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DRAFT INSURANCE LAW REFORM AMENDMENT ACT 199–

CONTENTS

1 Title

2 Commencement

3 New section inserted

4 Time limits on claims under contracts of insurance

5 New section substituted

6 New sections inserted

Miscellaneous provisions

7 Application of Act

8 Repeals and amendments

1 Title This Act is the Insurance Law Reform Amendment Act 199– and is part of the Insurance Law Reform Act 1977 (“the principal Act”). 2 Commencement This Act comes into force at the end of 3 months beginning on the day on which this Act receives the Royal Assent.	COMMENTARY Section 2 C1 Because in particular the new provisions as to non-disclosure are likely to necessitate a review by insurers of their proposal forms a lapse of 3 months following the Royal Assent is provided for.
3 New section inserted The principal Act is amended by inserting after section 7 the following section: “7A Non-disclosure (1) Any right of an insurer to cancel a contract of insurance by reason of the failure of an insured to disclose a fact to the insurer before the contract is concluded may only be exercised, if the cancellation is to take effect from a date earlier than the date on which it is notified to the insured, within 10 working days of the risk first attaching. (2) This section does not apply (a) to contracts of reinsurance; or (b) if the failure to disclose a fact is blameworthy; or (c) if, before the contract is concluded, the insured answers a specific question expressly put by the insurer in a way that is substantially incorrect because of the failure to disclose a fact. (3) A failure to disclose a fact is not blameworthy unless the insured knew, or in the circumstances a reasonable person could have been expected to know, both the undisclosed fact and that disclosure of the undisclosed fact would have influenced the judgment of a prudent insurer in accepting the risk or the terms of such acceptance. (4) For the purposes of subsection (2)(c), (a) a question is not a specific question expressly put by the insurer if, in order to answer it, the insured must decide whether a fact is or might be relevant to the decision of the insurer to accept the risk or the terms of such acceptance; and (b) an insured’s answer to a question is substantially incorrect only if the difference between what is stated and what is actually correct would have been considered material by a prudent insurer. (5) This section has effect despite any warranty by the insured that the insured’s disclosure obligation has been complied with. (6) For the purposes of subsection (1), (a) a reference to a risk first attaching does not include the attaching of a risk on the issue of a policy replacing interim cover or on the reinstatement or renewal of a policy; and (b) working day means a day of the week other than (i) a Saturday, a Sunday, Waitangi Day, Good Friday, Easter Monday, Anzac Day, the Sovereign’s birthday, and Labour Day; and (ii) a day in the period commencing with 25 December in a year and ending with 2 January in the following year; and (iii) if 1 January falls on a Friday, the following Monday; and (iv) if 1 January falls on a Saturday or a Sunday, the following Monday and Tuesday.”	Section 3 C2 This section inserts into the Insurance Law Reform Act 1977 a new s 7A intended to reform the law as to non-disclosure. Its placement in the 1977 statute positions it immediately following four sections (ss 4–7) concerned with mis-statement. C3 The only remedy presently available to an insurer in the event of non-disclosure is to cancel the contract ab initio, that is, retrospectively from the start of the contract. Subsection (1) provides that that remedy may be exercised only within 10 working days of the risk first attaching. C4 Subsection (2) provides exceptions to the rule set out in subsection (1). The section will not apply and the right to cancel ab initio will survive in three circumstances only, namely: in the case of reinsurance contracts, if the non-disclosure is blameworthy, or if an answer to a specific question put by the insurer (usually, it may be expected, as part of a proposal form) is answered in a way that by reason of non-disclosure is substantially incorrect. C5 Subsection (3) defines when non-disclosure is blameworthy. It is necessary that the insured should know both the undisclosed fact and that the failure to disclose it would have influenced the judgment of the underwriter. To make unnecessary the process of drawing inferences as to the extent of the knowledge of the particular insured, the subsection provides that it is enough if in the circumstances a reasonable person could have been expected to know those facts. C6 Subsection (4)(a) is designed to avoid the reform being defeated by insurers posing such questions as “Are there any other facts material to the assessment of risk?” The specific question expressly put, as required by subsection (2)(b), may not be one that leaves it to the insured to determine the issue of materiality. Subsection (4)(b) defines when an answer is substantially incorrect in terms analogous to s 6(1) of the 1977 Act. C7 Subsection (5) is designed to avoid the reform being defeated by insurers stipulating for a warranty as to disclosure. C8 Subsection (6)(a) defines risk first attaching used in subsection (1). Subsection (6)(b) defines working day. Subsection (6)(b) copies the definition of working day contained in the Interpretation Bill now before Parliament; subsection (6)(b) will be unnecessary if that Bill is enacted.
