The Contracts of Insurance Act (the “Act”), which received royal assent in 2024 and will come into force at the latest by November 2027, will overhaul and rationalise insurance law in New Zealand while harmonising it with existing law in other common law jurisdictions. In some respects, the Act should be celebrated as a win for policyholders, as it adopts some of the policyholder-friendly approaches taken in the UK Insurance Act 2015 (the “UK Act”).
The Act is intended to provide greater clarity for both consumers and commercial parties, replacing the previously fragmented law that was contained in multiple statutes and common law principles.
Key Provisions
The Act distinguishes between consumer and non-consumer (ie, commercial) policies. This article focuses only on the latter.
- Disclosure Duties
Previously, an insured’s duty of disclosure was based on the principle of utmost good faith. Under the Bill, this is amended to a duty of fair presentation of the risk, mirroring the UK Act. This requires that a policyholder:- Discloses every “material circumstance” that the policyholder knew or ought to have known, or provides sufficient information to put a prudent insurer on notice to make further inquiries;
- Gives disclosure in a reasonably clear and accessible manner; and
- Makes every “material representation” of fact substantially correct.
Here, “material” means anything that would influence the judgment of a prudent insurer.
For our thoughts on how the English courts have applied the principle of fair presentation, please see A “WIN WIN” for Policyholders – Fenchurch Law APAC [1].
- Proportionate Remedies
The Act also introduces proportionate remedies where the duty of fair presentation is breached, again mirroring the UK Act,. This is a departure from the previous “all or nothing” position, which meant the insurer could avoid the policy for breach of duty. The Bill now provides that the insurer can either:- Avoid the policy but return the premium (where the breach is not deliberate or reckless);
- Amend the policy terms where the insurer would still have underwritten the policy but on different terms; or
- Where the insurer would have charged a higher premium, it can either raise the premium for the term of the policy or proportionately reduce the indemnity.
- Damages for Late Payment of Claims
Another import from the UK Act, the Act establishes a new cause of action for damages where insurers fail to process claims within a “reasonable time”.- Whether the insurer has reasonable grounds for disputing the claim is a relevant factor in determining whether the obligation has been breached, as is the case under the UK Act.
- An insured will only be entitled to damages if it can establish that the insurer’s breach caused a loss, and those losses will be subject to the usual principle that they must not be too remote.
Aims
The above changes should allow policyholders to understand their obligations, and those of insurers more clearly and allow more efficient resolution of claims disputes.
The Act is designed to provide clarity and address historical imbalances between policyholders and insurers, and levels the playing field for policyholders by making their obligations and rights of recourse easier to understand.
What can be learnt from the UK market?
The coming into force of the UK Act has resulted in relatively few reported cases, making it more challenging to predict how New Zealand courts will interpret the provisions of the Act.
However, market feedback to the UK Act has shown that it has had a positive influence, fostering better communication before a policy is taken out, and fairer treatment of policyholders during the claims process.
Qualitative research suggests that Risk Managers have changed how they approach disclosure following the UK Act, with survey respondents reporting greater engagement with insurers.
While the introduction of damages for late payment has not so far resulted in any successful claims in the UK, the mere presence of the rule may be a motivator for insurers to handle claims diligently.
Most importantly, surveyed risk managers reported that the impact of the 2015 Act has overall been positive. Further, the data shows that, contrary to some initial fears, the introduction of the UK Act did not lead to a spike in disputes. The same result should be hoped for, and expected, in New Zealand.
Matthew King [2] is an Associate at Fenchurch Law.