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Report 46

Some Insurance Law Problems

May 1998

Wellington, New Zealand

Table of Contents

The Law Commission is an independent, publicly funded, central advisory body established by statute to undertake the systematic review, reform and development of the law of New Zealand. Its purpose is to help achieve law that is just, principled, and accessible, and that reflects the heritage and aspirations of the peoples of New Zealand.

The Commissioners are:

The Honourable Justice Baragwanath – President
Joanne Morris obe
Judge Margaret Lee
DF Dugdale
Denese Henare onzm
Timothy Brewer ed

The office of the Law Commission is at 89 The Terrace, Wellington
Postal address: PO Box 2590, Wellington 6001, New Zealand
Document Exchange Number: sp 23534
Telephone: (04) 473–3453, Facsimile: (04) 471–0959

Report/Law Commission, Wellington, 1998

issn 0113–2334 isbn 1–877187–19–4

This report may be cited as: nzlc r46

Also published as Parliamentary Paper E 31AH

21 May 1998

Dear Minister

I am pleased to submit to you Report 46 of the Law Commission, Some Insurance Law Problems.

The great majority of adult New Zealanders enter into insurance contracts of one sort or another. It is important to get the law governing such contracts right. This report deals with five separate problem areas.

The first area deals with the rule of disclosure of relevant facts. It is a sensible rule and one consistent with the duty of utmost good faith that a person seeking insurance cover should have to disclose relevant facts to the insurance company. It is sensible that if you want to insure your life you should have to disclose the fact that your doctor has told you that you have only 6 months to live. Those are obvious examples; less obvious examples abound where it is not as clear what matters the insured must tell the insurance company. Moreover, the consequences for the insured may be drastic if he or she gets it wrong. Judges and others have been saying for many years that the law needs fixing. While there is no perfect answer, we believe that our proposal holds a fair balance between insurer and insured. It should prevent unjust situations where people are denied insurance claim payouts for not disclosing some fact that the insurance company says should have originally been disclosed.

The Insurance Law Reform Act 1977 prevented, among other things, the unfair use by insurers of provisions requiring notification of claims within certain time limits, and of provisions excluding liability in certain circumstances where the risk of loss is increased. Although the Act has worked well it is clear that in certain respects it needs adjusting to avoid odd results. Chapters 2 and 3 deal with these issues.

The Fires Prevention (Metropolis) Act s 83 was enacted in 1774 (in the reign of George III) and is still part of New Zealand law. It is not needed. Part of our job is to concern ourselves with keeping the law tidy so it seemed sensible while we were dealing with insurance problems to get rid of this old statute as a matter of housekeeping.

The fifth situation with which our report is concerned is this: X, who may be an individual or a company, is insured against liability to third parties. X becomes liable to a third party but before the third party’s claim is finalised X dies or disappears, or (being a company) goes into liquidation or is dissolved. What then is the third party’s position? Parliament’s answer has been to allow the third party to step into the shoes of the insured. The earliest relevant statute was enacted in 1900 but that applied only to workers’ compensation claims. The remedy was extended to motor vehicle claims in 1928 and in 1936 to all liability insurance. Under all the New Zealand statutes including that of 1936 (still in force) the mechanism used was to give the third party a charge over the insurance moneys. Over the intervening 60 years or so (or nearly 100 if you calculate from 1900) it has become apparent that there are defects in this machinery, and our proposal is for a modern equivalent.

Of course, where the departure from the scene of X is because X has become insolvent, the theoretical effect of the present legislation and of our proposals is to give the third party a preference over other creditors. In practice, however, it is much more likely than not that in the absence of some such provision as the one under discussion there is no incentive to pursue the insurer, so that while the provision does give the third party an advantage it is unlikely to be at the expense of other creditors. The enactment simply avoids the situation where the insurer escapes having to meet the contractual obligation to pay up. I mention this aspect because although the question of preferential entitlement is expected to be reviewed as part of the Ministry of Commerce’s examination of insolvency law that fact should not be allowed to hold up the adoption of our present proposals.

Yours sincerely

The Hon Justice Baragwanath

The Hon Douglas Graham MP
Minister of Justice
Parliament House

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