4 Time limits on claims under contracts of insurance Section 9 of the Principal Act is amended by adding the following subsections: “(3) Subsection (1)(b) does not apply to a provision of a claims made policy that defines the period within which claims made against the insured or claims arising out of circumstances notified to the insurer are within the risk accepted by the insurer under the policy. (4) In this section claims made policy means a contract of insurance in which the period during which liability for claims against the insured is within the risk accepted by the insurer is defined by reference to the time when such claims are made or claims or circumstances which may give rise to a claim are notified to the insurer.”	Section 4 C9 This section adds two new subsections to the Insurance Law Reform Act 1977 s 9. That section provides that an insurer may never rely on time bars in an insurance contract limiting the time for making claims in the case of life policies and may rely on time bars in the case of other policies only if the insurer has been prejudiced. This provision causes difficulties where the time provision is not just procedural but as in claims made policies defines the risk that the insured has agreed to accept. Section 4 adds two new subsections to the existing s 9 to make it clear that s 9 does not apply to provisions of claims made policies defining the risk.
5 New section substituted The principal Act is amended by repealing section 11 and substituting the following section: “11 Increased risk exclusions (1) An insured is not bound by an increased risk exclusion if the insured proves on the balance of probability that the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of an event or the existence of a circumstance referred to in the increased risk exclusion. (2) For the purposes of this section, an increased risk exclusion is a provision in a contract of insurance that (a) defines the circumstances in which the insurer is bound to indemnify the insured against loss so as to exclude or limit the liability of the insurer to indemnify the insured on the happening of certain events or on the existence of certain circumstances; and (b) so defined the liability of the insurer, in the view of the court or arbitrator determining the claim of the insured, because the happening of such events or the existence of such circumstances was in the view of the insurer likely to increase the risk of loss occurring. (3) A provision is not an increased risk exclusion for the purposes of this section that (a) defines the age, identity, qualifications or experience of a driver of a vehicle, a pilot of an aircraft, or an operator of a chattel; or (b) defines the geographical area in which a loss must occur if the insurer is to be liable to indemnify the insured; or (c) excludes loss that occurs while a vehicle, aircraft, or other chattel is being used for commercial purposes other than those permitted by the contract of insurance.”	Section 5 C10 Subsections (1) and (2) of this section re-enact in modified form s 11 of the 1977 statute. That section prevents insurers relying on provisions excluding cover in situations of increased risk where the increased risk did not in fact cause the loss. It is unfair to insurers, however, to prevent their relying on such provisions where the excluded situation is one where loss becomes statistically more likely. Subsection (3) excludes from the operation of the section situations within that category.
6 New sections inserted The principal Act is amended by inserting after section 11 the following headings and sections: “ Insolvency or death of insured 11A Application of sections 11B to 11E Sections 11B to 11E apply in respect of any contract of insurance entered into before or after the commencement of those sections under which the insurer promises to indemnify the insured in respect of the insured’s liability to pay damages or compensation to another person (“the third party”), but do not affect a discharge of an insurer’s liability under a contract of insurance which discharge was concluded before the commencement of those sections. 