An extract from The Insurance and Reinsurance Law Review, 8th Edition

Insurance and reinsurance law

i Sources of law

Insurance law in New Zealand is governed by a combination of common law, statute and voluntary code.

The foundation for insurance law is the general law of contract, supplemented by insurance-specific principles, such as the doctrine of utmost good faith and the principle of indemnity.

Marine insurance is treated as a distinct subset of insurance law and is governed by the Marine Insurance Act 1908. There is no equivalent code in New Zealand relating to non-marine insurance. However, there are a number of statutes that are relevant to the terms of non-marine insurance, including the Life Insurance Act 1908, the Insurance Law Reform Acts of 1977 and 1985, and the Fair Trading Act 1986 (FTA). Reform of these statutes is proposed as part of the proposed general review of insurance contract law in New Zealand.

Members of the Insurance Council of New Zealand (ICNZ) also agree to adhere to the Fair Insurance Code. The ICNZ currently has 30 members and three associate members. The Code sets a minimum standard of service for insurers, describes the responsibilities owed between the insurer and the insured, and encourages professionalism in the insurance industry. The public made submissions on the updated version of the Code in 2019, with the updates to be implemented in 2020.

ii Making the contractEssential ingredients of an insurance contract

The IPSA defines a contract of insurance as a contract involving the transference of risk and under which the insurer agrees, in return for a premium, to pay to or for the account of the policyholder a sum of money or its equivalent, whether by way of indemnity or otherwise, on the happening of one or more uncertain events. This definition generally accords with the position at common law.

An insurance contract generally requires an insuring clause, and must identify the property or liability to be insured and the scope of the indemnity. This information is customarily set out in the policy schedule (which contains details specific to the particular insured) and the policy wording (which sets out further details as to the nature and scope of the insurance cover, as well as claims conditions and other provisions relevant to the insurance).

Recording the contract

Insurance contracts are usually recorded in a written document or combination of documents (usually a policy schedule signed or stamped by the insurer, together with a document containing the policy wording). However, the only express legislative requirement is found in the Marine Insurance Act 1908, which requires that a contract of marine insurance is signed or sealed by the insurer.

Regulation of contractual terms

The Life Insurance Act 1908 contains provisions relating to the assignment of life insurance policies, in relation to life policies taken out by or for the benefit of minors, and protecting the surrender value of life insurance policies if premia are not paid.

The Insurance Law Reform Act 1977 limits an insurer's ability to avoid a policy because of misstatements by the insured, or to decline a claim in reliance on certain types of exclusions or because of non-compliance with time limits for making a claim. It also provides that arbitration clauses in insurance policies (other than those entered into by the insured in trade) are not binding on the insured.

The Insurance Law Reform Act 1985 abolishes the common law requirement for an insurable interest in policies of life insurance and indemnity (other than where the Marine Insurance Act 1908 applies). It restricts the application of 'average' clauses in policies for dwelling houses and allows purchasers of land and fixtures to have the benefit of the vendor's insurance during the period between the contract of sale and settlement.

In March 2015, the FTA was amended to prohibit unfair contract terms in standard form consumer contracts. These prohibitions apply to a limited extent to consumer insurance contracts (although the legislation recognises that there are some terms that are necessary to protect the insurer and that will therefore not be considered unfair, such as provisions that identify the subject matter or risk insured, impose obligations of good faith, specify the sum insured or applicable deductible, or describe the basis on which claims are settled).

As mentioned, a review of insurance contract law is under way, which is discussed in Section V.

Statutory charge under Law Reform Act 1936

Pursuant to the Law Reform Act 1936, any insurance that is available to meet liability to pay damages or compensation is charged (to the amount of the claim, subject only to the policy limit) in favour of the claimant from the time of the event giving rise to the claim. The courts have held that the effect of the charge is to prevent an insurer from advancing defence costs to the insured where to do so would erode the amount of insurance proceeds subject to the charge.

The court decisions that clarified the application of this legislation and its impact on defence costs have resulted in significant changes to the structure of liability policies in recent years. Whereas it was previously common to issue liability policies with aggregate limits of cover for both defence costs, and damages and compensation, it is now common for insureds to purchase separate or additional defence costs cover.

Reform of the statutory charge under the Law Reform Act 1936 is proposed as part of the general review of insurance contract law in New Zealand.

Prohibited insurance

Certain types of insurance are prohibited by statute. For example, insurance that purports to indemnify a person for liability to pay a fine or infringement fee under the Health and Safety at Work Act 2015, or the Employment Relations Act 2000, is unlawful and of no effect. As a result of recent amendments, there is a similar prohibition in the Credit Contracts and Consumer Finance Act 2003.

The Companies Act 1993 contains restrictions on a company's ability to effect insurance for its (and its related companies') directors and employees. A company must be authorised by its constitution, and have the prior approval of its board, before effecting the insurance. A company cannot effect insurance for its directors and employees in respect of criminal liability (e.g., fines) or defence costs in respect of criminal proceedings unless the director or employee is acquitted. The directors who vote in favour of effecting the insurance must certify that the cost of the insurance is fair to the company.

