the FTA specifically does not apply to insurance contracts. It means that exclusion clauses in a policy, which are often the subject of dispute, would be subject to the FTA regime.
Our views
Given the various unforeseen events in recent years, both within New Zealand and globally, an effective, clear and fair insurance law regime is essential.
The focus and proposed changes in the Bill are consistent with the current general move towards consumer transparency and protection. However, there are a number of areas which will need further consideration and clarification.
The Bill is now awaiting its first reading, and it is uncertain whether it will pass its first reading in its current form. It is also possible that the Bill may be replaced by the current government's own draft Insurance Contracts Bill. Interested parties will have an opportunity to make submissions on the Bill (in whatever form) if it passes its first reading.
If you have any questions in relation to the Bill please contact one of our team.
