Andrew Hooker wants law reform to eliminate special legal privilege insurers have

Andrew Hooker wants law reform to eliminate special legal privilege insurers have

By Andrew Hooker*

Imagine this.

You are negotiating with someone to sell your car to them.

You have never met that person before. But as part of the negotiation process you have an obligation to tell them everything that you think they might want to know about yourself and the car.

You ask them what they want to know, and they tell you that you have to work that out for yourself. If due to some innocent omission, you fail to tell them something that they would have wanted to know, they can come back at you at any time in the future to undo the deal. 

Business would not work like that.

The commercial world would grind to a halt.

However, the insurance industry has lived with this privilege for centuries.

The current law is that someone to applying to insure their house, contents, car or business has to disclose to the insurance company any “material fact”.

This obligation exists whether or not the insurance company asks for that information. The person applying has a legal obligation to disclose facts that may be material and must work out for himself or herself what might be material.

That seems an almost impossible situation. 

Put simply, you have to disclose to your insurance company what your insurance company thinks it wants to know, but your insurance company does not have to tell you what it wants to know. You have to work that out for yourself.

If you get it wrong, your policy can be void and you will have no insurance.

But you will not know about that until claim time when of course it is too late.

This somewhat skewed approach to contractual relations has existed for centuries, and has been used regularly by the insurance industry to avoid paying claims.

A number of years ago the Government, on recommendation from the Law Commission, put together a Bill to reform the law of insurance.

If this Bill was passed into law, the rights of an insurance company to terminate your insurance in reliance on this principle would have been severely restricted. With very limited exceptions, insurance companies would only be allowed to void a policy if an actual question was incorrectly answered. So the insurance company had to ask the questions. It could not simply rely on the applicants to read its mind as to what should be disclosed. 

This legislation stalled in Parliament, and has not yet been passed.

There is some current movement to resurrect this legislation, and it can’t come too soon.

Insurance companies still rely on this unusual and arcane obligation to deny insurance claims with regularly monotony.

Another piece of legislation that is currently being considered is the Consumer Law Reform Bill. One of the interesting aspects of this legislation is a prohibition against what is known as an unfair contract term.

Where a term appears in a standard form consumer contract, it will be declared unfair if it:

· would cause a significant imbalance in the parties rights and obligations arising under the contract; and

· is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term;

· would cause detriment to a party if it were applied, enforced or relied on.

Again it seems legitimate that consumers should be protected by legislation against such unfair or unreasonable terms.

Consumers are not in the same position as commercial entities, and can often be taken advantage of.

However, the proposed legislation is likely to be amended so that there would be special exclusions for insurance contracts. This will provide that a clause will not be deemed unfair if it is in a contract of insurance and fits into a number of specified categories.  These categories include a clause in an insurance contract that:

· excludes or limits the liability of the insurer to indemnify the insured on the happening of certain events or on the existence of certain circumstances;

· relates to the duty of utmost good faith that applies to the parties of a contract of insurance;

· specifies requirements for disclosure all relating to the effect of non-disclosure or misrepresentation by the insured.

The proposed legislation would already protect companies such as insurance companies because the provisions could only be deemed unfair if they met one of the three criteria set out above. 

That raises the question of course – why does the insurance industry need special treatment?

If an exclusion (for example) in an insurance policy does not cause a significant imbalance in the parties rights, is reasonably necessary to protect the insurance company, then the Act would not apply. 

The corollary of course is that an exclusion clause in an insurance policy would not be deemed unfair even if it would cause significant imbalance in the rights and obligations between the insurer and the insured and it is not reasonably necessary in order to protect the legitimate interests of the insurer.

So the insurance industry will be lawfully permitted to include in contracts of insurance clauses that are unfair, notwithstanding that the rest of the commercial world is bound by this legislation.

All this of courses raises the question.

Why do insurance companies have this privileged existence?

An insurance policy is simply a contract between two parties. The insurance companies take the premium and they pay the claim when the loss occurs.

Why is it that the insurance industry is entitled to (for example) exclude events, even where that exclusion would otherwise fall foul of the unfair contract terms that the rest of the commercial world has to live with?

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*Andrew Hooker practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He is also director of Claims Information Specialists Ltd, an insurance information website.

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Insurers cannot possibly be expected to know all the material facts pertaining to the risk therefore it is incumbent on the insured to advise them anything which a prudent insurer would consider relevant.
Seems fair to me.
Without this insurance would be much more difficult to obtain.

Any buisness cannot possibly know all the risks it may face.
Insurance is scam.
And the directors of AMI should be made accountable, just like any other business.

Can you justify please?  To say the directors should be made accountable suggests they acted un-safely, I cant see how,

eg There has been comments that they used a risk model to assess their risks and that seems to have followed good practice.  They also had substantial re-insurance cover, except this event was in an un-expected area and of an un-expected size.
Yes they probably err'd however they seem to have acted in good faith and attempted to cover any reasonable and foreseeable risk.
regards

Now look here steven. I own several companies, if i stuff up then that's my problem, and my employees and thier families problem, and my creditors and thier families problem.
 
Compare that situation to this:
The bailout of failed Christchurch insurer AMI will cost the taxpayer more than double the amount estimated in March after the sale of the company's assets and brand to Australian insurance giant IAG.
According to Southern Response, the company set up by the Government to administer AMI's Christchurch earthquake liabilities, the Government's total claim exposure is now $1.934 billion after EQC contributions, up from an estimated $1.8b.
http://www.stuff.co.nz/the-press/business/7995303/AMI-bailout-cost-doubles
 
 
 

I fully agree Moa Man. We have part of the business sector taking full responsibility for problems and stuff-ups and the other half getting bailouts and it is not good enough and the latter is very much to the detriment of the NZ economy.
The insurance industry has layers of protection built into it via the legislative process which is nothing more than a subsidy against failure and incompetence.

