A major review of New Zealand’s insurance contracts law is a step closer to becoming a reality.
Commerce and Consumer Affairs Minister Kris Faafoi has released the terms of reference for a review of a set of six insurance contract laws described as “antiquated and fragmented”.
He says there are “significant problems” with these laws and maintains they are “undermining the effectiveness of our insurance markets and impacting those who do not receive the support they anticipated from their insurance policies”.
Non-disclosure a recognised sticking point
“I have heard, for example, that consumers are sometimes not covered for losses or unable to claim for important needs like health treatment because they innocently did not disclose seemingly unrelated matters to the insurer,” Faafoi says.
“This is really tough for people who genuinely believe they have met their requirements and are later unable to rely on benefits of insurance. So onerous disclosure requirements are one of the issues I am keen to look at.”
With around 10% of the complaints brought to the Insurance and Financial Services Ombudsman scheme centring on non-disclosure, Ombudsman Karen Stevens has been calling for a law change for years.
She explains the issue: “Strictly speaking, the law does not provide any remedy for a consumer who has failed to disclose (either intentionally or not), material information - materiality being determined on the basis of what would be material to a prudent underwriter in assessing the risk.
"The trouble with using the prudent underwriter test is that most consumers do not know what a prudent underwriter is, and neither do they understand how risk is assessed, until it is too late...
"Consumers can be left with no policy of insurance, no realistic prospect of obtaining replacement insurance and a very real possibility of having any other policies, held with the same insurer, cancelled on notice”.
Insurance lawyer, Andrew Hooker, in a column he wrote for interest.co.nz last year, highlighted the power imbalance caused by the current law.
He pointed out that while a consumer could lose huge sums of money by having their claim declined and policy cancelled due to non-disclosure, a High Court judge only fined Tower $5,000 for breaching its duty of good faith by withholding an expert report from a customer affected by the Canterbury earthquakes.
While the terms of reference say the aim of the review is to make sure policyholders can have certainty in the event of a loss, they also acknowledge the fact insurers need to be able to effectively measure and price risk.
The terms say parties should be able to “transact with confidence” and for interactions to be “fair, efficient and transparent at all points in the lifecycle of an insurance policy”.
Faafoi first announced his commitment to revamping insurance contracts law during a video interview with interest.co.nz in November.
His predecessor, Jacqui Dean, in May told interest.co.nz she wanted to start similar work in 2018 if the National-led Government was re-elected.
Review to consider IMF recommendations
The review will also consider whether there is a case for greater regulation and supervision of insurers’ conduct.
The International Monetary Fund, in a major review it did of New Zealand’s financial system last year, recommended “immediate” action be taken to enhance “insurance intermediary and conduct regulation and supervision”.
It said: “Aspects of the insurer’s relationship with customers where there may be misconduct, including the handling of claims and complaints, and advice on (nominally) simpler products provided by registered financial advisers, are effectively unregulated.”
Faafoi acknowledges the IMF identified “room for improvement in this area”.
The terms of reference say the review will also look at the difficulties consumers face trying to find and compare prices and policies between insurers.
While insurers have partaken in case studies interest.co.nz has conducted comparing premiums and policies, general insurers in particular have refused to play ball with those who have attempted to set up insurance comparison websites.
Legislation changes could be made during the current parliamentary term
Faafoi notes: “Insurance contract law has been significantly updated in comparable markets including Australia and the UK, so this work is long overdue.”
A couple of the six pieces of insurance-specific legislation that govern the insurance contract relationship in New Zealand date back to 1908.
The laws encapsulated in the review include the Law Reform Act 1936, the Insurance Intermediaries Act 1994, The Insurance Law Reform Act 1977, the Insurance Law Reform Act 1986, the Life Insurance Act 1908, and the Marine Insurance Act 1908.
Other general or financial services laws like the Financial Markets Conduct Act 2013 also apply to insurance products.
The terms of reference say the review will draw on work done by the Law Commission in 1998 and 2004, and the previous Labour-led Government in 2007.
Referencing the Law Commission’s work, a 2007 Cabinet paper said the main issue that needed addressing was disclosure.
It said: “The duty to disclose… can create a power imbalance between insurers and policyholders, because there are limited incentives for insurers to ask questions that signal to policyholders what information is important to underwriting their policy, and where questions are asked there is limited understanding by policyholders that there is a duty to disclosure matters outside the scope of the questions.”
The Ministry of Business, Innovation and Employment will release an issues paper for consultation in the middle of the year, and a follow-up options paper for consultation at the end of the year.
The aim is for policy decisions to be made by mid-2019.
“If I find that change is warranted, I’ll be working towards introducing legislation in the current Parliamentary term,” Faafoi says.
“I see this as an important piece of work so I am asking officials to move this forward quickly.”