Contracts of Insurance Bill

Members, we come now to Part 4. This is the debate on clauses 100 to 121, “Intermediaries”. The question is that Part 4 stand part.

Thank you, Mr Chair. I have a number of suggestions as to how this part of the bill can be improved. This is an important—was that Part 5 you said, Mr Chair?

CHAIRPERSON (Greg O’Connor): Part 4.

Hon Dr DUNCAN WEBB: Oh! Look, I’ll let my colleague take a call because I’ve actually prepared something on Part 5.

Speaking to Part 4 of the bill, I want to ask the Minister some questions about the role of intermediaries and brokers, particularly given the changes to the definition of “brokers” that was made at the Finance and Expenditure Committee. Is there anything in this part which has been drafted—given the old meaning of “brokers” under the previous definition that Cabinet has considered and that the previous Labour Government was working on, which is, essentially, what’s being proposed here by Part 4—that is materially affected by the change in the specified persons definition, which applies to brokers and intermediaries in this part?

We apologise for the earlier confusion, but I just really wanted to challenge the Minister on the inclusion of clauses 104 and 105, which provide default provisions for when—and I’ve never understood why we trouble the legislature with these clauses, which provide, essentially, a default provision. I think it’s something like 50 days that a broker has to pay money received from an insured as premiums to the insurance company. The irony is it isn’t even a rule of law; it’s just a default contractual provision, which they’re free to contract out on. It does seem to be an absolute waste of legislative paper to even print this clause, and the parties should just negotiate it between themselves as they do.

Now, I know that brokers make a lot of money because they sit on premiums and put it in investment accounts, and half of this blimmin’ section of the bill deals with how they can invest it and how they can retain the profits on investment, which all seems entirely superfluous because it’s a private relationship. Why are we even including, essentially, giving brokers a favour by including a default position?

Thank you, Mr Chair. I want to bring the Minister to the changes made to new subclause (2A) in clause 104 and the deletion of subclause (4). The question that I have is similar to my questions in previous parts which have not been answered by the Minister: which submitters asked for the change which is being made here, and is he satisfied that the change in legislation, which he is overseeing and which has only been submitted on by—I think it’s one in this case—one stakeholder who had an interest here, is a fair representation of a piece of legislation that should step forward the interests of consumers, where, in fact, very well-organised parties, who are able to contract for themselves and go into contractual negotiations very well represented, have come along to the Finance and Expenditure Committee and asked for a change which has then been accepted by officials as a change which was suggested to the committee? Is he satisfied with that as a legislative process in this instance? And the others I have asked him about, which he has not answered.

Thank you, Mr Chair. I did discuss this with the insurers and also with the brokers, so I don’t think anyone suggested to me that we should delete clause 104, which the Hon Dr Duncan Webb has proposed for both clause 104 and, consequently, clause 105.

First of all, the importance of this clause is that it sets a statutory backstop, and that is important. That’s the main reason for retaining this clause, and I think it’s wrong for the member to propose that we actually delete it in its entirety. Unless there’s a duty for the broker to hand over money, the insurer could be left with no one being required to pay them, and this is because clause 101 provides that a policyholder paying the intermediary discharges their liability when they do so. There’s a sort of flow-on effect to this, so we think it’s important that there is a regulatory backstop.

Of course, as the member suggested, insurers and their brokers can come to a different arrangement, but that is the main reason why these two clauses are important.

There is a further point I wanted to ask. I know that the Minister holds some other portfolios which relate to small business, and this relates to clause 108, “Duties of broker in relation to payments due to policyholder”.

Brokers often will, in fact, receive payments. Say you might have a small business, for example. There is a big flood and you can’t get to your premises, so you get business interruption insurance, and the question is when does the broker have to pay the policyholder—the person who has suffered the loss or damage? Now, there’s this really weird division here, because if you’re a consumer, it’s “7 days”—boom! They pay it out. If you’re a business, it’s “as soon as is reasonably practicable after the broker receives the money, in the case of a payment in connection with a non-consumer insurance contract.” There’s absolutely no sense in that division. There is no reason why a small business should be out of their money for longer, unless the Minister thinks that “as soon as is reasonably practicable” is less than seven days.

