Reform of Insurance Law: Lessons for New Zealand

1. Reform of Insurance Law: Lessons for New Zealand DLA Phillips Fox 15 May 2012 Rob MerkinUniversity of SouthamptonNorton Rose

2. The Common Law Position • Utmost good faith • Non-disclosure • Misrepresentation • Materiality • Inducement • Right to avoid for breach

3. New Zealand Modification I • Contractual Remedies Act 1979, sections 5- 6 • Misrepresentation only • Damages for breach of contract , not for misrepresentation • No right to avoid but right to cancel if significant effect on contract • Contracting out possible • Insurance Law Reform Act 1977, s 10 • Broker is agent of insurers for placement purposes

4. New Zealand Modification II • Misrepresentation only • Insurance Law Reform Act 1977, ss 4 , 7 (life) • Age. No avoidance, premium adjustment only • Other. No avoidance unless :substantially incorrect; material; and either fraudulent or within 3 years • Insurance Law Reform Act 1977, s 5 (non-life) • No avoidance unless: substantially incorrect; and material

5. Australian Modification I • Insurance Contracts Act 1984 (Cth) • Disclosure retained (s 21) but: prudent assured test; removed in most consumer cases with obligation to answer questions (s 21A); and available only with warning of duty (s 22) • Misrepresentation retained, but prudent assured test (s 26); silence is not misrepresentation (s 27); and ambiguities construed against insurers (s 23) • Remedies: inducement required; avoidance for fraud (subject to court discretion); otherwise restitution remedy (ss 28 and 31)

6. Australian Modification II: Life • Statement by life assured treated as statement by policyholder (s 25) • Age misstatements – no right to avoid but proportional remedy (s 30) • Other life misstatements – avoidance for fraud (subject to court discretion) but no avoidance for non-fraud after three years (s 29) • Member of group life scheme – treat as separate policyholder (s 32)

7. UK Reform: Background • Statements of Insurance Practice 1977 and 1986 • Insurance Ombudsman Bureau 1981-2001 • Financial Ombudsman Scheme 2001 • Insurance Conduct of Business Sourcebook 2005 (ICOB) • Insurance New Conduct of Business Sourcebook 2008 (ICOBS) • FSMA 2000, s 150

8. The path to reform • English and Scottish Law Commissions’ Reform Programme 2006-2013 • Issues papers on utmost good faith and warranties 2006-2007 • Report and draft Bill 2009 • Issues paper on micro-businesses 2010

9. Consumer Insurance (Disclosure and Representations) Act 2012 • Presented to Parliament May 2011 • House of Lords’, Special Committee Procedure • Passed March 2012 • Implementation delayed at least 12 months from passing

10. Scope of 2012 Act • Consumer: “an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession” • Micro businesses not covered • Marine insurance covered • Contracting out not permitted

11. Duty of disclosure • Duty abolished • Common law abrogated • Marine Insurance Act modified

12. Misrepresentation I: duty • Sole duty “to take reasonable care not to make a misrepresentation” • No definition of misrepresentation • All statements to be representations and not warranties • Duty relates to: knowledge of fact; knowledge of truth; nature of answer; knowledge of relevance to risk

13. Misrepresentation II: scope of duty • Reasonableness to be determined in light of all circumstances • Test is that of reasonable consumer • Insurer’s knowledge of consumer to be taken into account • Circumstances include: type of contract; insurers’ advertising material; clarity and specificity of question; whether broker used

14. Misrepresentation III: “qualifying misrepresentations” • No remedy if consumer has acted reasonably • Remedy only If • consumer has acted deliberately, recklessly or carelessly AND • Insurer can show that the contract would not have been made at all, on those terms or on that premium but for misrepresentation

15. Misrepresentation IV: remedies • Deliberate or reckless: avoidance of policy and no return of premiums unless unfair • Careless • if policy would not have been made at all, avoidance and return of premiums • If policy would have been made on different terms, claims subject to those terms • If policy would have been made with higher premium, proportionate recovery only

16. Misrepresentation V: special cases • If careless misrepresentation discovered before loss, right of insurers to avoid general but not life policy • Variations induced by misrepresentation to be severed if possible • Group policies – each assured to be treated separately • Life of another – statements provided by life assured treated as given by policyholder

17. Intermediaries • No duty on broker acting for consumer to disclose material facts (section 19 of Marine Insurance Act 1906 • Consumer responsible for agent acting on his behalf • Test of whether agent acted independently in searching the market

18. Business Insurance • Micro-Businesses, Issues Paper 5, April 2009 • Micro-businesses to be treated as consumers • Definition of micro-business • Business Insurance and Warranties: Consultation Document due June 2012 • Final Report due 2013 • Business Insurance Bill 2013

19. New Zealand Proposals • NZLC 1998 – status quo • NZLC 2004 – restrictions on avoidance • Ministry of Economic Development 2006 and follow up • Retain duty of disclosure, but insurers to warn • Avoidance limited to: fraud; material failure to answer specific question; avoidance within 30 days; reinsurance • Series of non-avoidance remedies, • Broker, whose agent?