Parliament has just passed the new Contracts of Insurance Act 2024, although we are still awaiting an Order in Council to determine the date that the Act will come into force. The Government will need to allow sufficient time for insurers to review and update all of their policy documentation and procedures before the Act is fully operational. The legislation provides for phased implementation over a three-year period, after which it will be fully in force.
Why do we have a new Act?
For more than a century, the law relating to insurance contracts has developed in a piecemeal way, with important rules scattered across a number of pieces of legislation and case law. This new Act consolidates and modernises all of the existing law.
What does the Contracts of Insurance Act say?
The Act covers a range of topics. It applies to all insurance contracts, although some provisions relate only to consumer insurance while others relate to business insurance.
Insureds’ duty of disclosure
One of the key changes brought about by the Act relates to the disclosure of information to an insurer.
The existing requirement has been that all insureds (both consumers and businesses) must, before entering into an insurance contract, disclose to the insurer all material information. This is all information which would influence the insurer in deciding whether or not to insure the risk, and what premium to charge. However, it can be difficult for insureds, particularly consumers, to know what an insurer might consider material. The consequences for failing to disclose information can be harsh, to the point where the entire policy may be deemed void.
The Act instead now puts the responsibility on an insurer to ask questions of insureds to obtain the information the insurer requires. Consumers are required to “take reasonable care not to make a misrepresentation” when answering these questions, and the Act sets out matters to be taken into account when determining whether reasonable care has been taken, including how clear and specific the questions asked by the insurer were.
Businesses are required to make a “fair presentation of risk” to the insurer, which means disclosing every material circumstance that the insured knows or ought to know, or that would give the insurer sufficient information to put it on notice that it needs to make further inquiries.
Any non-disclosure by consumer or business policyholders will be required to be treated proportionately by insurers. This will mean treating the policy as if it were entered into on different terms or for a different premium, rather than being set aside or cancelled, unless the insurer can show that there was dishonest or reckless conduct or that the risk would not have been accepted on any terms.
Genetic testing
The question of genetic testing came to the fore during the proceedings before the Finance and Expenditure Committee.
The Act was updated to respond to the concerns raised, and now includes provisions allowing for regulations to be made either to prohibit or control the conduct of insurers in connection with genetic testing. This could cover insurers requiring someone to undergo genetic testing, to disclose any results of genetic testing, or to confirm whether they have already undergone genetic testing.
The select committee noted that the Government did not currently have a policy on genetic testing, and said that before recommending any regulations, the Minister should conduct a full policy development and consultation process.
Implied term about payment of claims
The Act introduces an implied term into every contract of insurance that the insurer must pay any sums due in respect of a claim made under the policy within a reasonable time. No fixed time limit was introduced, allowing for flexibility when required. What is reasonable will turn upon what is required to investigate and assess the claim, as well as its complexity.
Duty of utmost good faith
The Act codifies in general terms the common law principle that insurance contracts are based on a duty of utmost good faith, which imposes duties on both the insurer and the insured.
Time for making claims
The rule that an insurer cannot decline a claim on the basis that it was not notified within the time set out in the policy (from section 9 of the Insurance Law Reform Act 1977) is carried into the Act, with one exception. “Claims-made” policies, which deal with claims according to when the claim was made rather than when the event occurred, may only be declined if the insured does not notify the insurer of the claim within 90 days of the end of the policy term.
Increased risk exclusions
The Act modifies the provision that an insurer cannot decline a claim because of an exclusion where that exclusion did not cause or contribute to the loss (from section 11 of the Insurance Law Reform Act 1977). The Act allows an “increased risk exclusion” where it:
- defines the age, identity, qualifications, or experience of a driver, pilot, ship-master, or other person in a similar position;
- defines the geographical area in which the loss must occur; or
- excludes loss where a personal vehicle, ship, aircraft, or goods is or are being used for commercial purposes.
Third party claims against insurers
The Act also updates the provisions relating to situations where a third party can make a claim directly against an insurer, bypassing the policyholder (previously dealt with by statutory charge in section 9 of the Law Reform Act 1936). A third party will be permitted, with the leave of the court, to claim directly from the insurer if the insured party is insolvent or dead.
Payments made by the insurer to the insured will not reduce the insurer’s liability to the third party, unless the payment was for the purpose of the insured paying the third party. This means that any payment for legal costs will not reduce the overall amount payable, regardless of whether the policy is “costs inclusive” or “costs exclusive”.
Insurance brokers
The Act maintains the existing financial requirements for insurance brokers, including the requirement to pass on to the insurer any premiums that they receive from a policyholder within a specified “relevant period” of time (generally 50 days after the end of the month when the policy commences).
In contrast, any amount that a broker receives from an insurer for payment to a policyholder must be passed on within seven days for a consumer policyholder, and as soon as is reasonably practicable for a business policyholder. This money must all be treated as if it is held on trust, and dealt with through an insurance broking client account with a licensed deposit taker.
An insurance broker is entitled to invest money held in the insurance broking client account, and to retain the proceeds from that investment, subject to some limitations.
Other changes
The Act also consolidates a number of provisions currently dispersed through other pieces of legislation, including:
- Not requiring the insured to have an insurable interest in the subject of the policy (sections 6 and 7 of the Insurance Law Reform Act 1985);
- Confirming that a purchaser of land is entitled to the benefit of the vendor’s insurance between the dates of the contract of sale and possession (section 13 of the Insurance Law Reform Act 1985);
- Provisions relating to the pro rata condition of average where an item is underinsured, notably that a pro rata condition of average is not permitted for insurance relating to a home or contents (sections 15 and 16 of the Insurance Law Reform Act 1985); and
- Confirmation that clauses requiring parties to go to arbitration will not be binding for consumer insurance (section 8 of the Insurance Law Reform Act 1977).
Amendments to other Acts
The Contracts of Insurance (Repeals and Amendments) Act 2024 has also been passed. This Act was originally considered as part of the main legislation, but has now been separated into a stand-alone Act. It makes some important changes to other pieces of legislation.
Unfair contract terms in insurance contracts
The Fair Trading Act 1986 prohibits unfair terms in standard form consumer contracts. However, the FTA excluded a range of terms in insurance contracts from that prohibition, so those terms could not be declared unfair. These insurance-specific exceptions have now been removed.
The only remaining exceptions to the unfair contract terms provisions in the FTA are those which apply to all consumer contracts: exceptions for terms relating to the main subject matter and the price of the contract.
A new provision has been added to the FTA, which defines the main subject matter for insurance contracts as being:
- the event, subject matter, or risk insured against;
- the premium payable for a life policy or health insurance;
- the sum insured;
- the basis on which a claim may be settled;
- any policy excess or deductible amount; and
- and exclusion or limitation on the policy.
The Act also reduces the threshold for whether an insurance contract is a “small trade contract”, used when determining whether contract terms with businesses include unfair clauses. The threshold for insurance contracts will reduce from an annual amount of $250,000 to $20,000. Far fewer businesses will have insurance contracts that qualify as small trade contracts as a result of that change.
Plain language policy documents
Concern has been raised that consumers often do not fully understand the terms of their insurance policies, particularly in respect of important features such as the extent of cover and exclusions which may apply. To counter this, the Act has amended the Financial Markets Conduct Act 2013 now explicitly to require consumer insurance policies to be presented and worded in a clear, concise, and effective manner.
The Financial Markets Authority will be able to make a stop order, preventing the insurer from entering into insurance contracts, if the insurer does not comply with these requirements.
If you have any questions about the Contracts of Insurance Act 2024, including how it could affect your policies or your business, please contact a member of our insurance team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
