Contracts of Insurance Bill

Good morning, members. The House is in committee for further consideration of the Contracts of Insurance Bill. When we were last considering the bill, we were debating Part 2. This is the debate on clauses 10 to 69, “Disclosure duties”; and Schedule 2. Once again, the question is that Part 2 stand part.

Good morning, Madam Chair, and thank you for the opportunity to take a call in this debate. Since last the committee was debating this part, Part 2—and my questions will be particularly around clauses 7 and 11, on which there are still some unanswered questions still remaining. The Labour members of the Finance and Expenditure Committee had been supporting this piece of legislation because we believe in a consolidated piece of insurance law in New Zealand. It’s well overdue, and it’s something that is much needed in this area, but there were some major issues which we felt needed to be addressed at this stage and haven’t been amended. That is why we now will go part by part to consider the meaning of particularly those things which were changed not only by the select committee’s consideration, in response to submitters, but also by the Minister and his changes from the previous Government’s work on a prior iteration of the bill.

Now, I bring the Minister first to the unanswered questions around the conflict of laws point. Before the House rose, we were in consideration of the impact of clause 7’s changes on small businesses, particularly the meaning of the change to clause 7(2)—

CHAIRPERSON (Barbara Kuriger): Can the member explain—clause 7 is in Part 1.

ARENA WILLIAMS: I am sorry, Madam Chair. I was intending to speak to clause 11, and I will do so now. Thank you for your indulgence, Madam Chair.

Clause 11 has been deleted, which walks back an important provision in this bill, which was a consumer protection, and it related to setting out what the meaning of consumer insurance contracts are here. The reason I was mistakenly bringing the Minister back to our discussions previously in the committee about that clause is that it has an impact not only on consumers but also on small businesses and anyone who’s not included in the definition of the contracts of insurance as they are now.

The Minister needs to give the committee a better understanding of how this will impact not only on consumers but on small businesses, particularly now, under the new definition of what a consumer insurance contract is. If we’re not then carving out the way that these contracts will impact on businesses—and also those businesses that rely on insurance contracts—to then pass on the benefit of an indemnity to their customers or clients, say, if they’re a lawyer or an accountant, how that will impact on consumers downstream? The effect of removing that clause 11—though there are other provisions in the bill, it never takes it back up to that protection that was allowed by clause 11, in Part 2. We’ll start there.

Thank you, Madam Chair. It’s good to be here again. I note just for the committee that Robert Merton KC, an eminent scholar from the UK, is following this debate very closely, Minister. He expresses some disappointment in some of your decisions but is gratified that some of the suggestions that he made—and I understand he’s been in touch with the Ministry of Business, Innovation and Employment—have been adopted, but he has been in touch and is very interested in the progress of the debate. I did have to explain to him that the Minister hasn’t yet adopted any of the Amendment Papers on the Table, but there is still time.

I did want to talk to clause 30, which has an amendment in respect of it, and that is the clause relating to burden of proof. It notes there in the bill itself that the insurer has the burden of proof that a qualifying misrepresentation was deliberate or reckless—and that’s normal, that’s actually just the civil standard of proof. Anyone who wants to assert something naturally has the job of showing that that is the case. It’s not for an insured policyholder simply in response to “You told fibs.” to prove that they didn’t. That’s well and good, but my Amendment Paper just goes and really reflects what is in some of the common law, and that is that the standard of proof takes into account the seriousness of the allegations and, essentially, the likelihood of it occurring.

My amendment suggests that an additional subclause (3) is inserted, which would state that “Where the insurer claims there is a deliberate or reckless misrepresentation the standard of proof is that the court must be satisfied on the balance of probabilities taking into account the seriousness of the allegation and the gravity of the consequences.”

Essentially, if what’s being asserted is a fraudulent lie, then that’s a very serious allegation and there’s a strong presumption against that happening. It’s not a criminal presumption. It’s really important to note that this isn’t kind of beyond reasonable doubt, but it’s saying that it’s on the balance of probabilities, but in determining how likely it is that that would happen, you have to kind of take cognisance of the fact that people don’t lie in their insurance policies as a matter of course. The reason for that is there are very serious consequences. When balancing the scales of evidence, you need to recognise that tipping on the scales against that being the case—the fact that people don’t lie—and then look at the evidence presented by the insurer that there may have been a lie and weigh it accordingly.

Now, burden of proof and onus are always a little tricky. It’s also important because it’s not some kind of sliding scale; it is still just balance of probabilities, but it’s really clear in the cases that you need to be alert to the fact that this is an unlikely thing to happen. My concern is this: if you’re going to codify burden of proof by putting it in the legislation here, then you need to also codify the kind of common law gloss on that, because it’s going to look like that’s it, and there is no more. It’s clearly not the case, and there have been plenty of decisions both overseas and in New Zealand that do that.

