Reinforcing brokers’ duties

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Insurance lessons from the Sydney siege

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It’s not fair!

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Editorial

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Canterbury earthquake decisions

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COVER TO COVERM A G A Z I N E F O R T H E N E W Z E A L A N D I N S U R A N C E M A R K E T M A Y 2 0 1 5 / I S S U E F O U R

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Editorial

W hen I first came to New Zealand,

aged 17, I noticed a difference between telephone directories here and those in the UK. While I am glad to say this was not my main impression of New Zealand, it stuck in my mind that in the UK the telephone directories simply said: in the event of an emergency call the emergency services; whereas in New Zealand they gave instructions on what to do in the event of a volcanic eruption, tsunami, earthquake or flood.

The ever-present impact of nature in New Zealand is simultaneously one of New Zealand’s beguiling qualities and one of its challenges. This is reflected in the practical problems that have emerged from the Canterbury earthquakes, and, in a less dramatic way, in the forthcoming changes to the Fair Insurance Code, which

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Editorialimpose obligations on insurers as regards response times even after natural disasters. Insurers must also act reasonably in relation to non-disclosure issues. Reasonableness can be a difficult concept to pin down in practice. Once the preserve of the man on the Clapham omnibus, it is in the eye of the beholder, and it is difficult to ensure objectivity. Insurers will need to be able to demonstrate robust decision making and record keeping as to their criteria and reasoning, to be able to demonstrate reasonableness. A one-sided or blinkered approach is unlikely to be convincing.

Similarly, brokers are under the spotlight in the context of increased regulatory oversight, and will need to ensure robust record-keeping as to (among other things) advice given in relation to insureds’ disclosure to insurers and during the placing and renewal of policies generally. Key messages for brokers include reconsidering professional requirements in the context of increased regulatory interest; ensuring staff are appropriately

trained; establishing robust record-keeping processes; and checking their own professional indemnity insurance cover.

Political risks such as terrorism may seem a million miles from New Zealand, but the recent siege in Sydney, and the Charlie Hebdo events in Paris, not to mention 9/11, remind us that terrorism can strike out of the blue and that insurance exists, among other things, to protect against the almost unimaginable. Stacey Shortall and Cameron Loughlin examine insurance lessons from the Sydney Siege.

We hope you will find this fourth issue of Cover to Cover interesting and useful. Please do not hesitate to give us any feedback, including any requests for future issues, by a quick email to covertocover@minterellison.co.nz.

Toby GeeEditor

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It’s not fair!There is an increased focus on fairness for consumers generally and, since the Canterbury earthquakes, in particular for people making insurance claims. This has led to two important changes to the requirements for fair policies and robust claims handling processes.

“There is no definition within the Code explaining what is ‘fair’, or what response might be ‘reasonable’.”

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The consumer space has been busy recently, with the introduc-tion of new rules and guidelines targeted at improving protection for consumers. This article explores two such areas: new pro-hibitions against unfair contract terms in the Fair Trading Act 1986 and a new Fair Insurance Code.

‘Rebalancing’ standard form consumer contractsOver the last 18 months, the Fair Trading Act has seen a number of amendments as part of significant reform to New Zealand’s consumer laws. The final step in a series of changes was the introduction of prohibitions on unfair contract terms in standard form consumer contracts on 17 March 2015.

One of the main aims of the unfair contract terms provisions is to achieve alignment with Australian consumer law. Australia’s regime has been in effect since 1 July 2010.

Only standard form consumer contracts will be affected by the new regime. Practically speaking, standard form contracts are those in which the supplier’s terms (often written by lawyers) are presented more or less on a ‘take it or leave it’ basis with no room for negotiation.

The contract must also be with a ‘consumer’. Under the Fair Trading Act, a ‘consumer’ is a person who:(a) acquires from a supplier goods

or services of a kind ordinarily acquired for personal, domestic, or household use or consumption;

and(b) does not acquire them for the

purpose of resupplying them in trade; consuming them in the course of production

or manufacture; or, in the case of goods, repairing or treating in trade other goods or land fixtures.

Since 17 March 2015, the Commerce Commission can apply to the Court for a declaration that a term in a standard form consumer contract is unfair. Contracts entered into before 17 March 2015 are not affected, unless varied or renewed after that date, in which case they are treated as new contracts for the purposes of the regime.

For a term to be considered ‘unfair’, the Court must be satisfied that the term:• would cause a significant

imbalance in the parties’ rights and obligations arising under the contract;

• is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term;

and• would cause detriment

(whether financial or otherwise) to a party if it were applied, enforced or relied on.

Where the Court has declared a term unfair, it cannot be included in a standard form consumer contract (unless it complies with the terms of the Court’s decision), applied, enforced or relied upon.

Some terms are exempt, including terms that define the main subject matter of the contract; those that set the up-front price payable under the contract - if the price is transparent; or terms required or expressly permitted by any statute.

There are specific rules for insurance contracts. Insurance contracts entered into before 17 March 2015 are not affected, even

if they are varied or renewed after this date. There are also certain terms in insurance contracts that are exempt from being declared unfair terms. These are terms that: • identify the uncertain event

or that otherwise specify the subject matter insured or risk insured against;

• specify the sum(s) insured; • exclude or limit the liability of

the insurer to indemnify the insured;

• describe the basis on which claims may be settled or specify any sums to be con-tributed by the insured (e.g. an excess);

• provide for the payment of the premium;

• relate to the duty of utmost good faith owed by all parties;

or • specify requirements for

disclosure, or relate to the effect of any non-disclosure or misrepresentation, by the insured.

