Insurance law reforms to protect consumers finally arrive 25 years after first being proposed

Thursday, 24 February 2022

Insurers will lose the ability to decline claims for innocent “non-disclosure”, if proposed law reforms published on Thursday go ahead.

Insurance ombudsman Karen Stevens said the move comes nearly 25 years after reform of punitive non-disclosure laws was first recommended by the Law Commission to protect consumers.

The proposed reforms, published by the Ministry of Business, Innovation and Employment (MBIE), would also result in insurance companies lose the right to include “unfair” contract terms in their policies.

Insurers would also be required to write their policies clearly, so policyholders could better understand what they were covered for, and to enable them to shop around more easily.

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The proposed law changes would only cover new policies, but general insurance contracts like house insurance renew each year, meaning the laws would cover all general insurance contracts within 12 months, the Insurance Council Te Kāhui Inihua o Aotearoa said.

Currently, insurers could decline claims and cancel policies, if they discovered the policyholder had innocently failed to disclose something a “prudent underwriter” would have wanted to know when they applied for the policy.

Stevens said this was unfair.

“There are a lot of people who suffer unfairly because they forget to disclose, or do not know they need to disclose. There’s so much harm caused. It's harm to individuals,” she said.

Non-disclosure could, in the case of a life insurance policy, involve failing to tell an insurer about past medical treatment a person has had, and forgotten about, or did not think was relevant.

People could end up paying premiums for years, only to find they effectively have no cover because of an act of innocent non-disclosure, Stevens said.

Under the proposed law changes, people applying for policies would have a legal duty to take reasonable care not to mislead an insurer.

People who intentionally mislead insurers would still face having their claims turned down, and policies cancelled.

People who innocently mislead insurers should face “proportionate” responses from their insurers, which could include their claim payout being reduced.

“Anything but the prudent underwriter test would be a good move, but it's taken now since 1998 when the first report was provided by the Law Commission that the law should be changed,” Stevens she said.

Tim Grafton, Insurance Council chief executive, said insurers, including AA Insurance, Vero and IAG, supported reform to the non-disclosure laws.

Insurers which were members of the council, were already obligated by its rules to treat policyholders reasonably in cases of innocent non-disclosure, he said.

Richard Klipin, chief executive of the Financial Services Council, said modernising insurance law was overdue, with some laws governing insurers dating back to 1908.

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.

Stevens said she had lobbied for change, but government after government did not see it as a priority.

“There was nobody prepared to run with it. I hope this piece of legislation gets enacted as soon as possible,” she said.

Submissions on the proposed reforms close May 4.