The Contracts of Insurance Act 2024 represents the most significant reform and consolidation of New Zealand insurance law in more than a century.  Once in force, it will consolidate and replace a number of older insurance statutes, modify aspects of the common law, as well as modernise the law governing insurance contracts, bringing New Zealand more in line with Australia and the UK.

The Act states that it is intended to promote certainty and confidence for participants of the insurance market as well as fairness in the operation of insurance contracts and in the practices of insurers. The reforms are extensive and included changes to disclosure obligations, the duty of utmost good faith, insurer remedies, policy drafting, intermediary conduct and claims handling. While in some cases the changes will simply enshrine in law what has become existing practice, the overhaul of legislation is still likely to impact the New Zealand insurance sector for years to come.

The Act will come into force on a date or dates appointed by Order in Council. Any provisions not brought into force earlier will commence automatically on the third anniversary of royal assent, meaning the Act will be fully in force by 15 November 2027.

Participants in the insurance sector should prepare now to ensure they are familiar with the Act and what it covers. This article sets out some of the key changes coming to help market participants think through how they may need to respond.

Duty of disclosure

Perhaps the most significant reform brought about by the Act relates to disclosure obligations. The Act will impose different disclosure obligations depending on the type of insurance contract being entered into. These will override and replace any disclosure obligations that would otherwise arise from the common law duty of utmost good faith.  

For a "consumer insurance contract", defined as a contract of insurance ordinarily entered into wholly or predominantly entered into for personal, domestic or household purposes, the only obligation is "to take reasonable care not to make a misrepresentation". Certain criteria assist with evaluating whether reasonable care has been taken. Dishonest misrepresentation will "always be taken" as showing a lack of reasonable care.  

In practical terms, consumers will no longer be subject to a positive duty to volunteer all material facts. Instead, they must take reasonable care not to make a misrepresentation, including when answering questions asked by the insurer. The onus will be on insurers to craft careful and comprehensive questions for prospective insureds aimed at obtaining a full and complete picture of the risk.

For a contract of insurance that is not a consumer insurance contract, the Act introduces a duty to make "a fair presentation of the risk". This more closely resembles a duty of disclosure, requiring insureds to disclose every material circumstance they know or ought to know in a manner that is reasonably clear and accessible. It may also be satisfied where the insured gives the insurer enough information to put a prudent insurer on notice that it needs to make further enquiries. A circumstance is "material" if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.

The Act also requires insurers to take reasonable steps to clearly explain the applicable disclosure duty and the consequences of failing to comply with it.

The new disclosure duties will apply to new contracts and variations entered into on or after the commencement of the relevant part of the Act.

Although the Act provides criteria for assessing reasonable care, fair presentation, materiality and insurer knowledge, those concepts may generate disputes, particularly during the early years of the new regime. Points of detail may be unclear in practice, such as the boundary between consumer and non-consumer contracts, and exactly when a variation occurs.

Proportionate remedies

The Act changes the consequences that arise from a failure to disclose. Historically, an innocent non-disclosure could in some circumstances permit an insurer to avoid a policy entirely. Under the new Act, remedies are generally intended to be proportionate to the nature of the failure and reflective of the underwriting decision that would have been made had the correct information been provided. These principles reflect the longstanding Australian approach. They also broadly align with the current approach to non-disclosure typically taken by insurers in practice.

In the case of a consumer insurance contract, an insurer only has a remedy against an insured for a failure to comply with its duty to take reasonable care not to make a misrepresentation if the insurer proves that, without the misrepresentation, the insurer would either:

• have not entered into the contract at all; or
• would have done so only on different terms.

Effectively, this amounts to a requirement that the misrepresentation must have been material to the risk.

From that point, the remedies an insurer is entitled to depend on the nature of the misrepresentation. For deliberate or reckless misrepresentations, the insurer retains the ultimate remedy in that it may avoid the contract entirely and not refund any of the premiums paid. However, for non-deliberate or reckless misrepresentations:

• where the insurer would not have entered into the contract on any terms, the insurer may avoid the contract and refuse all claims but it must refund the premiums paid;
• where the insurer would have entered into the contract on different terms, the contract must be treated as if those terms applied; and
• where the insurer would have charged a higher premium, the insurer may charge that higher premium or reduce the amount paid out on a claim proportionally.

In many cases, the question will be what remedy best reflects the insurer’s actual position. To that end it will be critical for insurers to document what decision would have been made if the misrepresentation had not occurred. This places increased emphasis on maintaining clear underwriting guidelines and related documentation and recording and explaining underwriting decisions thoroughly. For insureds, this change may provide greater clarity on the criteria and evidence required to challenge indemnity decisions and evaluate any entitlement to damages.

