Duty of disclosure is an issue that promises to be carefully examined in the government’s ongoing insurance contract law review, with many industry players stating that a reform of current laws is well overdue. But what exactly is duty of disclosure, and how can New Zealand learn from changes made in other countries around this complex subject?
“The current ‘duty’ is this – a fact must be disclosed when we know it will influence the judgement of an insurer when considering whether to insure a risk,” Keegan Alexander insurance partner Crossley Gates explained. “This is an ‘underwriting fact’ - you know it, and you know an insurer will want to know it.
“An example is if I have a four cylinder car and I install a V8 engine – I’ve modified that car considerably, and the policyholder may not realise that this is something the insurer should know about. But there is always a question on policy forms that asks whether or not you’ve modified your car, so this modification would be a ‘known fact.’ You knew the insurer would want to know about it, but you didn’t tell them. This is a fraudulent non-disclosure.”
This is in contrast with an ‘unknown underwriting fact,’ which is a circumstance the insurer would need to know about, but one the insured was not aware needed to be disclosed. This is one of the most common traps for New Zealand insurance consumers – disclosing incorrect, or incomplete information unknowingly.
“An example is if you were six months into your period of insurance, and you receive a letter saying you’ve reached 100 demerit points and you’ve lost your license for two months,” Gates said. “You get back on the road, your renewal comes up and you renew as you would normally. You’ll find that most insurers do want to know if you’ve lost your license at any time during the insurance, but you can see how that person might not have thought that that was a material fact – that is what we call an ‘unknown underwriting fact.’”
A number of countries have modified their laws around duty of disclosure in recent years – most notably Australia and the UK, which significantly relaxed the duties placed on the policyholder, and put more onus on the insurer to properly investigate for any factors that might affect their level of risk. Gates says adopting laws similar to those of the UK may be useful for New Zealand, as it would also give the country a solid history of case law to guide its own decisions.
“Australia modified its duty of disclosure in relation to a number of consumer policies, and those reforms abolished the duty of disclosure except in circumstances where the insurer asked the relevant questions,” Gates stated.
“The duty of disclosure still exists in business policies in Australia, but it’s limited to known underwriting facts. When it comes to unknown underwriting facts, it’s limited to whether the insured could be expected to know that an approved underwriter would want to take that into account.”
In 2017, the UK reformed its business policy laws - duty of disclosure was abolished, and replaced with something called ‘duty of fair presentation.’ This states that direct disclosure of every underwriting fact may not be necessary, so long as enough information has been provided for the insurer to be able to identify its risk, or the need to investigate further.
“The idea is to fairly represent the risk to the insurer,” Gates explained. “You can satisfy this test in two ways. One is to disclose all material circumstances that you know are important, but you can also do that by putting the insurer on notice that they need to make further enquiries to reveal those circumstances. Even though you haven’t given them everything, you’ve given them enough.
“The English reforms are very comprehensive and well thought through, and if we were to follow those, it would provide us with English case law to guide our New Zealand courts. This would be very useful, as England is really the home of insurance.”
Duty of disclosure is an issue that has regularly been raised in the life and health space as well as the commercial space, with innocent non-disclosure having been a pitfall for customers who weren’t necessarily aware of their obligations. According to Tim Gunn of Shine Lawyers, a reform within this area certainly needs to happen, and MBIE has highlighted the insurance contract law review as one that will be given due focus in the coming year.
“I presented to MBIE several months ago on the issue of non-disclosure in mental health as part of their mental health awareness programme,” Gunn said. “It’s easy to see that the issue of non-disclosure is something that needs to be fixed, and that’s clearly a large part of the reason why a review of this area is being undertaken.”
“The issues facing insurance law have been well documented for many, many years, and other countries have made those changes over the last few years,” he continued. “There’s a carve-out for insurance contracts when we’re talking about fair contract terms, and, as a result, we’ve really got an industry that’s self-regulated. It’s been allowed to create policies which have a huge imbalance in their favour, which ends up producing very unfair results.”
Gunn says the relationship between brokers and insurers may also fall under the spotlight in the process.
“There are three parties to this arrangement – a broker, an insurer and an insured,” Gunn said. “The brokers have come under some scrutiny for soft commissions and undisclosed commission rates, and there’s a large grey cloud over the practices in that regard. If you have obscure terms in an insurance contract and an incentivised broker, there’s not a lot of incentive to make sure that all the risks are explained and the client is fully informed about their rights under those very complex and hard to understand contracts. I think contracts should be made simpler and easier to understand, and that we should remove these archaic exceptions such as non-disclosure.
“That’s a fundamental failure in the entire system, and the net result is that the insureds are the ones who miss out.”