Insurance Contracts Legislation: Everything Everywhere All at Once

The Finance and Expenditure Committee has called for public submissions on the Contracts of Insurance Bill, with a submission deadline of 3 June 2024. 

For the uninitiated, it is an understatement to say that there is a lot going on in the Bill. The Contracts of Insurance Bill is an omnibus Bill intended to consolidate and modernise existing insurance legislation in New Zealand. Its introduction follows general consensus that New Zealand's insurance contracting laws are complex and dated, and substantial work undertaken over several years to understand the extent of the issues and craft legislation to address them. The Bill, therefore, covers a range of insurance related issues and amends and/or repeals a number of other pieces of legislation, including amendments proposed to the Financial Markets Conduct Act 2013 and the Fair Trading Act 1986.  

Progress on the reforms has slowed since the Ministry of Business, Innovation and Employment released a Consultation Paper with an Exposure Draft of the proposed legislation in February 2022 (see our article on the Exposure Draft here). However, there has been a recent flurry of activity with not one but two Bills appearing:

• the Hon Dr Duncan Webb's Member's Bill, the Insurance Contracts Bill, was pulled from the ballot on 21 March 2024; and
• the Government's own version of the Bill, the Contracts of Insurance Bill, was then introduced on 29 April 2024 with its first reading on 2 May 2024.

Both Bills broadly follow the approach of the Exposure Draft and reflect policy decisions made by Cabinet at the end of 2019, although there are some notable differences between the approaches. 

While two Bills are now in circulation, submitters can breathe easy that they will not be required to participate in two consultations at the same time. Despite Dr Webb indicating during the first reading of the Government's Bill that he had declined the Minister's invitation to withdraw his own Member's Bill, the Labour party voted in support of the Government Bill at first reading and the latest Order Paper indicates that the Member's Bill is postponed until next calendar year in accordance with Standing Order 268(a) (which prevents the proposal of a Bill substantially the same as a Bill already in progress or passed that year). Accordingly, it appears that the Member's Bill will, at this stage, serve only to inform submissions on, and the Select Committee's consideration of, potential amendments to the Government Bill.

It has taken some time for any Bill (let alone two) to emerge from the review process. As things have turned out, however, a Select Committee review of the Bill at this stage is timely as it will occur in tandem with the Government's broader review of the New Zealand financial services regulation landscape announced at the end of last month. To that end, in addition to considering the substance of the obligations in the Bill, we suggest that submitters also consider the appropriateness of the regulatory institutional design settings in the Bill and the relationship between obligations in the Bill and other legislative requirements.

Please contact one of our experts if you would like to discuss any aspect of the Bill. In the meantime, we summarise below:

• the key changes proposed by the Government Bill,
• observations on some of the notable differences in approaches between the Exposure Draft, Government Bill and Member's Bill; and
• our thoughts on some of the regulatory design matters arising from the Bill,

Key changes to insurance contracting law in New Zealand 

The Contracts of Insurance Bill represents a marked departure from the status quo for insurance contracts in New Zealand with a focus on enhancing protections for policyholders, particularly consumer policyholders. 

Key changes include:

• Modification of the laws relating to a policyholder's duty of disclosure at the time of entry into a contract of insurance. The current common law requirement that a policyholder must disclose all information that would influence the judgment of a prudent insurer in setting the premium or deciding whether to insure the risk is proposed to be modified so that:
• • A consumer policyholder must take reasonable care not to make a misrepresentation to the insurer; and
  • A non-consumer policyholder must make a fair presentation of risk to the insurer.

Changes are also proposed to ensure the insurer's remedies for any non-disclosure are more proportionate to the nature and consequences of the non-disclosure and limit an insurer's right to avoid a policy to circumstances involving deliberate or reckless non-disclosure or where it can be shown the insurer would not have entered into the insurance contract at all had the true position been disclosed.

• The creation of several new obligations for insurers, bringing the regulation of insurers closer to that of lenders and issuers of financial products. These new obligations include duties for an insurer to assist policyholders to understand insurance contracts.
• Broadening the extent to which the unfair contracts regime in the Fair Trading Act 1986 will apply to contracts of insurance.
• Technical changes to other aspects of the law, including abolition of the statutory charge under the Law Reform Act 1936 over insurance moneys under liability policies and establishment instead of a direct right of action by claimants against insurers with leave of the court. 

Notable differences between Exposure Draft, Member's Bill and Government Bill

While both the Member's Bill and the Government Bill have their foundations in the Exposure Draft circulated in early 2022, there are some notable differences between the three approaches, including:

