By: Antony Holden, Caroline Laband, Michael Cavanaugh and Colette Clayton

The Contracts of Insurance Bill, previously referred to as the Insurance Contracts Bill, has (finally) been introduced to the House.

The Bill looks to consolidate and replace six Acts and the surrounding principles and case law that currently govern New Zealand insurance law. The most notable changes focus on the duties owed by both the insurer and policyholder, and the insurer’s responses and remedies when those duties are breached.

We summarise some of the key changes from the current position below (noting changes from the previously proposed Bill). However, this is a complex area of pre-existing law, and some major reforms and consolidations are being proposed. If you would like to discuss this further, please reach out to the Wotton Kearney team.

What changes should insurers be aware of?

The duty of utmost good faith

The Bill no longer codifies the common law duty of good faith between insurer and policyholder.¹ Instead, the Bill expressly recognises there is a “rule of law to the effect that a contract of insurance is a contract based on the utmost good faith”,² which the Bill modifies in relation to disclosures or representations.³

In recognising this rule of law, and given these modifications, the Bill necessarily (and expressly) abolishes any rule of law permitting a party to avoid a contract of insurance on the ground that utmost good faith has not been observed by the other party.⁴

The duty of disclosure

A policyholder’s duty of disclosure depends on whether the policy is a consumer policy, being wholly or predominantly for personal, domestic, or household purposes.⁵ If not, it is a non-consumer policy.⁶

Consumer duty

The consumer duty is to take reasonable care not to make a misrepresentation to the insurer before entering (or varying) the insurance contract.⁷ The onus, however, remains on the insurer to ensure they are receiving an appropriate representation of the risk – as explicitly stated by Parliament in introducing the Bill, it will be “the insurer’s responsibility to ask the right questions”.⁸

The Bill prescribes what is relevant for assessing whether the policyholder took reasonable care.⁹ There will not, for example, be any misrepresentation where a policyholder has either (a) failed to answer a question or (b) given an obviously incomplete or irrelevant answer to a question.¹⁰

Non-consumer duty

The non-consumer duty is to make a fair representation of the risk to the insurer before entering (or varying) the contract.¹¹ A fair representation of risk is prescribed by the Bill as disclosing every material circumstance known or ought to be known by the policyholder, or giving the insurer sufficient information to put a prudent insurer on notice that it needs to make further inquiries for the purpose of revealing those material circumstances.¹²

A circumstance is material if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.¹³ A policyholder is not obliged to disclose circumstances if the insurer knows, ought to know, or is presumed to know the circumstances, or if the insurer waives the information as material.¹⁴

Remedies for insurers

Connected to this change on duties of disclosure, the Bill proposes changes to the scope of remedies available to an insurer, so the remedies are proportional to the breach. The insurer will only have a remedy for breach of the respective duty if it can prove that it would either not have entered into the contract at all or entered into the contract on different terms.¹⁵

The remedies available also depend on when the misrepresentation was made.¹⁶

An insurer only has the right to avoid a policy and decline a claim if the misrepresentation was deliberate or reckless. The test for deliberate or reckless misrepresentation depends on whether the policyholder is a consumer or a non-consumer. For a:

• consumer policyholder, it must have:
  • known that it was untrue or misleading (or did not care that it was), and
  • known the matter was relevant to the insurer (or did not care that it was).
• non-consumer policyholder, a breach is deliberate or reckless if the policyholder:
  • knew that it was in breach of the duty of fair presentation, or
  • did not care whether or not it was in breach of that duty.

The available remedies are helpfully summarised in explanatory material to the Bill, for the consumer duty as:

*The proportionate reduction is calculated by reference to the amount of the premium actually charged compared with the higher premium that would have been charged.

and for the non-consumer duty as:

*The proportionate reduction is calculated by reference to the amount of the premium actually charged compared with the higher premium that would have been charged.

Unfair contract terms regime

Currently, the Fair Trading Act 1986 prohibits unfair contract terms in standard form consumer contracts. Insurance contracts are specifically exempt.

The Bill removes these insurance-specific exceptions from the Fair Trading Act,¹⁷ and clarifies which insurance terms are part of the “main subject matter” of the contract (which, under the unfair contract terms regime, cannot be declared unfair).¹⁸ These “main subject matter” terms identify the insured risk or event, the sum insured, the basis on which claims may be settled, uninsured sums, exclusions and limits of liability.¹⁹

Late notice – claims-made policies get their teeth back

The Bill heralds an important change for claims-made policies. The insurer may decline cover where an insured does not notify an insurer of a claim or circumstance within 90 days of a claims-made policy period ending.20

For other types of policy, there will be limited remedy for late notice of claims or circumstances. The substance of s9 of the Insurance Law Reform Act 1977 (currently remedying such late notice in the absence of material prejudice) will be carried over.²¹

No statutory charges

The Bill removes any statutory charge over insurance policies and preclusion of defence costs from eroding limits.²² Instead, there will be a similar regime to New South Wales, under which claims can be made directly against the insurer.²³ This requires the insured to first be insolvent, deceased or struck-off the companies register,²⁴ and then for the Court to grant leave to proceed.²⁵ Unlike the old statutory charge regime, the right to claim directly against an overseas insurer is not precluded by the fact sums payable under the contract of insurance fall outside New Zealand.

A third party will be able to request specified information including regarding the existence and terms of a policy from another person, including a policyholder, if they have reasonable cause to consider this would assist their claim.

Claims under the affected policy can be paid out in the order in which they are settled, or judgment obtained.²⁶

What will this mean for insurers?

The Contracts of Insurance Bill passed its first reading on 2 May 2024 and is a step closer to becoming enforceable law. The next step is another consultation process with the Bill being referred to the Select Committee. The Committee will consider the Bill and any public submissions and report back to the House on any recommended changes. The due date for public submissions is 3 June 2024.

Many of the proposed changes are already reflected in insurers’ contractual terms and are consistent with the Fair Insurance Code. The reform fixes important anomalies in the treatment of claims-made policies and does away with the clunkiness of the almost hundred-year-old statutory charge over liability policies. The Bill will necessitate some changes to policy terms and to disclosure and underwriting practices. Should you wish to conduct a review of your polices and/or processes, please contact one of the Wotton Kearney team.

^[1] The previous iteration of the Bill expressly codified this duty.

^[2] Clause 63(5).

^[3] Clause 63(1) via clause 63(4).

^[4] Clause 63(3).

^[5] Clause 10(1).

^[6] Clause 10(2).

^[7] Clause 14.

^[8] (2 May 2024) 775 NZPD (Contracts of Insurance Bill – First Reading, Andrew Bayly).

^[9] Clause 15.

^[10] Clause 19(1).

^[11] Clause 33.

^[12] Clauses 34 and 35.

^[13] Clause 36.

^[14] Clause 35(2).

^[15] For the consumer duty: clause 27. For the non-consumer duty: clause 52.

^[16] The previous iteration of the Bill did not draw a distinction between this timing for remedies.

^[17] Clause 177, repealing ss46L(4) and (5).

^[18] Clause 176, inserting s46KA to the Fair Trading Act.

^[19] This differs from the previous Bill’s proposed Options A and B. It represents an expansion that Option B.

^[20] Clause 73(1). This does away with the previous Bill’s proposal for a 60 day period from the period ending, plus a 14 day period of the insurer notifying the policyholder of the consequences in failing to notify within time.

^[21] Clause 72.

^[22] Clause 169(e) repealing Part 3 of the Law Reform Act 1936.

^[23] Clause 88.

^[24] Clause 87(2).

^[25] Clause 89.

^[26] Clause 94.