Extending the UCT regime to insurance contracts: a rogue wave?
Like waves in the ocean, the reviews and reform of the laws relating to financial institutions are currently swelling in a set, heading to New Zealand's shores. In assessing those reforms, it will be important that focused attention is given to the costs and benefits of each individual wave, rather than rogue waves being missed in the swell of other reforms.
One important wave to consider is the proposal to remove the exemptions for insurance contracts from the unfair contract terms (UCT) regime. That would reverse the policy decision previously made to exempt certain insurance terms from the UCT regime. What has changed in the last four years to justify a change in approach? What would be the implications for insurers and consumers?
The UCT regime
In 2015, prohibitions in the Fair Trading Act (FTA) came into force prohibiting unfair contract terms in standard form consumer contracts (the UCT regime). Certain terms of insurance contracts were excluded from the UCT regime to reflect the unique nature of insurance contracts, and the fact that insurance contracts are subject to their own legal regime. Excluded terms include those:
- relating to the subject matter insured;
- specifying the sum insured;
- excluding liability in certain circumstances;
- providing for the basis on which claims may be settled;
- providing for the payment of premiums;
- relating to the duty of utmost good faith; and
- specifying requirements for disclosure, or relating to the effect of non-disclosure or misrepresentation, by the insured.
However, in its April 2019 Insurance Contract Law Review Options Paper (the Options Paper), MBIE has said that there "is a problem with the status quo, which results in consumers being disadvantaged by genuinely unfair terms" in insurance contracts. In support of that position, MBIE has provided examples of insurance contract terms that it considers are potentially unfair, and it is apparent that MBIE favours removing the exceptions for insurance contracts from the UCT regime.
The Australian Government has also committed to extend UCT protections to insurance contracts in that country.1
The New Zealand insurance industry has consistently opposed carte blanche application of the UCT regime to insurance contracts on the basis that insurance contracts can be distinguished from many other types of consumer contracts given the contract for the product and the product are, in effect, one and the same thing.2
There are multiple concerns arising from carte blanche application of the UCT regime to insurance contracts. These include:
- Insurers use contractual terms to outline the risks they will accept or exclude, and price their premiums accordingly. Any subsequent finding that a particular term is unfair would fundamentally change the product provided to the insured. A finding of "unfairness" would not just apply to the specific policy in question, but would mean that the term declared unfair would be unenforceable across all affected policies. This could mean that an insurer would become required to cover a risk across a significant number of customers for which they have not collected any premiums. This would significantly alter the liability of the insurer in ways outside of its control at the outset of a contract.
- Insurers are uniquely dependent on the accuracy and completeness of information provided by their customers. There is a need to include sufficient contractual protections to provide for that information asymmetry and the fundamental implications of any material non-disclosure.
- The ability of New Zealand insurers to obtain reinsurance from overseas reinsurers depends on the ability of those insurers to include/exclude risks at the outset of an insurance contract, and with certainty, in accordance with the requirements of their reinsurers.
- In addition to reinsurers, the potential loss of contractual certainty from including all insurance contract terms in the UCT regime would undermine the willingness and confidence of insurers and investors to participate in the New Zealand insurance industry.
- If insurers were unable to exclude certain risks with upfront certainty it would change their ability to underwrite risks and may result in insurers:
- not offering certain types of cover or cover in certain high-risk segments; or
- substantially increasing their premiums.
In implementing the reforms that led to the 2015 implementation of the UCT regime, the Government of the day accepted that such concerns justified exceptions from the UCT regime for certain insurance contract terms.
The fact this reform is now on the table in 2019 does not reflect that any of those concerns have dissipated in the meantime. Rather it reflects that the current Government, in the current climate, is placing a greater weighting on "pro-consumer" reforms than previously. While achieving outcomes for consumers is a noble aim, it is nevertheless very important to also:
- balance the benefits to consumers against the costs/risks to the industry; and
- balance possible individual benefits in particular isolated cases against the likely flow on effects for the cost and affordability of all consumers seeking similar cover.
It is also important to consider whether it is premature to extend the UCT regime to insurance contracts at the present time given the regime remains in its infancy. Indeed, while we have been involved in a number of interactions with businesses and regulators on the existing UCT regime, and the Commerce Commission has published a number of reports on its view of the application of the regime, the lack of case law means that significant uncertainty remains about what terms would ultimately be viewed by the Courts as "unfair". Before taking the significant step of extending the regime to insurance contracts, there could well be merit in allowing time for further clarity to emerge on the scope of the regime.
What insurers can be doing
Even setting aside the large set of other potential financial services law reforms, it is apparent that this one proposal could have significant consequences for the provision of insurance in New Zealand.
Providers of insurance should have this proposal well up their priority list, and be forming views on:
- how they respond as part of the law reform process to ensure any law reforms are fit for purpose; and
- how they might prepare for any law reform, including having plans in place to review and amend any existing policy terms (if necessary).
Who to contact?
If you have any questions on the implications of the potential law reform, or would like assistance in submitting on the reforms or reviewing existing policy terms, please get in touch with Troy Pilkington, Sarah Keene, Joe Edwards, Emmeline Rushbrook, Marika Eastwick-Field, or Will Irving. We have extensive experience advising on the UCT regime and law reform processes, and we will help you proceed with confidence.