UPDATE – AS OF 10 JULY 2013
A Supplementary Order Paper released on 10 July 2013 makes substantive amendments to the Consumer Law Reform Bill, alleviating the concerns raised in the article below.
The Insurance Council of New Zealand is largely responsible for bringing about the changes. It pointed out that the inherent uncertainty of the previous wording of the Bill would create higher risks to insurers, resulting in consumers paying higher premiums.
Supplementary Order Paper 273 makes special provisions for contracts of insurance. The fundamental problem in the section 46L (4) has been resolved; the word "may"
has been changed to "must"
, and a list of legitimate interests is set out which "must"
be taken into account.
Terms necessary to protect legitimate interests have been defined in s46L (4) (a)-(g), to include terms dealing with uncertain events, sums insured, limitation clauses, premium payments, the duty of utmost good faith, and disclosure requirements. The inclusion of the utmost good faith requirement as a legitimate interest codifies the common law relating to insurance contracts.
Following these developments, the insurance industry can rest assured that the Consumer Law Reform Bill will not be enacted in a form as uncertain as initially proposed.
It is understood that the Insurance Contracts Bill, which has languished for over 10 years, will be advanced and, once enacted, will incorporate the insurance provisions from the Consumer Law Reform Act
To download the original article as a pdf, click here.
On the evening of Wednesday 17 April, Craig Foss, Minister of Commerce and Consumer Affairs, proposed without prior announcement an amendment to the Consumer Law Reform Bill, specifically targeted at insurance contracts.
The Consumer Law Reform Bill will implement changes to the Fair Trading Act 1986, and prohibits "unfair" terms in consumer contracts, including insurance contracts. Under the proposed Bill, a term is deemed unfair if:
(a) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
(b) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause a detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.1
The amendment that was made yesterday, with no public consultation or industry input, provides:
In relation to insurance contracts only, for the purposes of ss(1)(b), a term in an insurance contract may be treated as being reasonably necessary in order to protect the legitimate interests of the insurer if the term relates to the underwriting risk accepted by the insurer.2
The clause attempts to permit insurers to pass some of the risk back to their policyholders, through exclusions within the policy. However, legally, the drafting is unclear. The phrase "may be treated" creates distinct uncertainty as to what will be considered "reasonably necessary" to limit insurers' liability.
To put this into context, if there is another severe earthquake in Canterbury, and insurers can not get reinsurance for their risk, policyholders may be able to rely on s46L(1)(b) (above), to block any resulting changes to their policies. Alternatively, insurers may be able to rely on the new clause to make widespread changes to policies without them being deemed "unfair".
Unless this uncertainty is cleared up at the Third Reading, only litigation will allocate whether insurance contracts are bound by terms of fairness. The Bill has passed its second reading (and therefore the Select Committee) and is likely to be in force by the end of 2013.3
1 Consumer Law Reform Bill s 46L (1) (a) – (c)
2 Supplementary Order Paper No 207, Clause 26A