The Ministry of Business, Innovation & Employment’s (MBIE
) review of insurance contract law was delayed last year so that MBIE could consider the Financial Market Authority’s (FMA
) review of life insurer conduct, and the Australian Law Commission’s Inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry (Australian review
). Both these reports have now been released and both were critical of certain aspects of the insurance industry.
MBIE has now released Options Papers for its review of insurance contract law and also for the conduct of financial institutions. This article discusses some of the key changes being considered.
Currently, failure to disclose a material circumstance when entering into a policy allows an insurer to treat the contract of insurance as void from the start, even if the relevant facts would not have made the insurer decline to provide cover. This can obviously have serious consequences for policyholders.
The Australian review recommended that, for consumer contracts, the duty of disclosure be replaced with a duty to take reasonable care not to make a misrepresentation to an insurer. This puts the onus on the insurer to ask specific questions in the insurance proposal form. The review considered that current regime was unfairly weighed in favour of insurers in a consumer context. This is similar to the current position in the UK.
The Options Paper
considers three alternatives:
- A duty to take care not to make a misrepresentation (i.e. the Australian approach);
- A duty to disclose what a reasonable person would know to be relevant – this approach still puts the onus on the insured to assess what information should be disclosed; or
- A requirement for life and health insurers to use medical records to underwrite.
Option 1 is most favourable to the insured and is likely to be the government’s preferred option.
The Options Paper also considers option for reform in the business context, although it recognises that there do not appear to be the same issues with the status quo in the business context because of the routine reliance on expert broker advice.
Unfair contract terms
Under the Fair Trading Act 1986 (FTA
), a contract term is ‘unfair’ and may be void where:
- It causes a significant imbalance in the contracting parties’ rights and obligations;
- It is not reasonably necessary to protect the legitimate interests of the party receiving the benefit; and
- It would cause detriment to a party if relied upon.
Insurance contracts are covered by these provisions, but with certain exceptions.
In Australia insurance contracts are not covered by unfair contract terms legislation. The Australian review considered that the body of research in this area consistently tended in favour of applying unfair contract terms’ regimes to insurance contracts.
The Options Paper proposes three options:
- Tailoring of generic unfair contract terms’ provisions to insurance, i.e. to remove the insurance specific provisions but amend the generic unfair contract terms’ provisions, for instance to define the ‘main subject matter’ of an insurance contract broadly. This is similar to the Australian proposal;
- To rely on the generic unfair contract terms’ provisions as currently drafted, or to do so, but with a proviso that core terms are excluded (i.e. main subject matter and price) but only if they are transparent and/or prominent. This is the UK approach; or
- Completely exempt insurance contract from the unfair contract terms’ provisions.
MBIE does not think option three is viable. As far as options 1 and 2 go, the devil will be in the detail, for instance in how broad (or not) ‘main subject matter of the contract’ is defined.
Exclusions with no causal link to loss
Currently, under s 11 of the Insurance Law Reform Act 1977, insurers cannot decline claims based on a policy exclusion where there is no causal link between the exclusion and the loss. This provides protection for insureds but can interfere with insurers’ ability to charge different prices to reflect higher levels of risk. The classic example is the pricing of vehicle insurance policies, which are generally cheaper when the vehicle will only be driven by those over 25.
The Options Paper seeks feedback on two options for reform:
- Removal of certain types of exclusions from the operation of section 11 (such as the characteristics of a driver, the geographic area in which the loss may occur, and use for a commercial purpose); or
- Changing s 11 so that the exclusion will not apply if the insured can show non-compliance with the exclusion could not possibly have increased the risk (i.e. regardless of whether or not it actually did, in fact, contribute to the loss). This is the UK position.
Option 2 has the advantage that it still allows insurers to price different risks because losses with greater statistical likelihood of occurring will not be covered, but still provides protection for the insured where there is absolutely no connection between the exclusion and the loss.
Failure to notify claims within time limits
Under s 9 of the Insurance Law Reform Act insurers cannot decline a claim due to an insured’s failure to comply with time limits for making a claim, unless this has prejudiced the insurer such that it would be inequitable that the time limit did not apply. This can cause problems for professional indemnity policies which are usually claims made or claims made and notified, rather than occurrence based.
The Options Paper suggests that s 9 could be amended so that it does not apply to time limits under claims made policies, where notification takes place after the end of a policy term. This would mean that insurers would know their risk at (or soon after) the end of the policy term but would place more risk on the insured, and could limit the ability (or desire) to move between insurers.
Duty of utmost good faith
The Options Paper notes that there is uncertainty about the scope of the implied duty of good faith and that there could be confusion about its interaction with the new overarching conduct duties being considered for insurers.
In light of this, consideration is being given to codification of the duty, as articulated in Young v Tower
 NZHC 2956,  2 NZLR 291. This would have the advantage of clarifying how the duty applies but could also limit the ability of the courts to develop it as a flexible remedy through application of case law.
Conduct regulation for financial institutions
The FMA report took a strong view that insurers have failed to embed conduct and culture risk management into their practices at all levels of their organisations.
MBIE’s Options Paper on the Conduct of Financial Institutions makes a number of recommendations to address this issue, including:
- Establishment of an overarching set of duties to govern conduct, including a duty to consider and prioritise the customer’s interest to the extent reasonably practicable, duties around skill and care and communication to clients, and around handling of complaints and conflicts of interest;
- A duty to design remuneration and incentives in a manner likely to promote good customer outcomes and a ban on target-based remuneration and incentives for both in-house staff and intermediaries;
- A duty on insurers to ensure that insurance claims handling is fair, timely and transparent; and
- Measures to ensure that financial products are suitable for customers, including an ability of the regulator to ban specific products if they have particularly poor customer outcomes, and a duty on manufacturers of financial products to take reasonable steps to ensure sales of products are likely to lead to good customer outcomes (i.e. this imposes a duty on insurers to ensure proper oversight of intermediaries).
MBIE says that the FMA should be empowered and resourced so that it can monitor and enforce compliance with the new conduct duties, including having a wide range of regulatory tools to address non-compliance and an ability to impose strong penalties for non-compliance (in line with penalties under the Financial Markets Conduct Act 2013: $1 million for individuals, up to $5 million for others).
It is also considering a possible entity licencing scheme, establishing duties for accountability at executive level, regular reporting requirements, whistleblowing procedures, and whether there could be a greater role for industry bodies (e.g. industry codes approved and enforced by the regulator).
MBIE is seeking submissions on both Options Papers:
- Conduct of Financial Institutions Options Paper: submissions due by 7 June 2019; and
- Submissions on the Insurance Contract Review Options Paper: submissions due by 28 June 2019.
If either of these reviews is likely to affect you or your business, we recommend that you make a submission. We would be happy to assist in drafting submissions if required. Please feel free to get in touch with us to discuss.