Insurance law amendments are on the cards that will profoundly affect most New Zealanders.
The amendments relate to the obligation on the Kiwi consumer to provide all material information to an insurer when taking out insurance.
What is material depends on the risk and whether a prudent underwriter would take on the risk and, if so, on what terms.
According to
Karen Stevens, Insurance & Financial Services Ombudsman, this begs the question as to how the consumer, often without any knowledge of insurance, can be expected to determine what information is “material” to their cover.
This issue is central to non-disclosure in insurance, for which Stevens has been advocating change over the past two decades.
In New Zealand, the consequences of non-disclosure are that the insurer can refuse to not only pay out the claim but also avoid the whole policy and only reimburse the premium unless there are extenuating circumstances like fraud.
“This manner of dealing with non-disclosure is very severe in cases where someone has failed to disclose information because they forgot, or didn’t understand the questions asked,” exclaimed Stevens.
“While most policies contain warnings about the duty and what happens if the duty is breached, in our experience people don’t read the policies, they don’t know what questions to ask, and they often don’t understand the consequences of failing to disclose.”
She elaborated that the consequences for the insured could also include a lasting black mark against their name and the inability to get new cover from another insurer.
“This is because all insurers ask applicants whether they have had insurance declined before,” she pointed out.
Stevens’ solution to the problem is for New Zealand to follow Australia and the UK and “terminate the duty of disclosure for consumers of commoditised insurance products.”
Australia led this reform with the Insurance Contracts Act 1984, which modified the duty of disclosure for consumers.
“This enables insurers only to avoid a policy in the event of deliberate non-disclosure,” explained Stevens.
“This leaves the insured in a better situation of being treated as though full disclosure had taken place and having the insurer underwrite the policy as they would have done, imposing terms or a higher premium, but without any black mark against their name,” said Stevens. “To be fair, this approach is taken by insurers in some of the complaints we deal with.”
Australia’s reform was followed by the UK’s in 2013, when the Consumer Insurance (Disclosure and Representations) Act 2012 changed the duty of disclosure in consumer insurance contracts.
“A UK insurer can only avoid a policy where there has been deliberate non-disclosure,” said Stevens.
“For the consumer this basically means that both in Australia and the UK consumers are only responsible for answering questions asked by insurers and any unintentional failure to disclose will not be used against them.”
Stevens underscored that their responses are only expected to provide material information in relation to that which would be expected from a reasonable customer as opposed to the current test of what would be material to a prudent underwriter.
This cause is close to Stevens’ heart because she has seen how integral insurance is in terms of holding lives together and the devastation that ensues when claim payouts are not forthcoming. “Underinsurance is a real problem in New Zealand and non-disclosure can actually prevent people who want insurance from getting it in future,” she said.
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