On 1 January 2016, the Insurance Council of New Zealand’s new Fair Insurance Code comes into force. The Code applies to all insurers who belong to the Insurance Council. However, it does not apply to all business placed with one of those insurers. It only applies to consumers and businesses that have not more than 19 full-time equivalent employees. Therefore, it doesn’t apply to large businesses.
The new Code’s most significant change is to the duty of disclosure.
In summary, the current law requires insureds to disclose to insurers all material facts. A material fact is a fact that would influence (without necessarily being determinative) a prudent insurer in deciding whether to accept the risk and, if so, on what terms. Where questions are asked in a proposal, the duty is not necessarily limited to those questions. Where a fact is not disclosed, the insurer must not only prove the fact is a material one, but also that it would have changed its position in some way if the fact had been disclosed (eg imposed a higher premium or excess, or it wouldn’t have underwritten the risk at all). The law calls this reliance.
The only remedy is to avoid the policy retrospectively. The remedy is the same whether the non-disclosure is innocent or deliberate.
The new code
The new Code changes the current law. The relevant parts of the Code say:
19. You must tell us any facts that may affect our decision to insure you and on what terms, whether we ask a specific question or not. You must do this:
- When you buy insurance from us
- During the term of your insurance with us, and
- When you renew your insurance with us.
20. If you do not tell us something that would have affected our decision to insure you or the terms under which we insure you, we may refuse to pay all or part of your claim, or we may even cancel your insurance from the start date of your policy. We will respond reasonably in relation to what you did not disclose.
There are two main changes:
1.The influence test has changed from an objective one to a subjective one. In other words, it is no longer a matter of what the objective prudent underwriter would have taken into account; it is what the actual underwriter says it would have taken into account that matters.
2.The remedies available for a breach have broadened to include not paying part or the entire claim, as well as avoiding the policy retrospectively. The insurer’s decision about this must be reasonable.
The first change is, arguably, helpful to insurers. Underwriting is not a positive science and risk appetites vary around the edges of established products. Therefore, while a prudent underwriter may not be troubled by a particular fact, a cautious one might. The new Code will enable the cautious underwriter to rely on a particular fact troubling it to establish a breach of the duty, when the same fact wouldn’t have troubled the prudent underwriter. Having said that, establishing what a prudent underwriter would have done is troublesome in itself. While a court usually hears evidence from one or two independent underwriters as to what they would have taken into account, ultimately the court decides what a prudent underwriter would have done. In one New Zealand decision, the court refused to accept the evidence of the independent underwriters as being prudent and substituted its own decision.
Increasing the remedies available to insurers is welcome and should allow more scope for the ‘punishment fitting the crime’. The reality is that non-disclosures can vary greatly from minor inadvertence about a small matter to serious fraud. The requirement that the insurer must act reasonably in determining the remedy should result in an element of proportionality. This is similar to the Australian law. In the absence of fraud (which entitles the insurer to avoid retrospectively), the insurer must take the position it would have taken about a claim if it had known the material fact.
The reliance requirement in the existing law is not expressly included. However, the requirement for the insurer to respond to a breach reasonably should, in practice, address the reliance point to some extent.
From 1 January 2016, the duty of disclosure varies depending on whether the insured is, on the one hand, a consumer or a small business, or, on the other hand, a large business.
It will be interesting to see how the dispute resolution services apply the new test of subjective influence. Will they accept what the actual underwriter says would have influenced it without reservation, or will they try to add an element of objective reasonableness to this?
The rationale for a proportional remedy is compelling and applies equally to large businesses. However, large businesses will have to wait for a law change before they can catch up.
This article by Crossley Gates, partner at DLA Piper, was first published in CoverNote in December 2015.