Similar restrictions apply under the Financial Markets Conduct Act 2013 (in respect of conduct regulated by financial markets legislation) to 'specified persons' (e.g., issuers, offerers and licensees) that are not companies subject to the Companies Act 1993.

Information provided to the insurer at placement

The insured is subject to a general duty to disclose any material fact to the insurer. The insured's duty of disclosure extends beyond the answering of questions specifically asked by the insurer. Failure to disclose material facts can entitle the insurer to avoid the policy. However, where an insured discloses facts that reasonably point toward the existence of further relevant facts, the insurer may be treated as having waived disclosure if it did not make further enquiries.

This duty of disclosure is codified in respect of marine insurance in the Marine Insurance Act 1908, which also expressly states that the following circumstances do not have to be disclosed in the absence of enquiries: circumstances that diminish risk; circumstances that are known or presumed to be known to the insurer; and any circumstance that is superfluous to disclose by reason of any express or implied warranty.

The House of Lords has confirmed that the duty of utmost good faith is an extra-contractual duty and therefore cannot give rise to common law damages. While the Contract and Commercial Law Act 2017 imposes a general right to damages for misrepresentation (which could provide a pecuniary remedy for a breach of the duty of utmost good faith), such remedies are unlikely to be available for breach of a simple failure to disclose unless it can be established that there was a positive misrepresentation that there was nothing further to disclose.

As noted above, the Insurance Law Reform Act 1977 precludes an insurer's right to avoid a policy for misstatement by the insured unless the misstatement was substantially incorrect and material (and, in the case of life insurance policies, made either fraudulently or within three years of the date that the policyholder dies or the contract is sought to be avoided).

The scope of the insured's duty of disclosure, and the consequences of non-disclosure, are part of the review of insurance contract law in New Zealand.

iii Interpreting the contractGeneral rules of interpretation

There are no special rules that apply to the interpretation of insurance contracts. Accordingly, insurance agreements are interpreted according to the general law of contract, which aims to ascertain the meaning that the document would convey to a reasonable person having all the background knowledge that would have been reasonably available to the parties at the time they entered into the agreement.

The ordinary and natural meaning of the language at issue will be a 'powerful, albeit not conclusive' indicator of what the parties meant, but might not be determinative if the wider or commercial context reliably shows otherwise.

The New Zealand position on the admissibility of pre-contractual communications and post-contractual conduct represents a departure from the long-standing position in England and Wales. In Gibbons Holdings Ltd v. Wholesale Distributors Ltd, the Supreme Court held that mutual conduct of parties after the formation of a contract could be used to construe the agreement. In Vector Gas Ltd v. Bay of Plenty Energy Ltd, the Supreme Court considered the extent to which preliminary negotiations could be used to aid the interpretation of a contract. The controversial decision, which resulted in four separate judgments, drew criticism for introducing undue uncertainty into contractual interpretation. While the decision in Firm PI 1 Ltd v. Zurich Australian Insurance re-emphasises the focus that will be given to the express wording of the particular contract, the New Zealand courts retain a greater ability than their UK counterparts to take into account pre-contractual communications as an aid to interpretation.

Intermediaries and the role of the brokerAgency/contracting

Brokers generally act as agents of the insured. However, as a result of statutory reform in the Insurance Law Reform Act 1977, a person acting for the insurer during the negotiation stage within the scope of their actual or apparent authority remains an agent of the insurer throughout that process. The insurer is subsequently deemed to be imputed with notice of all matters material to the contract of insurance known to this representative concerned in the negotiations before the insurance proposal is accepted.

Commissions

Typically, a broker, who is the effective cause of placement of the risk, is entitled to remuneration on a commission basis. In practice, the amount of commission is typically agreed with the insurer (not the insured) and brokers deduct the commission from the amount of premium before passing it on to the insurer. In 2019, the government introduced the Financial Markets (Conduct of Financial Institutions) Amendment Bill. The Bill will allow the Governor-General to prescribe regulations relating to incentives (defined as including a commission, benefit, or other monetary or non-monetary incentive) and introduces an obligation on financial institutions and intermediaries to comply with any relevant incentives regulations. The content of these regulations is not yet known.

iv ClaimsNotification

Insurance policies in New Zealand commonly include express requirements for prompt notice of claims to be given to the insurer. However, where an insurance contract prescribes a time limit within which notice of any claim must be given, the time limit will only apply where the insurer has been prejudiced by the insured's delay (and will not be binding in respect of time limits for notification following death in life insurance policies). Unless the policy provides otherwise, there is no particular form in which notice must be given.

Good faith and claims

An insured is under a general duty not to make fraudulent claims.

It is accepted that an insurer is under a duty to admit liability and to pay promptly, failing which there is a liability in damages for breach of an implied term of the contract to the extent that the delay is the fault of the insurer. In Young v. Tower Insurance Ltd, the court confirmed that a duty of good faith on the part of the insurer is implied in every insurance contract. While the court did not delineate the full scope and limits of that duty, at a bare minimum it requires the insurer to disclose all material information that the insurer knows or ought to have known and to act reasonably, fairly and transparently (in both cases, including the initial formation of the contract, and during and after the lodgement of a claim), and to process the claim in a reasonable time.