By Rebecca Sellers*
The Government is considering making changes to insurance law that will affect every New Zealander. Our lives are buoyed up by insurance. Warranty and indemnity insurance enables merger and acquisition activity; every building that is built, every container that leaves New Zealand’s shores is kept afloat by an invisible web of insurance. Our lives are held together by that invisible web: the car you drive; your child on the sports field; your home; your teeth; your pet.
Insurance is an unusual bargain. It should be as light as gossamer until you need it and have a strong flexible embrace when you fall. No customer wants to spend lots of money on insurance – you hope you will never need it. And no customer wants to spend lots of time providing information when insurance is arranged.
The bargain is unusual for both parties. Insurers know nothing of your life. They risk their shareholder’s money based on trust. In a curious twist of the invisible web, as well as being insured, you may be the shareholder of an insurance company through your KiwiSaver. All of us are effectively shareholders in the EQC and ACC. So, all of us have an interest is making sure the bargain is as effective as it can be.
Insurance companies may no longer have mutual ownership, but there is still an element of mutuality in insurance. Most insurance policies are never claimed on and so the web of insurance will remain invisible. The money you pay in premiums will be used to pay the claims of other policyholders. Each of us as customers depend on insurance companies to charge the right price and to accept the right level of risk. It is in all our interests that insurers only pay valid claims and run their businesses efficiently. If they do not, there is a risk that the web of insurance will not be there to catch us when we fall. Most insurers are covered by reinsurance which will only allow the payment valid claims. The law should offer certainty, but insurance law is ripe for reform. The customer’s duty of disclosure has not changed since Captain James Cook first came to New Zealand.
What the customer must disclose is not certain
In the 18th Century in Mr Lloyd’s coffee house in London, merchants shared the risks of a voyage. The ship’s owner would pay a premium to the other merchants. If the ship was lost, the merchants would share the loss: this is the essence of the insurance bargain.
Three years before Captain Cook sought to observe the transit of Mercury off the Coromandel, the English Courts decided that an insurance customer is under a general duty to disclose all information material to assessment of the risk: “..the underwriter knows nothing and the man who comes to him to ask him to insure knows everything”.1 The ship owner had the best information about his ship – so the other merchants were entirely dependent on the ship owner to disclose material information, such as the state of the vessel, the drunkenness of the crew or whether the French planned to attack the ship’s destination.
New Zealand remains one of the last Commonwealth jurisdictions to impose that unrestricted duty of disclosure developed in the 1700s. As a consumer, you are under a duty to disclose all material facts which are or ought to be known by you and which are material to the formation of the insurance contract. A fact is material if it would influence the judgment of a prudent insurer in determining whether to accept the risk or set the premium.
The law of 1700s England is our current law. But modern business has moved on from Mr Lloyd’s coffee house. Now most insurance cover is commoditised. When a family or small business applies for an insurance policy, in most circumstances there is little active underwriting of the risk. It costs time and resources for an underwriter to consider information, so lack of active underwriting means everyone gets cheaper insurance. This utilitarian approach suits most people as price is a critical factor in buying insurance.
Insurance is often sold at the same time as another product, such as a flight. The sales process usually emphasises how quick and easy it is to get insurance. But this is the moment when the consumer should consider the law of 1700s England. Before clicking “Yes” to the insurance option, the consumer must consider the notional prudent insurer. As the Law Commission identified: “How can the ordinary consumer be expected to know what circumstances would influence the judgement of a prudent insurer?”2. The insurer may ask the customer specific questions in the proposal form, but the customer is not excused from providing any other information that could be material to a prudent insurer – even if that information is outside the scope of the questions. Ignorance of the law is no excuse, even if the insurer did not warn the consumer about the duty of disclosure.
Australia effectively abolished the duty of disclosure for consumers in 1984. Australian consumers are only required to disclose answers to express questions. The consumer’s answers must provide material information. But what is “material” will be assessed by reference to a reasonable customer – not a prudent underwriter. In 2013, the UK abolished the duty of disclosure for consumers. Both jurisdictions have retained disclosure for businesses, but since 2016 in the UK in substantially modified form.
Disproportionately harsh results
The remedy for non-disclosure in New Zealand is that the insurer can decide to void the insurance. It will be as if the insurance never existed. No claims will be covered and the subject matter will be uninsured. The insurer must repay the premium unless fraud is established. This is a draconian remedy. The New Zealand Courts have described the law as leading to “uncertainty and injustice’. 3 The impact is permanent. The unfortunate customer is cursed with the metaphorical “black spot” of bad honour. Every new insurer will ask if a claim has ever been declined or policy cancelled or avoided: it may be impossible to obtain any insurance cover, or cover may only be available on unfavourable terms.
In Australia, an insurer can only avoid the insurance contract where there has been fraud. The general remedy is that the insurer is entitled to be put in the position they would have been in had full disclosure been made. This may mean that the policy is amended or no benefit is payable, but the customer is not left as a pariah with no cover. A UK insurer can avoid a consumer policy only where the consumer has failed to act honestly in making statements to the insurer, and a business policy can be avoided only where there is fraud or where the insurer can show that, had the truth been told, it would not have insured at any price.
How will NZ law change?
The remedies for non-disclosure and misrepresentation need to be updated and the mismatched legislative reforms of the 1970s should be streamlined. There are strong arguments in favour of adopting the UK reforms and abolishing the duty of disclosure for consumers of commoditised insurance products. Insurance law is out of step with other aspects of financial services law. Previous proposals for reform in New Zealand were relatively timid, but those proposals have been overtaken by time and technology.
The insurance industry is going through a process of radical change. Development of peer-to-peer, usage based, and on demand insurance are challenging current insurance models. Insurers are looking at digital methods of distribution and it is likely that insurance will become further embedded in other services or products. Later this month the Financial Markets Authority will be consulting on possible exemption relief to facilitate personalised robo-advice services.
It is timely for the Government to examine New Zealand’s insurance laws to ensure that the bargain between consumers and insurers is as effective as it can be and is suitable for InsurTech offerings. There is a vital need for New Zealand to move on from an outmoded legal model for this most pervasive and important of financial instruments. Quite clearly, we are no longer in the 1700s.
 Carter v Boehm (1766), Rozanes v Bowen(1928)
 “Some Insurance Law Problems”, New Zealand Law Commission, 1998
 State Insurance v McHale  2 NZLR 339
Rebecca Sellers is director of Melior Law & Regulation and a contributing editor of Colinvaux’s Law of Insurance in New Zealand.