Effect on brokers and other intermediaries

Insurance brokers occupy an increasingly important role under the new legislation. The Act contains specific provisions dealing with insurance intermediaries, including imposing statutory duties to pass on material information to the insurer.  A court may even order compensation against an intermediary that fails to comply with these duties, on application by an insurer.  The Act also imposes rules in relation to the handling of premiums and client monies.

For brokers the reforms reinforce the importance of carefully documenting advice, disclosure discussions and information provided during placement or renewal. Keeping good records will be critical.

Policy wording will receive greater scrutiny

Insurers and underwriters will need to review existing policy wordings before the Act comes fully into force to ensure compliance with new provisions.

Among other things, an important change is coming in relation to increased-risk exclusions, policy terms that exclude or limit cover because a particular circumstance increases the risk of loss. Essentially if the insured can show the relevant circumstance did not cause or contribute to the actual loss, the exclusion will not apply.

Clauses outlining a pro rata condition of average (allowing a proportional reduction in insurer liability where a property is under-insured) are void unless the insurer clearly informs the insured of the nature and effect of the condition.  In the case of home and contents insurance, the Act prohibits pro rata average clauses entirely.

The Act also restricts pre-dispute arbitration clauses in consumer insurance contracts.  Such provisions will not bind the insured, although parties may still agree to arbitrate after a dispute has arisen. Consumer policy dispute-resolution clauses should therefore be reviewed.

Finally, a related legislative change will introduce a general requirement (to be overseen by the Financial Markets Authority) that insurers must write and present consumer insurance contracts and life and health insurance contracts in a clear, concise, and effective manner. Reviewing policies to comply with this requirement is likely to be a significant undertaking for some insurers.

Claims handling and late notification

The Act also introduces an implied term in every contract of insurance requiring insurers to pay sums due in respect of a claim within a reasonable time.  That does not prevent insurers from investigating complex claims, but it may embolden insureds to litigate where a claim has stalled, an undisputed amount has not been paid, or further information requests are said to be excessive. If insurer delay causes additional loss, the insured may also seek damages in addition to payment of the claim and any interest.

The Act also limits when insurers can rely on late notice exclusions or procedural time limits. Before it can rely on the relevant limit, an insurer must show it has suffered prejudice and that, as a result of that prejudice, it would be inequitable if the provision did not bind the insured. Claims-made policies are treated differently. Where the policy defines the period within which claims or circumstances fall within the insured risk, the relevant provision can remain binding if the insured does not notify the claim or circumstances within 90-days of the end of the relevant period.  

Other changes to note

The Act also makes other targeted changes, including in relation to third-party claims against insurers, genetic testing, life policies, insurable interest and purchaser protection between sale and settlement. Those changes are not addressed in detail here but may be relevant depending on the policy type and circumstances.

Preparing for the new regime

As with any major legislative reform, there is likely to be a period of uncertainty while courts first apply the newly minted provisions to real-world scenarios. As the Act draws from UK and Australian legislation, it may be that overseas case law plays an important role in the interpretation and application of the new rules.

Questions surrounding fair presentation of the risk, materiality, proportionate remedies, policy interpretation, late notification and claims-handling delay are likely to be tested in litigation, mediation, arbitration and other forms of dispute resolution over the coming years.

For insurers, early legal advice on policy drafting can assist with mitigating the risk of fallout in complex coverage decisions. Insurers should be considering whether underwriting processes, proposal documentation, policy wordings and claims procedures remain fit for purpose.

For brokers and commercial insureds, obtaining advice early, particularly on disclosure obligations, may help resolve disputes before they ever arise, or before they escalate into costly proceedings. Commercial insureds should inform themselves as to what is required of them by the duty of fair presentation and how that may affect future renewals and claims. Brokers should ensure that disclosure processes and advice to clients reflect the new statutory regime.

How we can help

The Contracts of Insurance Act 2024 changes the law governing insurance contracts and will require market participants to review longstanding practices.

Our insurance team advises insurers, underwriting agencies, brokers, agents and insureds on coverage, policy drafting, claims handling and disputes, as well as licensing matters and regulatory engagement, and are actively supporting insurer clients with their transition to the new regime. We can assist you with preparing for the implementation of the Act, including reviewing policy wordings, disclosure processes, intermediary arrangements and claims procedures as well as dealing with any fall out or insurance disputes that arise.

If you would like to discuss how the new legislation may affect your business, policy wording or a particular claim, please contact one of our insurance specialists.