Insurance law to be overhauled to prevent insurers from unreasonably declining claims

Commerce and Consumer Affairs Minister Andrew Bayly progresses job started by the previous government, modernising insurance contracts law. Photo / Mark Mitchell

The Government has introduced a bill to Parliament aimed at preventing insurers from unreasonably declining claims.

It’s worried that currently, insurers can point to an honest or accidental lack of disclosure by a claimant to decline a claim.

Of course, insurers need customers to disclose material information about themselves, or the property they’d like insured, so the risk can accurately be priced.

The issue is that insurers can come down disproportionately hard on a policyholder if they believe the policyholder has failed to disclose key information – however immaterial it may seem to the policyholder.

For example, the Government has heard from a cancer patient who had their income protection claim declined because they hadn’t told their insurer about psychological problems experienced as a teenager.

It’s also heard of a life insurance claim being declined because the insured, who died of a heart attack, didn’t disclose the fact they had a sore hip.

Deficiencies in the existing law are long-standing and well-known.

Hence, Commerce and Consumer Affairs Minister Andrew Bayly has broad political support for his Contracts of Insurance Bill, which builds on work done by the previous government to modernise the archaic law.

“The bill makes a really positive change for consumers by shifting the onus of disclosure duties to insurers,” Bayly said.

“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.”

Bayly recognised the importance of striking the right balance between protecting consumers from opportunistic insurers and protecting insurers from fraudulent consumers.

Hence, the bill introduces ways insurers can respond to non-disclosure proportionately.

For example, rather than void an entire claim due to non-disclosure, an insurer could make the payout, but reduce it by the additional amount it would’ve charged in premiums, had the policyholder disclosed everything they should’ve about themselves.

Bayly didn’t believe the change would prompt insurers to bog policyholders down with longer, more detailed questionnaires when taking out cover. He said this wasn’t the feedback he’d received from the industry.

In addition to addressing issues around disclosure, the bill (among other things) requires insurance policies to be written and presented clearly, so people can better understand them.

The industry group for general insurers, the Insurance Council of New Zealand, supported the bill.

Its new chief executive Kris Faafoi did some of the groundwork for the bill when he was Commerce and Consumer Affairs Minister under the previous Labour Government.

“The current legislation is widely acknowledged to be outdated, unwieldy and not fit for purpose in today’s world,” Faafoi said.

“The new Bill will help tidy up, rationalise and update New Zealand’s insurance law into a single framework to support well-functioning insurance markets for both insurers and consumers.”

The public will have the opportunity to provide feedback on the bill as it goes through the select committee process.

Bayly hoped to have the bill passed by the end of the year, although said it could take up to three years for it to be implemented.

Faafoi said that given the “sheer scale” of the reforms, it was important the Government gave the industry enough time to bed in the changes.

The Financial Markets Authority will monitor and enforce compliance with the law once it’s in force.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.