May 2018 . . . The Minister of Commerce and Consumer Affairs has announced a review of New Zealand’s insurance contract law saying that there are “significant problems with New Zealand’s insurance contract law which are undermining the effectiveness of our insurance markets and impacting those who do not receive the support they anticipated from their insurance policies.”
Insurance plays an important role for both consumers and businesses by compensating for loss and allowing the effective management of risk. Despite the importance of insurance policies and contracts to nearly all sectors of the economy and society, insurance remains an area of law characterised by uneven bargaining power between market participants. Insurers retain nearly all the power in setting insurance policies, premiums and excess amounts and insurance customers rarely have an ability to effectively negotiate these standard form contracts to protect themselves.
In particular, insurers often insist on onerous disclosure requirements from those that they insure and failure to disclose “material” facts can often void insurance cover. The Minister has identified disclosure obligations and the subsequent remedies for non-disclosure as an area of interest for the review. It is worth noting that the UK has abolished the duty of disclosure in consumer insurance situations through the Consumer Insurance (Disclosure and Representations) Act 2012, in a consumer-friendly move which goes some way to redressing the imbalance between the insurer and the insured. It will be interesting to see whether the NZ review follows a similar course and recommends abolishing the duty of disclosure in consumer situations.
While the duty of disclosure sits with the insured party, consumers are generally not well versed in what should and should not be disclosed and what constitutes a “material fact” for the purposes of disclosure. The impact of this is that many consumers enter into insurance contracts without having complied with their duty of disclosure, which can lead to the insurer denying cover once a claim is made and the material fact subsequently discovered by the insurer. This again represents a significant power imbalance between the insured and insurer. Steps could be taken by insurers to more adequately educate consumers on what constitutes a material fact and the potential impact of failing to disclose a material fact. Currently, it would be recommended to undertake a total disclosure to insurers, including information that may not be considered material, in order to reduce the possibility that an insurer will rely on material facts not being disclosed in order to deny cover.
Sitting alongside the insurer-friendly position around the duty of disclosure, insurance contracts are also partially exempt from the restrictions on “unfair contract terms” brought into the Fair Trading Act in 2015. This contributes to the power imbalance between the insurer and the consumer and hamstrings consumers and businesses from negotiating a more fair set of terms to apply to their insurance policy. This review will consider whether the exemption from unfair contract terms in the insurance context should be reduced, or possibly moved into insurance specific legislation. The benefit of this could be that insurance policies become more consumer-friendly and less one-sided in favour of the insurer. Insurance contracts are currently an outlier from the standard form consumer contracts currently covered by the unfair contract terms provisions and it is likely that consumer groups would welcome insurance contracts being redefined as standard-form consumer contracts.
If you have an issue with your insurer denying you cover, or would like to understand more about your disclosure obligations, please get in contact with us.