The new Bill makes a number of important changes around the duty of utmost good faith, unfair contract terms, liability of brokers, and remedies for breach of the duty of disclosure. Submissions are due to the Select Committee by 3 June 2024.
Background
Labour’s Insurance Contracts Bill was drawn out of the parliamentary biscuit tin last month as a Member’s Bill. We covered that bill last month here.
The Government has quickly responded by introducing the Contracts of Insurance Bill as a Government Bill. The new Bill is broadly similar to Labour’s, retaining the key reforms that are needed to modernise the law. However, the new Bill makes significant changes in several contentious areas. It has been welcomed by the insurance sector and, in our view, it strikes a better balance between the interests of insurers and insureds.
The Bill is already at Select Committee, and is likely to progress quickly, with the Minister having said that he intends to pass the Bill before the end of the year, bringing long-awaited reform to fruition.
Key changes in the new Bill
There are a number of important changes in this new Bill, particularly around the utmost duty of good faith, unfair contract terms, liability of brokers, and remedies for breach of the duty of disclosure. Some of these changes align with submissions made by Bell Gully during the previous MBIE consultation:
- Removal of consumer-focused purpose: The new Bill removes the “protection of the interests of consumers” as a purpose of the Bill, which reflects that the Bill also provides new duties and remedies in relation to non-consumers.
- Utmost duty of good faith: The new Bill provides that the utmost duty of good faith does not create any disclosure obligations prior to entry into, or variation of, a policy other than the new statutory duties of disclosure. The new wording removes a potentially ambiguous provision that Bell Gully submitted could, on its face, have excluded the operation of the duty of utmost good faith in relation to representations made during the policy period.
- Claims handling: There is a new implied term that an insurer must pay out on a policy claim within a reasonable time. In the Insurance Contracts Bill, this was characterised as part of the duty of utmost good faith, and there was a default reasonable period of 12 months. The new Bill removes that default period, reflecting the fact that a reasonable time for settling a policy claim must take account of a range of factors (e.g., where the claim is reasonably disputed), consistently with the High Court’s recent decision in IAG v Degen (which we covered here).
- Disclosure duties: The Bill aligns the law relating to remedies for breach of the duty of disclosure more closely with the statutory regime in England, as we had submitted should be the case. In particular, where an insurer would still have entered into the policy if it had known the truth, but would have done so on different terms, the insurer is allowed to proportionally reduce claims payable under the policy by reference to the higher premiums it would have charged to provide cover, rather than the nominal difference in premiums. The difference can be illustrated as follows. Under the Insurance Contracts Bill, if the insurer would have charged NZ$1,000 more in premiums had it known the truth, it can deduct NZ$1,000 from the pay out for a claim under the policy. Under the new Bill, if the insurer would have charged a 10% higher premium, it is able to deduct 10% from the claim.
- Unfair contract terms: The original exposure draft of the Bill provided two options for opening insurance policies up to the unfair contract terms regime in the Fair Trading Act 1986: option A, which (among other things) would have potentially made exclusion clauses subject to the regime, and option B, which (among other things) specifically provides that exclusion clauses are not subject to the regime, because they are part of the main subject matter of the contract. The Bill has adopted a similar approach to option B, meaning that exclusion clauses would not be subject to the unfair contract terms regime. This is a welcome change because, as we previously submitted, exclusion clauses are fundamental to the operation of an insurance policy; they are critical to determining the scope of the risk that is covered. Insurers use standardised policy wordings that contain standardised exclusion clauses, which are often mandated by their reinsurers; any uncertainty in relation to any individual exclusion clause could have systemic effects in terms of the cover that insurers are willing to offer, and/or the price at which it will be offered.
- Threshold value for unfair contract terms: The unfair contract terms regime applies to standard form contracts that are entered into with consumers and with parties in trade. In the latter case, the regime only applies where the annual value of the trading relationship falls below a certain threshold. The default threshold is NZ$250,000, but under the Bill, the threshold has been lowered to NZ$20,000 for contracts of insurance.
- Brokers: The Bill retains the existing offence under the Insurance Intermediaries Act 1994 for brokers who fail to pay premiums on to insurers, which is punishable by a fine of NZ$5,000 for an individual or NZ$10,000 in any other case. The Insurance Contracts Bill would have imposed significantly greater liability under the Financial Markets Conduct Act 2013, with pecuniary penalties of up to NZ$200,000 in the case of an individual or NZ$600,000 in any other case.
- Interest payable on life insurance contract claims: The new Bill provides that, if a life insurer does not pay a sum owing following the life insured’s death, interest applies from the 31st day after the life insurer was notified of the death of the person insured. The Insurance Contracts Bill provided for interest to start accruing from the date of the death. The status quo is that interest is payable from the 91st day after death.
Next Steps
The Bill passed its first reading on 2 May 2024. It is currently in Select Committee and submissions are open to the public until 3 June 2024. We intend to make a submission, and encourage industry stakeholders to do so as well.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.