• Consumer protection focus. The Member's Bill proposes that a more overt consumer protection lens is applied to insurance contracting. This is signalled, first, by the inclusion of an additional purpose statement to "protect the interests of consumers under insurance contracts when they are entered into, throughout their duration, and in the claims management and settlement process" (this purpose statement did not appear in the Exposure Draft and is not a feature of the Government Bill). Consistently with this, the Member's version of the Bill contains some further divergences from the Exposure Draft and Government Bill which would provide additional protections to policyholders. For example:  
  • The Member's Bill proposes a new statutory obligation to pay interest on claims commencing from the day on which it becomes unreasonable for the insurer to withhold payment, with a rebuttable presumption that it will become unreasonable for the insurer to withhold payment after after 12 months from the day the claim was made. The Government Bill, in contrast, infers a term into every contract of insurance that the insurer will pay any claims within a "reasonable time" and preserves the existing law in relation to interest.
• Duty of good faith: The Exposure Draft proposed the inclusion of a provision stating that a contract of insurance is a contract based on the utmost good faith. The Member's Bill seeks to take this further, stating that "A contract of insurance is based on a duty of utmost good faith owed by both insurer and policyholder to each other throughout the insurance relationship" and that the duty of utmost good faith includes a duty on an insurer to accept (or reject), assess and settle a claim within a reasonable period of time. The Government Bill does not contain a statutory good faith provision but leaves that to the existing common law, instead simply clarifying the extent to which the provisions in the Bill relating to the duty of disclosure modify the existing utmost good faith rule.
• Unfair contract terms: Currently, the unfair contract terms regime in the Fair Trading Act is largely inapplicable to contracts of insurance as a variety of terms central to the operation of insurance contracts are deemed "reasonably necessary" to protect the legitimate interests of the insurer. This includes terms that identify the subject matter or risk insured against, the sum insured, exclude or limit the liability of the insurer to indemnify the insured, describe the basis on which claims may be settled (for example, the payment of an excess), relate to the duty of utmost good faith, and address disclosure (including non-disclosure) by the insured). Terms that define the subject matter of the contract are also generally excepted from being deemed unfair contract terms.
  
  Both the Member's Bill and the Government Bill look to expand the unfair contract terms regime to insurance contracts by repealing these insurance-specific exclusions and imposing more tightly defined (but differing) exceptions:

• • The Member's Bill (adopting the same approach as the Exposure Draft) proposes to narrow the types of clauses which cannot be declared unfair to those "transparent" terms that are disclosed at or before the entry into the contract and which specify the sum insured or any contributory sum due from, or to be borne by, a policyholder in the event of a claim (ie an excess).
  • The Government Bill proposes to specify when a term of a contract of insurance defines the main subject matter of the contract, such that it would fall within the general exception. It proposes that a term defines the main subject matter of the contract only to the extent that it identifies the uncertain event or subject matter insured or the risk insured against, specifies the sums insured, describes the basis on which a claim under the insurance may be settled, specifies the excess, or excludes or limits the liability of the insurer to indemnify the policyholder on the happening of certain events or the existence of certain circumstances. The Government Bill also proposes to reduce the threshold for whether an insurance contract is a small trade contract from $250,000 to $20,000.

Regulatory context 

As above, the opportunity to comment on the Bill comes at the same time as the Government's "Phase 2" review of financial service regulation in New Zealand (See MBIE update here). It is timely in that respect.

In terms of the current regulatory design elements of the Bill, key points to note are that:

• The Bill itself is already largely consistent with the intention to move jurisdiction to the Financial Markets Authority for conduct matters pertaining to financial institutions. For example:
  • the new duties on insurers to help policyholders to understand insurance contracts are proposed to sit within the Financial Markets Conduct Act, rather than in the Contracts of Insurance Act; and
  • other obligations, such as new duties to inform policyholders of their disclosure obligations and obligations regarding brokers’ client accounts, while set to be included within the Contracts of Insurance Act, are specified to have civil liability consequences under the Financial Markets Conduct Act; and
  • the Contracts of Insurance Act will be designated as Financial Markets Legislation for the purposes of the Financial Markets Authority Act 2011. This will have the effect of making the Financial Markets Authority responsible for monitoring, investigating compliance with, and taking enforcement action in relation to the Contracts of Insurance Act once passed.
• The Bill is also mindful of the interplay of the timing of the reforms with obligations under the Financial Markets (Conduct of Institutions) Amendment Act 2022 (COFI). The commencement provisions provide that the Bill will come into force by Order in Council with an implementation date of the third anniversary of Royal Assent for any provision not in force by then. The Explanatory Note to the Bill explains that one rationale for this is to allow the timing of commencement to take into account insurers’ preparation for, or recent implementation of, the requirements imposed on them under COFI.

That said, further thought may be warranted on some regulatory design aspects, including:

• Whether there is sufficient clarity between (i) the intended COFI fair conduct programme obligations which, for example, expressly include assisting customers to make informed decisions as part of the fair conduct principle; and (ii) the proposed new Contracts of Insurance duty on insurers to help policyholders to understand insurance contracts; and
• Whether the Commerce Commission ought to retain jurisdiction for the unfair contract terms regime pertaining to insurance contracts under the Fair Trading Act. 

On the latter, in 2019 then then Government's policy decision was that the Financial Markets Authority would, at least, obtain dual jurisdiction with the Commerce Commission for the unfair contract terms regime in relation to financial products. In addition, the recent Commerce Commission v Viagogo proceeding provides an example of a regulator advancing arguments about both misleading and deceptive conduct and unfair contract terms in the same proceeding. The shape of that proceeding, accordingly, suggests there may be merit in the Financial Markets Authority having jurisdiction for both the fair dealing provisions and the unfair contract terms regime.