Insurer’s unfair treatment of widow shows why insurance overhaul is needed

Thursday, 2 May 2024

Commerce and Consumer Affairs Minister Andrew Bayly is reforming insurance law, some of which is a century old.

Outdated and unfair insurance laws are finally to be overhauled a quarter of a century after the Law Commission called for them to be reformed.

Commerce and Consumer Affairs Minister Andrew Bayly stood in Parliament’s debating chamber on Thursday for the first reading of a bill he said would modernise insurance law.

The Contracts of Insurance Bill contains changes to insurance law first recommended by the Law Commission in a report in 1998 to limit insurers’ ability to deny claims, and even cancel people’s insurance policies, if those people made innocent mistakes when they applied for cover.

Bayly told MPs the story of a wife who was told by an insurer it would not pay a claim after her husband was killed by a truck driver because he had not told the insurer he had once been bankrupted when he applied for his life insurance.

“I think most New Zealanders will agree this is not fair, or right,” Bayly said.

Bayly’s bill would also require insurers to pay claims within a “reasonable” time, and a specific requirement that life insurers must pay interest on death claims from the 31st day after they were notified a policyholder had died.

Labour’s Duncan Webb is a former insurance lawyer who has seen the heartache that people have experienced at the hands of insurers.

Bayly’s bill contains many of the things included in a private members’ bill drafted by Labour’s last Commerce and Consumer Affairs Minister Duncan Webb had been working to change before the current coalition government won power.

Webb, a former insurance lawyer, said Bayly’s bill was “not a bad bill, but not as good as my bill”.

Aerial shots of Esk Valley after Cyclone Gabrielle - a very costly insurance event.

“I’ll be honest. I’m a bit peeved that the minister has stolen this show, but we are constructive and pragmatic, and we will put our heads down and make this bill good for all New Zealanders because this bill is of critical importance,” Webb said.

National MP Stuart Smith said it was a shame that insurance law reform had not been passed before last year’s extreme weather events in Auckland and other parts of the North Island.

“These reforms are long overdue,” Bayly said. “New Zealand’s insurance law is complicated and dated, some of which is more than 100 years old.”

“We have all heard stories of people being denied compensation because they didn’t realise they had to disclose certain information, or waiting months on end in limbo while they wait for a decision from their insurer. This isn’t fair or right,” Bayly said.

“The Bill makes a really positive change for consumers by shifting the onus of disclosure duties to insurers. Right now, consumers must disclose everything that might be relevant to an insurance policy. But it’s difficult for everyday Kiwis to know what information is relevant.

“Under this Bill, there will be no more guesswork for consumers. It will be insurers responsibility to ask the right questions, which will reduce insurers’ ability to void cover or refuse to pay claims,” he said.

And, under Bayly’s bill, when customers make innocent mistakes, insurers would have to deal proportionately with them.

Instead of declining a claim for innocent non-disclosure, for example, insurers would be able to reduce the amount they paid to compensate them for the extra premiums they would have charged had the innocent non-disclosure never happened.

Bayly’s bill would also require insurance policies be written in simple terms.

Bayly said the proposed laws would bring New Zealand into line with international best practice, and would be enforced by the Financial Markets Authority.

Webb was disappointed that the “reasonable” timeframe for paying claims in Bayly’s bill was not clearly defined. His private members’ bill included a presumptive 12-month “brightline” time limit, after which an insurer has to show it is acting reasonably.

Webb was also disappointed that insurers had successfully lobbied the government not to include a definition of the duty of good faith in his bill, or to remove the Fair Trading Act exemption for insurers to include unfair contract terms in their policies.

Webb said this would give insurers a free pass to put unfair exclusion clauses on insurance contracts, limiting people’s cover.

“That can’t be right,” Webb said.

Insurance ombudsman Karen Stevens had been calling for the law to be changed since she was appointed in 1998, the year the Law Commission issued its call for change.

Speaking to Stuff 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.