An exposure draft of the legislation to implement these decisions is expected to be released for consultation in mid-2020, and the Government expects to introduce the Bill in Parliament by the end of 2020.
Here are the key decisions:
Consumers' duty of disclosure
Currently, consumers are required to disclose all information that a prudent insurer would consider to be relevant, even if not specifically asked for. Under the proposed changes, insurers will be required to ask specific questions, and consumers will only be required to “take reasonable care not to make a misrepresentation" in answer to those questions. This follows the reforms adopted in the United Kingdom.
If adopted by Parliament, the law of insurance contracts will diverge from the general law of contracts. Under the general law, a person is liable for a misrepresentation, whether or not they have taken reasonable care. Under the reforms, an insured will only be liable for a misrepresentation if they have not taken reasonable care.
Businesses' duty of disclosure
Businesses currently owe the same duty of disclosure as consumers. This duty will be changed to require businesses to make a “fair presentation of risk", which again follows the reforms in the United Kingdom. This test requires policyholders to disclose every material circumstance that they know or should know.
New disclosure obligations for insurers
Insurers will be required to inform insureds before they enter the contract of the duty of disclosure and the consequences of not complying. In practice, most insurers already do this.
In addition, if insurers seek permission to access a person's medical records, they will be required to inform that person as to when they will access those medical records – at the time of insuring the risk or at claims time.
Remedies for non-disclosure
Under the current law, insurers can avoid an insurance policy whenever there is material non-disclosure – even if it there is no connection between the facts that were not disclosed and the claim. This rule will be replaced by a regime in which insurers will be required to apply proportionate remedies:
- For deliberate or reckless material non-disclosure, insurers will be able to avoid contracts, reject all claims and retain premiums.
- For non-disclosure that was not deliberate or reckless, insurers will be entitled to:
- avoid the contract (but must return the premiums)
- vary the policy terms
- reduce the claim amount
depending on what the insurer would have done had it known the non-disclosed information when entering the contract.
Existing legal remedies for pre-contractual misrepresentation by an insured will be brought into line with the new proposed remedies for non-disclosure.
Insurance exceptions to unfair contract terms legislation
The unfair contract term regime under the Fair Trading Act currently has a number of specific exclusions for insurance policies, under the reforms these exceptions will be removed. However, a number of new exclusions for insurance contracts will be introduced. This will be done in one of two ways, which will be the subject of further consultation:
- Option 1: This exception would extend only to insurance terms that set the main subject matter in narrow terms (for example, that the house is insured, but not terms that define all the exclusions to cover). This option is consistent with what has been proposed in Australia and is similar to what is currently in place in the United Kingdom.
- Option 2: This exception would extend to terms that set the main subject matter in broad terms (that is, all of the terms that define the risk accepted by the insurer and the insurer's liability). This would mean that policy limitations and exclusions that affect the scope of cover would be considered part of the main subject matter and would not be open to review for unfairness.
The proposed legislation will also provide for the Financial Markets Authority (FMA) to share responsibility with the Commerce Commission for enforcing the unfair contract term provisions in relation to contracts for financial services and financial advice products (which includes insurance).
Comparing consumer policies
Another area that will be subject to further consultation is a proposed new obligation requiring consumer insurance policies to be written and presented clearly. This is intended to assist consumer understanding. The Government is also considering requiring insurers to publish certain consumer policy information in a prescribed format, with a view to assisting consumers choose an insurer and promote transparency.
As we discussed in our submissions on the options paper, a heavily prescriptive approach is likely to come at a high cost to the industry, with little benefit to insureds. It is inherently challenging to accurately translate complex insurance terms into plain language, and there is a risk that doing so may dilute the clarity and effectiveness of insurance policies.
Duty of utmost good faith
A duty of utmost good faith will be codified in the new legislation and will apply to both parties in an insurance contract. The FMA will be able to take court action for breaches of the duty by insurers. In addition, insureds will be able to seek redress for a breach of the duty through dispute resolution schemes and the courts.
Repeal of section 9
Finally, the Government has proposed repealing section 9 of the Law Reform Act 1936 and replacing it with a provision that allows third parties to claim directly against the insurer (that is, the third party would stand in the shoes of the insured person). This effectively reverses the Supreme Court's Steigrad decision, and will likely remove the need for separate defence costs-only policies for liability policies.
The next formal consultation on the reforms will be when an exposure draft of the proposed Bill is released in mid-2020.
In the meantime, if you would like to discuss how the Government's proposed reforms affect you or your business please get in touch with the contacts listed or your usual Bell Gully advisor.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.