I won’t go on. I got told off by one of the former Chairs for just trying to fill five minutes and I’ll wait—

CHAIRPERSON (Barbara Kuriger): Short, sharp questions are really good. Thank you.

Hon Dr DUNCAN WEBB: —for the Minister to respond.

Thank you, Madam Chair. Just first of all, just responding to Ms Williams’ question, she was a very active participant in our last round, but I think without trying to highlight it, she wasn’t here for the discussion around clause 11. We traversed that—

CHAIRPERSON (Barbara Kuriger): It might be better to say that she may not have—

Hon ANDREW BAYLY: She may not have been available to hear it—

CHAIRPERSON (Barbara Kuriger): Thank you.

Hon ANDREW BAYLY: —but I know she was a very active participant. With regard to that new clause raised by the Hon Dr Duncan Webb, I think the first driving clause is clause 30(1), “The insurer has the burden of proving that a qualifying misrepresentation was deliberate or reckless.” That’s a pretty important statement. That’s one of the clear things that this bill seeks to do—is to be clear about the obligation of the insurer not only to make sure that documentation is clear but that the insurer has to ask the right question. It’s not up to the policyholder to determine what was right or wrong. That’s a key part of the change, and this is sort of the third leg to that. Quite simply, in response to your amendment, it’s simply not needed.

I note that the member has proposed in a number of his amendments that he seeks to define the role of how the courts should approach the different pieces of litigation, should it get to that. We are not proposing to do that. It’s very clear what the principles are and it’s common practice, and the approach of the bill is to leave it to the courts to decide. There is a normal civil burden of proof. That’s why the bill has operated at that level and it’s consistent throughout in adopting that. Leave the courts to make their own decision. The framework is there to be very clear about what the operating framework is for that decision making, but that’s been the approach of the bill.

Thank you, Madam Chair. Good morning. I really take the Minister’s comments about wanting clarity with this bill, and I would love to hear from the Minister whether he would consider the adoption of this amendment to clause 14. This is clause 14(2A), which seeks to replace the word “dishonestly” from (2A). This is “A misrepresentation made dishonestly must always be taken as showing lack of reasonable care.” Now, the Green Party proposed to replace this word with “fraudulently”. We’re doing this because the word “fraudulently” sets a more appropriate, clear, and specific standard for policyholders to actually show reasonable care.

Now, we know that these policyholders have this duty of reasonable care not to make a misrepresentation when actually entering into these insurance contracts. An honest mistake, really, I don’t think, should be grounds to deny insurance cover. The bill actually previously stated that misrepresentation made fraudulently must be taken as a lack of reasonable care. However, we really disagree with the Finance and Expenditure Committee’s change to this to replace “fraudulently” with the weaker and vaguer term of “dishonestly”.

What we’re really clear about, when it came to submissions that came before select committee, was the submission from the Insurance Council of New Zealand, and they argued that fraud and dishonesty are really different concepts. They stated that—and this is a quote from their submission—“Dishonesty and fraud are related but distinct concepts. Dishonesty is a broad term that refers to actions that are not honest or lack integrity and can manifest in many ways, including lying, omitting important information, or otherwise misleading someone.”, whereas they say, “Dishonesty does not necessarily involve a deliberate attempt to deceive for personal gain.” Now, this is really serious definition content, and I think it’s really important that we take the advice of the experts in this field and actually clarify these definitions.

I’d love to hear from the Minister whether he would consider the adoption of this amendment to improve the clarity.

Thank you. Again, we’ve actually traversed this statement. I’ve discussed it before, but just to reiterate what I covered previously: it is an important definition, and the member’s right to raise it, but there are different tests and they’re quite distinct, and one has a criminal implication; one has a civil implication. Fraud is used in civil compared to criminal cases, so the meaning is much less clear. The criminal standard of fraud describes crimes for personal gain or depriving someone of something by deceit. This implies criminal behaviour proved to a criminal standard of proof—which is different from civil, by the way—and which would not be appropriate here.

The civil law standard of fraud, which we have focused on—why it is in civil law. It’s been quite deliberate why we’ve used this definition. The test is different, and it’s actually much, much more appropriate, because we’re not talking about criminal stuff; we’re talking about a civil thing. Actually, like the bill, the UK legislation uses “dishonestly” to discourage deliberate wrongdoing. So, again, I’ll just reiterate: we have covered it, but it is quite a deliberate approach.

Thank you, Madam Chair. I want to take the Minister to Schedule 2. The empowering provisions in the underlying Act are sections 27 and 52 for Schedule 2. It is in this Part 2 that we would be debating Schedule 2.