The fact of the matter is that, if you are holding money under a business contract, it could be many millions of dollars. I have seen payouts of hundreds of millions of dollars. Holding that for two days is a good little earner. Why should a broker be able to hold insurance moneys on behalf of a small business, or, indeed, any business, for longer than they can for a consumer? Can you answer that for me, please, Mr Bayly?

Yeah. Thank you, Mr Chair, and I was just checking there. Obviously, in this bill, we’ve made a clear differentiation between consumer insurance, which is for individuals primarily, and commercial contracts, because they’re quite different types of products, and, in many cases, they’re much more complex. In light of that—and that theme carries right through the bill—we’ve made it very explicit that, for personal consumer products, they have to be paid out in seven days, as set out under clause 108(a). That’s important, but in the main they’re very simple insurance products.

With regard to clause 108, there is still a requirement—and I’d just draw the member’s attention to clause 108(b). It states right at the start of it that “as soon as is reasonably practicable”, the money must be paid from the broker. That is the key tenet of it, and, obviously, there can be agreements between brokers and insurers if they want to, but that reasonableness test is a crucial test. Again, we’ve talked about that and traversed that earlier in the discussions around the bill. That’s a commonly understood term.

Just for clarity: does the Minister expect that “reasonably practicable” to mean less than seven days or more than seven days? That’s the relevant question here.

When the Minister says that the bill is drafted in a way so as to create consumer contracts for insurance and other contracts for insurance, that’s not the case. For most of this legislation’s life, the legislation was drafted in a way in which the big delineations were between contracts for insurance for policyholders who were not in a position to negotiate contract terms with an insurer because the insurer had an outsized sort of corporate interest and corporate power to negotiate, and contracts for reinsurance, which were large, commercial arrangements between two large corporate entities that had sort of relative power. That was the distinction. These new distinctions which are created here around non-consumer insurance contracts are new and they have a different kind of impact than they did before because of the previous changes to the definitions and to the way the contracts for insurance are defined.

My question about these non-consumer insurance contracts that are created under clause 108 is new and different from the Hon Dr Duncan Webb’s and needs to be addressed. In the situation for contracts for insurance for businesses like accountants and lawyers for indemnities, where they pay on to consumers, and so, essentially, you claim against your accountant because they have given you negligent advice and that has caused you real loss, which does insure a consumer—that insures the exact kind of vulnerable person here, whom Mr Bayly is talking about needing to insure in this law. Does it apply to those, or not?

Look, I beg to differ. There has been a distinction between consumer and non-consumer throughout the bill, so that’s the fundamental sort of difference in approach. As we traverse, I think, in Part 2 extensively around the complexity, often, of commercial arrangements, insurance arrangements dictate that they have different arrangements. Clause 108 takes that and recognises that point.

To your specific question about what is reasonable and whether it is less than seven days for a commercial contract, it is reasonable in the circumstances. In some cases, it might be an earlier payment, as might occur within seven days for a commercial insurance policy, but, for other occasions, it might not be. Again, we’re just making sure that we recognise that there are different types of products that are more complicated and, therefore, in some cases, there might be an earlier payment required and, in other cases, there might not.

Thank you, Mr Chair. I just want to add to the issue with regard to the holding of the money for 50 days as a default because we’ve had some really interesting research in terms of the withholding of money owed to small businesses. The latest research from Xero says that we have had an increase in the amount that that’s costing our small businesses and our firms to $827 million a year, compared to $456 million in 2021. This is exponential growth. We’ve got a growing problem, it seems, of people who are in the middle of these transactions calculating to hold on to money for as long as they possibly can because they’re receiving the interest on it. They’re using our small businesses as banks.

It seems to me that this particular scenario is one where that is almost being sanctioned by us because we’re saying that 50 days is the default and we’re saying “in a reasonable time” and it becomes the practice. I was talking this week to someone senior in the business representation committee. They said that people are only being paid in 120 days. That’s becoming a calculated decision—120 days to pay a small business. That’s a very long time. While the average late payment might be about eight days—which is, by the way, way more than it is in Australia or the UK, which is taking this issue very seriously and publishing the results of people who pay late and how that’s calculated—those kinds of issues are really of a concern here.