11B Insolvency or death of insured before payment (1) The benefit of an insurer’s promise under a contract of insurance to which sections 11B to 11E apply to indemnify the insured in respect of the insured’s liability to pay damages or compensation to a third party is deemed to be a benefit conferred on the third party which is enforceable against the insurer by the third party under section 4 of the Contracts (Privity) Act 1982 as if it were a promise by the insurer to pay such damages or compensation to the third party if, before payment is made by the insurer to indemnify the insured, (a) the insured has become insolvent or, if the insured is deceased, the insured’s estate is being administered under Part XVII of the Insolvency Act 1967; or (b) the insured has been deceased for not less than 60 days and no administrator of the deceased’s estate has been appointed in New Zealand; or (c) the insured, being a corporation, has been removed from the New Zealand register under section 317 of the Companies Act 1993 (if a company), or has otherwise been dissolved or ceased to exist; or (d) the insured cannot, after reasonable inquiry, be found. (2) An insured is insolvent for the purposes of this Act if the insured (a) is subject to a statutory or contractual regime under which the assets of the insured have been or are to be realised for the benefit of secured or unsecured creditors; or (b) is unable to pay the insured’s debts that would be provable in bankruptcy or on a liquidation as they fall due and from the insured’s own money. 11C Extent of insurer’s liability in actions by third parties (1) An insurer is not liable to a third party in an action brought under section 11B for any amount in excess of the amount of the insurer’s liability provided for under the contract of insurance. (2) If the amounts payable in respect of claims made against an insurer by one or more actions under section 11B exceed the amount for which the insurer is liable under the contract of insurance, those claims are to abate proportionately to their amounts. (3) A payment made under the contract of insurance by the insurer to one third party without actual notice of a possible claim by any other third party constitutes, to the extent of that payment, a valid discharge to the insurer in respect of the claim of such other third party or third parties. (4) A payment made under the contract of insurance by the insurer to the insured without actual notice that the insured is insolvent constitutes, to the extent of that payment, a valid discharge to the insurer in respect of the insured’s liability to the third party. (5) Nothing in this Act prevents the variation or discharge of an insurer’s obligation under a contract of insurance at any time before the insurer has actual notice that the insured is insolvent. (6) A payment made under the contract of insurance by the insurer to an insolvency administrator who has been appointed in respect of the insured’s property or estate does not constitute a valid discharge to the insurer in respect of the insured’s liability to the third party. 11D Duty to give necessary information to third parties (1) Every insurer and every insured and any receiver, manager, trustee, liquidator, personal representative or other person in possession of the estate or property of the insured must, at the request of the third party, give to the third party such information as the third party may reasonably require to ascertain whether any promise of the insurer to indemnify the insured is one to which section 11B applies. (2) The duty to give information under this section includes a duty to allow all contracts of insurance, receipts for premiums, and other relevant documents in the possession or power of the person on whom the duty is imposed to be inspected and copies of them to be taken. (3) An application to enforce a duty imposed by this section may be made by originating application either in the High Court or in a District Court. (4) A provision of a contract of insurance is of no effect if it purports, directly or indirectly, (a) to prohibit or prevent the giving of any information required to be given by this section; or (b) to avoid the contract or to alter the rights of the parties under it upon the giving of any such information. 11E Actions by third parties against insurers (1) A third party may bring an action against an insurer under section 11B although judgment has already been entered against the insured for damages or compensation in respect of the same matter. (2) Before commencing an action against an insurer under section 11B, a third party must obtain the leave of the court in which the action is to be commenced unless (a) the insured is subject to a statutory or contractual regime under which the assets of the insured have been or are to be realised for the benefit of secured or unsecured creditors; or (b) the insured’s estate is being administered under Part XVII of the Insolvency Act 1967; or (c) the insured, being a corporation, has been removed from the New Zealand register under section 317 of the Companies Act 1993 (if a company) or has otherwise been dissolved or ceased to exist. (3) On an application by a third party for leave to bring an action against an insurer, the court must grant leave if it is satisfied that the third party has established a prima facie entitlement to bring such an action. (4) If an action for damages or compensation is commenced by a third party against an insured within the time allowed by section 4 of the Limitation Act 1950 and subsequently the third party commences an action under section 11B of this Act against the insured in respect of the same matter, section 4 of the Limitation Act 1950 does not apply to that action against the insurer.”	