In Schedule 2, the first part that I want to ask him about is clause 2. It does relate to the question that Lan Pham has posed and one of the amendments that Labour members indicated was a priority amendment for us, which is the question of “fraudulent” or “dishonesty” and what is the appropriate standards. We disagree with the Minister very strongly that “dishonesty” is the appropriate standard, when, in fact, “fraudulently” was used in a prior iteration of the legislation. The question I want to ask him is about, now, if we’re speaking about insurer’s remedies for qualifying misrepresentations or breach, how the change from “fraudulent” or that standard to one of “dishonesty” then plays into what the appropriate remedies are, as described in clause 2.

Clause 2(a) gives the insurer the ability to avoid the contract and refuse all claims, but the question that I want to pose to the Minister is the original standard for what is a qualifying breach required a standard of fraud. In a fraudulent situation, you have a consumer, say, or someone making a claim under a contract for insurance using a document to deceive another party in order to gain something of benefit to them. That is the fraud standard. Then that standard that’s described for insurer’s remedies at clause 2(a) in Schedule 2 would have meant that a refusal of claims and the avoidance of the contract would have been related to that fraud in some way.

The example that I’ll pose for the Minister to engage with is—and I’m interested in his views on this: if someone like me, who has a contract for insurance for my car, my home and contents, and my home’s value with one particular insurer, was to make a mistake on one of, say, my disclosures to do with my car, would the “dishonesty” standard apply to my other contracts of insurance—whether that would apply to, say, a claim for the roof of my home in a weather and storm event?

In the case where the primary legislation sets out a “fraudulent” standard, in that situation, I have committed absolutely no fraud, because I have not intended to deceive an insurer and get a benefit for myself by making a mistake with my car insurance, on a benefit to me related to my home insurance. But, in the context of now a standard of “dishonesty” on both counts of the disclosure—and then, in Schedule 2, a “dishonesty” standard related to the insurer’s remedies—do we now have a situation where any dishonesty in an insurance relationship voids the entire relationship? The initial legislation surely was not drafted, when the intention of the legislation as it was drafted was to protect consumers, to create a situation where disclosures in one kind of insurance or disclosures on a particular thing might impact your entire cover.

This might happen not just in that context of cover in one situation for another kind of contract with the same insurer; it might be that you’ve made a disclosure even in your health insurance about your health that had no intention to get cover for yourself in some way. It might be, say, a health insurance contract between me and my husband, where my husband is the insurance holder—this is a real situation for me, because he is the primary insurance holder and I tried to claim on it the other day and the insurance company only wanted to deal with him. What’s that about?

In the situation where the person who has made the disclosures is giving the most honest and most factual information that they possibly can, but they are under the wrong impression or there is some dishonesty there because they have come to the situation with clean hands but they have given the wrong information with absolutely no intention to receive a benefit that they were not entitled to, can it possibly be the case that this Part 2 in Schedule 2 creates the wrong standard?

Thank you, Madam Chair, and it’s just good to move on. Can I say this is a very complex piece of legislation and the Minister’s done a great job in picking up my good work and coming up with many hundreds of clauses which deserve careful examination, given the importance to the commercial sector and everyday New Zealanders. I’m very glad to be here and to talk to clause 35, “What must be disclosed”.

Now, most of that clause is pretty straightforward, but there’s one which I think deserves further elucidation, and that’s in clause 35(2)(c). My amendment identifies that—and that’s that the insurer—sorry, let me go back a step to clause 35(1)(a), to what the insured ought to know. There’s a real question in these “ought to know” propositions, because the question is this: is it what that policyholder—to use the modern word—ought to know, or is it what a reasonable and objective policyholder ought to know? That’s two quite different standards. If you think of your reasonable objective policyholder or reasonable person test—or if you want to take the Fair Trading Act framing, the slightly dim consumer—the fact of the matter is that there are some policyholders who the insurer should know are less adept than others. They may be people with English as a second language or who have very modest educational achievement and present in a quite different manner.

My proposal is, rather than just saying that the policyholder “ought to know”, to replace that to reflect the fact that it’s not an objective reasonable policyholder test, which is, essentially, a gendered and race-based test, because you’re like “OK, let’s take a white bloke and what they ought to know.” That’s actually where the common law has come from in that. The man on the Clapham omnibus is the reasonable test.

Arena Williams: The wife should have known everything.

Hon Dr DUNCAN WEBB: I think that’s right, Arena Williams. So replace it, to recognise that it’s what that policyholder “ought to know” and introduce a subjective element. My proposed amendment is to change “or ought to know” and insert “or that a policyholder of the kind and in the position of the policyholder would reasonably be expected to know”.