I’d like the Minister to address whether he is concerned that, by putting in a payment term like 50 days, we are almost creating a calculation of, “We will keep this money for this long. We will make this amount in interest because we’re gathering up all these amounts.”, and that will become part of the business model. We’re almost saying in this legislation that that’s OK, and the term “reasonable” will become dictated by those outliers at 120 days or 90 days, which has become a habit in New Zealand and that will be seen as reasonable when, in fact, it’s really hurting our small businesses. Thank you.

I’m not quite sure whether the numbers the member is quoting there are general credit or whether she’s specifically talking about money held for insurances policies, so I suspect—

Helen White: No. Just generally.

Hon ANDREW BAYLY: Generally—yeah, that’s a different issue. You’ll be aware that we made an announcement about that yesterday. In terms of the 50 days, when I met with brokers and insurers my recollection is that 50 is now the current normal. We’re not changing there. Some people wanted it to be brought forward, some people didn’t—so we reflect the current practice of 50 days. Obviously, there’s ability for insurers and brokers to negotiate a different and quicker payment time, but I just want to be very clear that the 50-day test relates to money that the broker passes on to the insurer. It’s not what, I think, the member was alluding to. It does not affect payment to small business policyholder. That’s a clear differentiation, because we want to make sure that small businesses get paid in a timely manner. This is merely relating to the arrangement between the insurance company and the broker.

Thank you, Mr Chair. I just want to make sure that I am speaking clearly about this. Yes, the Minister is right. It’s a general reflection of payments not made to businesses—it’s research from Xero—which is a real concern. It’s not about what the Government sets; it’s about business to business, etc., so it’s being withheld.

I’m kind of concerned even more about what was said, because we’re talking about two different things. One is premiums held. There is very little reason not to pass on a premium as soon as possible. That’s just taking money from people and using it for insurance. The other is holding money that you’re supposed to pass on to somebody who’s actually been injured. They have had some event, which means that that money is really vital, and in terms of holding that for a long time, there are two things going on. One is that we have prescribed a time of 50 days because it’s the norm. Well, actually, it sounds like a worrying norm to me. Did we investigate whether that was, in fact, a sensible time; whether there was any reason to hold that money; or whether we’re building it into a business model whereby those brokers, those third parties, will hold that money for that long and just simply claim they’re investing it and claiming the interest, and whether the other is of concern too.

Surely we need things to go through swiftly, and I’m concerned that if we’ve got that growing issue with an increased amount of time, we’re actually sending a signal, again, that, “It’s too bad for the little guy and it will take as long as it takes. We’ll decide if it’s reasonable.” And if you’ve got judges who, with respect, earn a lot of money and are not under the pump the way small businesses are, they wouldn’t necessarily see that that sinks a business.

Obviously I did a poor job of explaining it. There is a requirement for insurers to pay policyholders—commercial and non-commercial—promptly. We’ve traversed that in the previous part. That is an absolute requirement. What we’re talking about here is something quite distinct from that. All we’re talking about in this clause is the arrangement between the broker and the insurer. That’s the big differentiation. There’s always been a norm, from my recollection, that brokers would have up to 50 days to pay the insurer.

If you’re concerned about the brokerage industry going broke or the insurance industry going broke, let’s have that discussion, but that’s quite separate from what I think the member’s trying to allege—that there’s going to be a subsequent and consequential delay in making the payment between the insurer and the policyholder, and that’s not the case. You need to put a knife between those two connections.

Just a brief question: how many submitters asked for this change to clauses 104 and 108, and is it a good enough legislative process that the change has been made with a minimal number of submissions and no submissions from consumers about it?

The question is that the Hon Dr Duncan Webb’s tabled amendment to clause 101(1)(b) be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment to delete clause 104 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment to delete clause 105 be agreed to.

The question is that the Hon Dr Duncan Webb’s tabled amendment to clause 108 be agreed to.