Many insurers will be aware that the Consumer Law Reform Bill introduces a new regime for unfair contract terms. The Bill allows the Commerce Commission to seek a declaration from the Court that a term in a standard form consumer contract is unfair and therefore unenforceable.
As drafted, and despite an earlier supplementary order paper (SOP), the Bill poses significant difficulties for insurers. Although there are some exceptions to the terms that can be declared to be unfair, there is considerable uncertainty as to the scope of these exceptions.
In addition, insurance policies are different from many other standard consumer contracts. For example, the product being supplied is the contract of cover itself, and both cover and pricing depend not only on the insuring clause, but also on the definitions, conditions, qualifying exceptions and exclusions. Insureds are also subject to duties of good faith and disclosure that do not apply to other contracts. A declaration that any of these terms are unfair may have a significant impact on price and therefore the cover that insurers may be prepared to offer.
This month, following submissions from the Insurance Council of New Zealand, insurers, and others, the government recognised that insurance contracts are different, and introduced a further SOP to amend the Bill before it is passed. The SOP introduces a new exception for insurance contracts, specifically providing that a number of terms cannot be declared to be unfair. In summary, these include terms that:
- identify the subject matter or risk insured against;
- specify the sum insured;
- exclude or limit liability;
- describe the claims process or provide for an excess amount;
- provide for the payment of the premium:
- relate to the duty of utmost good faith; and
- relate to disclosure.
These new exceptions are a welcome improvement over the current Bill. The SOP addresses many – although not all – of the potential issues for insurers posed by the Bill.
Insurers will still need to carefully review the standard form consumer contracts before the Bill comes into force, to reduce the risk of action by the Commerce Commission or an adverse finding by the courts. For example, a term in an insurance contract may still be "unfair" if it is not transparent – that is, if it is not expressed in reasonably plain language, presented clearly, or readily available.
Under the current SOP, the Bill will come into force 15 months after the date on which the Bill is passed. The Bill has support from both sides of the House, and as a result, we expect it to be passed shortly.