That’s actually a much fairer test, because it then means that, if someone makes a mistake and they don’t know it, but a reasonable policyholder would—a reasonable policyholder would know that you’re expected to provide this information or that a car of that kind has this defect, or whatever it might be—then the question isn’t whether I, as a reasonable policyholder; it’s whether that particular person, in those instances. And it cuts the other way. This is the problem with sophisticated people taking advantage of consumer law. If you’re a very clever business person and you know all about insurance—

Hon Andrew Bayly: What about a clever lawyer?

Hon Dr DUNCAN WEBB: —thank you—you’re expected to know more. It’s a much fairer test and, actually, it doesn’t anti-insure in any way. It simply says it’s contextual and that’s a much more modern and appropriate approach to take to that question. Kia ora.

Thank you, Madam Chair. Just to deal with perhaps that one, which is an amendment from Reuben Davidson—I think that’s the one you were referring to. Look, this has had a lot of consideration about whether the use of the term “ought to know”—and there’s obviously a proposal in the amendment. Look, “ought to know” is an important term that is actually defined in clause 44, as, no doubt, the member knows. This requires policyholders to conduct a reasonable search of available information, which is a key element of fair presentation duty. Now, that’s a really important part, and what we’ve adopted here is in line with the UK model. I think we’re in good space, adopting both the UK approach but also making sure that we’ve got a clear definition in clause 44.

I just want to return to Ms Williams’ question, which, again, I’ve actually dealt with on a number of occasions. Just briefly, to deal with this, a civil law standard of fraud is wide. In civil law, fraud is knowing a statement is false or recklessly not caring whether it’s correct or not. Obviously, the “dishonest” approach is a high threshold. It would require intent and not capture consumers simply being careless or making an honest mistake.

I think, just moving right back up, what we’ve sought to do in this bill is to be very clear that the obligation on the insurers, first of all, is to present policies in an easy-to-understand presentation so you don’t have to look through lots of terms and conditions. The second key issue is it is up to the insurer to ask the right questions. It’s not for the policyholder, whether it’s you or a husband, to determine what is the right answer—“Did I have my tonsils out, do I have to disclose that in a health application, is it relevant or not?” That’s not the obligation of the consumer or policyholder. This is the most important shift of this bill: to move the obligation to the insurer.

The third major part of this bill is being clear that, in the event that someone has filled out a form and it’s unclear what the position is, we have been clear about the scale of the remedies and how that should be done. If there’s gross negligence on behalf of the policyholder or recklessness or whatever, then the insurer has no obligation to pay the claim. If there was an honest mistake made but it wouldn’t have had any direct bearing on whether the insurer accepted the policy or not, then the policy amount will be paid out in whole. If there was an element that, if the insurer had known about it, it might have resulted in a different premium, then obviously that premium adjustment will be made and deducted from the due amount, but ultimately there will be a payment made. Being absolutely clear about the three areas when the insurer has to pay out and when they do not is a key, third, important part of this bill. I think we’ve struck a good balance with this bill.

I move, That debate on this question now close.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new clause 11 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new paragraphs (c) and (d) in clause 12(1) be agreed to.

The question is that Ricardo Menéndez March’s amendment to clause 14 set out on Amendment Paper 107 be agreed to.

Arena Williams’ amendment to clause 14 set out on Amendment Paper 109 is ruled out of order as being the same as an amendment previously not agreed to.

The question is that the Hon Dr Duncan Webb’s three tabled amendments inserting new subclauses (4) to (6) in clause 14 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new subclause (3) in clause 30 be agreed to.

The question is that Reuben Davidson’s tabled amendment to clause 35(1)(a) be agreed to.

The question is that Reuben Davidson’s tabled amendment to clause 36(1) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment to clause 37 be agreed to.

The question is that Reuben Davidson’s tabled amendment to clause 38 be agreed to.

The question is that Reuben Davidson’s tabled amendment to clause 40(2)(a) be agreed to.

The question is Reuben Davidson’s tabled amendment inserting new paragraph (c) in clause 42 be agreed to.

Helen White’s tabled amendment to clause 43(2)(c) is ruled out of order as not being in the correct form of legislation.

The question is that Helen White’s tabled amendment inserting new subclause (3) in clause 46 be agreed to.

The question is that Helen White’s tabled amendment inserting new paragraph (c) in clause 47 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new clause 50A be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment amending clause 52(1)(b) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment amending clause 56 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new subparagraph (iii) in clause 57(a) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new subparagraph (iii) in clause 58(2)(b) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new subparagraph (iii) in clause 59(2)(b) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment replacing clause 60 be agreed to.

The question is that the Hon Duncan Webb’s tabled amendment to clause 61(1)(a) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment to clause 62(1) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment inserting new clause 62A be agreed to.

The question is that Arena Williams’ amendments set out on Amendment Paper 110 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment deleting clause 63(5) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment to clause 68(3) be agreed to.