Yep notaneconomist that's right.
A normal company owner has both fudcial and moral responsibilites to consider.
Not so for those, to big to fail or to big to jail.
Perhaps i should diversify  into P manufacturing, I mean why not, seems like it's a free for all, might as well make money while sun is shining and if the Govt is going to bail out losers like AMI directors, then why should i give a shit.
 

There is a legal requirement to consider the shareholders and creditors, yes.  There is no real moral responsibility that is legal Im aware of?
ie if a owner / CEO did something morally that dis-advantaged the shareholders then there is I suspect a legal case they have to answer.  Of course if the CEO doesnt do something "morally right" and the income drops he also could have a case to answer.
regards
 

I suspect equity law has a moral foundation to it, at least in orginal concept if not modern practice.

and if the directors were honest and did a reasonable job to met that legislation then there is no case for them personally to answer.
regards
 
 

Moa man, but
a) The amounts do not or should not matter.
b) You would not be held accountable in the extreme. All that should be required is that you took all reasonable and foreseeable steps to run your businesses in a legal, competant and safe manner.
There is always risk and impact in everything we do, we cannot cover for everything no matter what and especially, ALL unkowns.
regards

but more to the point an Insured may have particular insight into a factor affecting the risk as regards a particular peril that they are insuring against.  to not disclose this creates a one-sided contract. Good faith is all thats required here.
Perhaps the wording should be changed to reflect the reasonable man as opposed to the 'reasonable insurer'. I do agree that it is not always possible for a person to know what an insurer would consider relevant (but mostly it still is).

I think that the insurer has a much better chance of knowing what it wants to know than the insured.  To expect mums and dads to know what your hypothetical "prudent insurer" might like to know places an impossible burden on them.

2 issues here to say I strongly dis-agree,
a) The insurer has decades if not centuries of experience, (I think houses have been insured since the 1650s?) . As a result of 10s of millions of claims and has thus pretty much seen it all.  Therefore insurer as a professional should therefore have the experience to know what to ask about up front. Sure there maybe the odd thing but the insurer can go to court for that rare event and justify it.
The insured on the other hand often does not. I for instance in 35 years of insurance have made maybe a handful of claims, and 1 in NZ in 17+ years.
b) In the USA you have to have medical insurance, yet something like 75%? of personal bunkruptcies result from ppl who thought they had cover but when they claim found it declined so had to pay themselves and this is a growing problem.  So insurers are abusing this position.
Finally bear in mind that what you are paying cheaply for maybe for nothing, as per b)  you find your cheap and easy to get insurance is null and void, then you are up creek with no paddle.
regards
 

Insurers have huge legal resources, consumers don't and ambiguous terms are frequently ruled in favour of the policy holder because of this. Asking a question like - have you ever had this disease and then discovering the policyholder stated no because he didn't remember having Chicken pox at 2 years old and at 50 no longer had his parents or orginal doctor to ask and refusing the claim is patently unfair. In view of the disparity of resources I reckon Andrew is right in suggesting insurers do not require special legal priveledges and if they obtain them in equity the insured should also have counterbalancing rights.
Insurers in NZ have handled quake claims in an inefficient and apalling manner and the question should be why have politicians failed to act in the interests of thier citizens??!!

There are pros and cons on this point.  One has to aknowledge the fact that the insured party is in a position to know far more about the risks than the insurer.  Maybe there should be a provision that the insurer has to prove that the insured knew of the risk and did not disclose it.  Otherwise their power is open ended and unlimited.
One point into favourable treatment for insurance companies that I would be interested to know about, is how are they treated for tax.  What is profit and what is a legitimate provision for risk. How does this play out over time and how are the profits from the income generated on these provisions treated.  How has all this worked through in the Christchurch situation?

If you are buying insurance you are selling your risk. If you are selling insurance you are buying that risk. The legislative process should reflect a level of fairness and treat the parties equally otherwise the legislative process is a failure. The insurer has the ability to factor risk into the premium charged. The competitive market also assists in pricing the risk.

Yes it is the basics that should be driving the rules. Any reference to shareholders and creditors is smoke. The basics state that with a pool of the insured paying into a fund at a rate that is set by the identified level of risk, there is enough to pay for the few events that do happen, company costs and a bit left over to pool for those years when it all goes sour. The problem is that the Insurance companies have raked off the pool as profits to be frittered away, and when it all went sour, instead of fronting up and owning their screw-up, they are now gouging their customers and saying it is the cost of re-insurance etc...
Material fact could be anything. Did either the insurance companies or their customers know or realise that due to the geological formation beneath Christchurch, a reasonable sized earthquake could be devastating? Would anybody have been in a position to advise them of the fact? Regardless, if they had maintained the pool mentioned earlier they would have had more than enough to cover the cost. Like other big businesses the model now used is about profit anyway you can get it, rather than delivering a service. Insurance companies, just like banks have been able to con (or bribe) politicians into writing legislation in their favour that is all. Time for our Government to serve the people they are supposed to, not the ones who give them nice presents and soirees (bribes).

Further to the above, why am i now paying insurance rates based on the risk at Christchurch when my home sits on completely different gelogical strata with a significantly lower reaction to earth movement than that demonstrated at Christchurch?

Apparently there is no party who is willing to enter into a contract with you on that basis.

Give 'em an excuse and they'll milk it for all its worth and then some. I used to get $1 mill if high jacked now all I get is lunch money.