Section 6 C11 This section inserts into the Insurance Law Reform Act 1977 new sections 11A–11E which replace the Law Reform Act 1936 Part III. C12 The new section 11A applies the new provisions to existing as well as future contracts but leaves unaffected any release of the insurer pre-dating the commencement of the sections. C13 The new section 11B provides that liability cover is to be treated as enforceable as against the insurer under the Contracts (Privity) Act 1982 by a party entitled to redress from the insured if: the insured has become insolvent; or if an individual has died and after 60 days no administrator of the deceased’s estate has been appointed; or being a corporation, it has ceased to exist; or if the insured cannot, after reasonable inquiry, be found. Subsection (2) defines the word insolvent used in subsection (1). One consequence of this section is to override the cases referred to in para 107 requiring the third party to obtain judgment against the insured before proceeding against the insurer. C14 Section 11C(1) makes it clear that the insurer’s contractual liability may not be exceeded. This is the existing law. “The claimant cannot be in a better position viz a viz the insurer under s 9 than was the insured”: Tipping J for the Court of Appeal in UEB Packaging Ltd v QBE Insurance (International) Ltd (unreported, 19 December 1997, CA 169/96). Subsection (2) provides for abatement if there are a number of claims exceeding in total the available fund. Subsection (3) protects an insurer who pays one claimant unaware of the existence of others. Subsection (4) protects an insurer in the event of a payment without actual notice of an insolvency. Subsection (5) makes it clear that insurer and insured may vary their contract at any time before the insurer has notice of an insolvency. Subsection (6) makes it clear that an insurer is not discharged by a payment to an insolvency administrator. C15 Section 11D(1) and (2) spell out the duty of various parties to disclose to the third party information relevant to the insurance cover. Subsection (3) gives a right to apply to a court to enforce that duty. Subsection (4) invalidates provisions inhibiting such disclosure of information. C16 Section 11E(1) makes it clear that a third party’s right to sue the insurer directly is not affected by the existence of a judgment against the insured in respect of the same matter. Subsection (2) provides that the prior leave of the court is necessary before suing the insurer directly unless there is a liquidation, a receivership, a statutory management, an administration under the Insolvency Act 1967 Part XVII or a dissolution. Subsection (3) provides for a corporation that leave must be granted if the third party establishes a prima facie case. Subsection (4) provides that the Limitation Act 1950 does not apply as between third party and insurer if proceedings against the insured have been commenced within the time limited by that statute.
Miscellaneous provisions 7 Application of Act Section 13 of the principal Act is amended by adding the following subsection: “(3) Subsections (1) and (2) have effect in relation to the application of the amendments of this Act enacted by sections 3 to 5 of the Insurance Law Reform Amendment Act 199– as if the references in those subsections to “the commencement of this Act” were references to the commencement of the Insurance Law Reform Amendment Act 199–.” 8 Repeals and amendments Section 16 of the principal Act is amended by adding, as subsection (2) and (3), the following subsections: “(2) Part III of the Law Reform Act 1936* is repealed. (1936, No. 31, R.S. Vol. 3, p. 187) (3) The Imperial Laws Application Act 1988* is amended in the item in the First Schedule relating to The Fires Prevention (Metropolis) Act 1774 by omitting the following: “section 83, and”. (R.S. Vol. 30 p. l)”	Section 7 C17 Section 13 of the 1977 statute applies that statute to all life policies whether entered into before or after that Act’s commencement, subject to certain qualifications preserving rights, and to all other policies whether entered into before or after that Act’s commencement without those qualifications. Section 7 adds a subsection to s 13 that applies those provisions mutatis mutandis to sections 3–5 of this draft Act. Section 8 C18 Section 8  repeals Part III of the Law Reform Act 1936 and, in its application to New Zealand, the Fires Prevention (Metropolis) Act 1774 s 83.