Tougher law in sight for insurers
Former commerce and consumer affairs minister Duncan Webb’s member’s bill to strip insurers of the right to rely on unfair contract terms, and to force them to pay interest when they fail to pay claims promptly, doesn’t look like a typical member’s bill.
Webb’s bill was drawn from a ballot on March 21.
Most members’ bills run to a handful of pages; Webb’s runs to 87, and it bears the hallmark of careful drafting after extensive consultation with insurers and consumer groups.
That’s because Webb’s bill is a former government bill which never made it through the parliamentary “log jam” before Labour lost power at the last election.
Webb, a former insurance lawyer, came to Parliament in 2017 with a mission to make insurance law fairer, and in 2019, under prime minister Jacinda Ardern, the Labour/NZ First/Green Party coalition government said it would change the law.
But Webb found himself in opposition before the planned law changes got across the line.
Despite most households’ reliance on insurance policies to protect their assets and finances, it’s been more than a quarter of a century since the Law Commission said insurance law needed to be fairer to policyholders.
Under New Zealand’s laws, insurers can decline claims and cancel policies if they discover policyholders have failed to disclose something that a “prudent underwriter” would have wanted to know when applying to an insurer for a policy.
The insurer could do that even if the matter not disclosed was immaterial to whether the insurer would have given the person a policy, or the price at which it would have given it.
It could do it even if the non-disclosure was accidental, and the policyholder never intended to mislead their insurer.
Webb’s law would change that. It would also require that insurers be “proportionate” in their responses to accidental non-disclosure.
It would also result in insurance companies losing the right to include “unfair” contract terms in their policies, a legal privilege specifically included in the Fair Trading Act.
It would also penalise them for dragging their feet on claims by forcing them to pay interest on payments, unless they could prove they had a good reason.
“Insurers will sit on their hands for a long time,” Webb said, and the current law did not provide any incentive for them to move quickly.
After the Canterbury earthquakes Webb said he saw hundreds of claims unresolved for years, sometimes for so long that policyholders would be dead before the claims were settled.
The failure to reform insurance law, which had left New Zealand behind other countries like the UK and Australia, was a classic stewardship failure of governments to maintain laws that governed key aspects of society, he said.
“It’s been a weeping sore on the side of the body legal for so long.’’
He blamed a “log jam” at the end of the last government’s term for preventing the bill from becoming law.
“Effective insurance law is essential for a well-functioning market to cope with unforeseen events,” he said. “Given what we have seen with recent and increasing major events as a result of climate change, these changes can’t come quick enough.”
Webb said he was optimistic the Government would support the bill.
Andrew Bayly, the man who replaced Webb as commerce and consumer affairs minister, congratulated Webb for getting his member’s bill drawn out of the biscuit tin.
He said he was currently reviewing insurance contract law, and was looking to “seek approval from Cabinet shortly with proposed amendments”, but it was not clear whether those would be drawn from Webb’s bill.
Insurance and Financial Services Ombudsman Karen Stevens has been calling for the law to be changed since she was appointed in 1998, the year the Law Commission issued its call for change.
Since then, New Zealand has seen Labour and National-led governments come and go from office.
In 2022, Stevens said the country came close to reforming insurance law in 2010 and 2011, but the plan was shelved in favour of regulating deposit-takers and financial advisers after the collapse of dozens of finance companies. “It was pushed into the background thanks to the finance company collapses,” she said.
The Insurance Council Te Kāhui Inihua o Aotearoa supported changes to the non-disclosure rules, but opposed latepayment fees, and codifying insurers’ duties of utmost good faith.
Webb’s proposed laws would also require insurers to write their policies clearly, so policyholders could better understand what they were covered for, and to enable them to shop around more easily.
“As a former insurance lawyer, I know from bitter experience that the current law did not serve consumers,” Webb said.
He said: “I worked with homeowners. I saw the heartache when it all fell apart.”
That could be seen in the consequences for breaches of the duty of utmost good faith.
Both parties to an insurance contract have a duty to behave in utmost good faith. However, when a policyholder breaches that duty they can find themselves unable to get insurance again, which can prevent them from doing things like owning a home, while an insurer just has to pay a fine.
In one recent case that came before the Insurance and Financial Services Ombudsman, a man who made, and then withdrew, a fraudulent insurance claim for his car after the Auckland floods was now uninsured and could lose his house because he had a mortgage.
Banks insist that homes they lend against are fully insured.
Insurers keep track of people who they consider have committed fraud against them or who have failed to make full disclosures to insurers, on a private database called the Insurance Claims Register, to which all have access.
In contrast, Tower was ordered to pay $5000 in damages to an architect whose home was damaged after the Canterbury earthquakes, and which Tower claimed could be repaired.
The insurer was found by the High Court to have breached its duty of utmost good faith after the homeowner discovered the company had withheld a report saying the house should be demolished and rebuilt.
The law was not a licence for people to lie, or take little care, when dealing with insurers.
“Consumers would be expected to take reasonable care and not misrepresent risk,’’ Webb said. ‘‘However, it is often the case that they don’t fully understand the terms of their insurance policies.”