Following on from last year's initial consultation considering an update to insurance contract law, the Ministry of Business, Innovation and Employment (MBIE) has released an Options Paper, setting out options that it is considering for three key areas:
- disclosure of information to insurers;
- unfair contract terms in insurance policies; and
- making insurance policies easier to understand.
For each area there are a number of options proposed, and the final decision could adopt one of those possibilities or incorporate multiple options together.
This review is being conducted alongside a wider consultation about financial institutions, which is investigating the sale of financial products including insurance to consumers.
Disclosure of information
Currently, when entering into a contract of insurance, an insured must disclose all information that would influence either the insurer's decision to take on the risk of providing insurance, the terms on which insurance would be offered, or the premium that the insurer sets. If this information is not disclosed, the insurer may subsequently avoid the contract when the full information is discovered, and refuse any claims made by the insured. However, there is a concern that consumers don't understand what information needs to be disclosed.
The options proposed by MBIE are:
- abolishing the duty of disclosure for consumer insureds and replacing it with a duty to take reasonable care not to make a misrepresentation, which would place the responsibility on insurers to ensure that they ask detailed questions of prospective customers;
- abolishing the duty of disclosure for business insureds and replacing it with a duty to disclose every material circumstance which they know or ought to know, or to make disclosures that gives the insurer sufficient information to put a prudent insurer on notice that it should ask further questions to reveal those material circumstances (this option is modelled on the current law in the United Kingdom);
- imposing a duty to disclose information that the customer knows, and that a reasonable person in the circumstances could be expected to know (although MBIE notes that this option still creates uncertainty due to the "reasonable person" requirement, particularly as reasonableness will be different for consumers and businesses);
- requiring life and health insurers to seek permission to access consumer medical records and to use these records to underwrite the risk; and
- requiring insurers to warn insureds of the duty of disclosure in writing before a contract is entered into.
Unfair contract terms
Unfair contract terms are those which would cause an imbalance in the rights and obligations of the parties and which aren't reasonably necessary to protect a party's interests. The Fair Trading Act 1986 prohibits unfair contract terms in standard form consumer contracts, subject to some generic exceptions about the subject matter and price, but there are also some specific exceptions for insurance contracts. In particular, clauses setting the sum insured, the basis on which claims may be settled, the premium payable, what is covered, and any exclusions on that cover cannot be considered unfair.
MBIE is proposing various changes, including:
- removing the insurance-specific exceptions to unfair contract terms, and instead tailoring the generic exceptions to accommodate specific features of insurance contracts (as currently being considered in Australia);
- removing the insurance-specific exceptions to unfair contract terms, and relying on the standard terms; and
- completely exempting insurance contracts from unfair contract term provisions, and instead rely on other regulations.
Insurance policy language
Insurance policies are often lengthy documents, and consumers can find it difficult to understand the details of all policy cover and exclusions. As well as leading to confusion over whether cover is available, it can also make it difficult to compare policies. Insurers have already been simplifying the language in policies, but MBIE wants to encourage this further.
MBIE's options for policy wording include
- requiring insurers to present their policies in plain language, with less jargon and legalistic language;
- requiring insurance contracts and policies to contain clear definitions for core policy terms;
- requiring insurers to highlight core policy terms or provide a summary statement, including possibly requiring use of a standard form for the summary statement to provide for easy comparison between products;
- requiring insurers to work with third-party comparison websites; and
- requiring insurers to disclose key information in a clear, concise and effective manner, using plain language.
Other insurance contract issues
In addition to the above three areas dealt with in the Options Paper, MBIE has provided brief comments on a number of other issues that were raised in the initial round of consultation. These are:
- insurers being deemed to know matters known by its representatives, and whether brokers should be an agent of the insured;
- exclusions with no causal link to loss, currently provided for in section 11 of the Insurance Law Reform Act 1977, and whether certain types of exclusions should be removed from the operation of section 11;
- failure to notify claims within time limits, currently provided for in section 9 of the Insurance Law Reform Act 1977, and whether this should be amended so that that it does not apply to late notifications under a claims made policy where the notification took place after the end of a policy term;
- third party claims for liability insurance money, as dealt with under section 9 of the Law Reform Act 1936, and whether the defence costs issue needs to be clarified; and
- the duty of utmost good faith, and whether this should be codified.
Financial conduct review
In conjunction with the review of insurance contract law, MBIE is also reviewing the conduct of financial institutions. This could affect the sale of insurance policies, helping to ensure that customers are not mis-sold products that are unsuitable. Responsibilities relating to claims management could also be imposed, potentially requiring that claims are handled fairly, timely and transparently, and that claims be settled within a set time, with exceptions for certain circumstances
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