Despite these exemptions, insurers will still need to carefully review the policies which may qualify as standard form consumer contracts, to reduce the risk of action by the Commerce Commission or an adverse finding by the courts. Particularly relevant to insurance contracts are terms that have the effect of permitting the insurer to terminate the contract or vary the terms of the contract. Such terms may be considered unfair if they would cause a significant imbalance in the parties’ rights and obligations, are not reasonably necessary in order to protect the legitimate interest of the insurer and would cause detriment to the insured if they were applied, enforced or relied upon. Therefore insurers should ensure that they

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commit its members to higher standards of service in all their dealings with customers, not just when dealing with claims. ICNZ Chief Executive, Tim Grafton, has said the new standards “will set a high benchmark for self-regulation, so the public can have trust and confidence in their dealings with our members”.

The revised Code is also aimed at addressing issues that arose from the Canterbury earthquakes. Previously, the Code did not take into account catastrophe situations or set out timeframes for responding to claimants or keeping them informed of the progress of their claims.

The revised Code includes the following key changes:

carefully consider any such terms in their policies by reference to those tests, including ensuring that they are able to demonstrate that such terms are reasonably necessary to protect their legitimate interests.

Revised Fair Insurance CodeThe Fair Insurance Code, administered by the Insurance Council of New Zealand (ICNZ), is a set of core principles aimed at improving standards of practice and service that member insurance companies provide to their customers.

The Code has recently been revised, with a new version coming into effect on 1 January 2016. It will

• Enhanced, effective commu-nication with the insured, par-ticularly concerning up-front disclosure of key information;

• Insurers committing to act reasonably when faced with the non-disclosure of relevant information by the insured;

• Introduction of best-practice timeframes for communicating with the insured at claim time;

and• Insurers committing to train

their staff and agents about the Code so they can fulfil their responsibilities as well.

While the revised Code recognises that insurers may refuse to pay all or part of the claim, or cancel the policy from its start date in the event of material

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Iva Rosic

Jeremy Muir

non-disclosure, the Code requires insurers to ‘respond reasonably’ to non-disclosure. The Code, however, does not go as far as the changes in the more customer-focussed UK and Australian law which essentially limit the ability of insurers to avoid contracts for innocent non-disclosure.

It is not yet clear how the concept of ‘reasonable response’ will be applied under the Code, where a non-disclosure was innocent or immaterial to the claim being made. There is no definition within the Code explaining what is ‘fair’, or what response might be ‘reasonable’. Overseas cases where fairness and reasonableness standards are being applied to non-disclosure are likely to be influential.

The revised Code also establishes a new Code Compliance Committee, mainly comprising independent experts. The Committee will be responsible for investigating significant breaches of the Code, referred by the ICNZ’s independent, external dispute resolution scheme. Sanctions against insurers for such breaches will range from a fine to expulsion from the ICNZ.

Insurers have until 1 January 2016 to familiarise themselves with the changes and make such changes as may be required to their policies, training and operational systems. In particular, they will need to ensure that their disaster plans are robust, so that when (not if) the next natural disaster or event occurs in New Zealand, they will be capable of complying with the new Code.

For more informationThe Commerce Commission has published guidance on its website setting out how it intends to approach the enforcement of unfair contract terms (www.comcom.govt.nz).

A copy of the revised Fair Insurance Code 2016 can be found on ICNZ’s website (www.icnz.org.nz).

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Insurance lessons from the Sydney siege

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when those attacks led to insured losses of approximately USD35bn, reinsurers largely pulled out of the market for terrorism coverage. Absent reinsurance, unsurprisingly, primary insurers excluded terrorism to protect themselves from the potential for huge losses.

With businesses unable to purchase insurance protection against further terrorist attacks, which caused lenders and investors to hold back, economic development in the US quickly slowed. In response the US Congress enacted the Terrorism Risk Insurance Act – Tria – as a government backstop, or reinsurer, to insurance companies in the wake of a terrorist attack.

The importance of Tria is hard to overstate. When it appeared late last year that Tria would not be renewed (it subsequently was), not only did US businesses protest but there were fears that big sporting events, like the Super Bowl, could be cancelled.

Australia and the US are not the only countries where governments have intervened to fill the gap in terrorism reinsurance. For example in the UK the government set up the Pool Re scheme with the insurance industry which requires insurers to pay up to a threshold before claiming on industry reserves and then drawing government funds if those reserves

T here are many lessons to be taken from the

recent tragic Sydney siege. But one lesson that is perhaps yet to be fully considered in New Zealand is the need for terrorism insurance.

When an armed gunman held 17 people hostage for over 16 hours in the heart of Sydney in December last year, businesses across that city were forced into shutdown. Workers were sent home. Commercial dealings were stalled. Business and retail losses were incurred.

While the threat of terrorist incident in New Zealand may seem remote, the attack at the Lindt Cafe, not unlike the Charlie Hebdo incident in Paris, serves as a chilling reminder that the unimaginable can happen anywhere.

Notwithstanding that damage and loss as a result of terrorist acts is generally excluded from insurance policies in Australia – like here – such exclusion clauses were overridden when, in January this year, the Australian Treasurer declared the Sydney siege a terrorist incident. This was because – unlike here – Australia has legislation that overrides terrorism exclusion clauses in eligible policies when a terrorist incident is declared and which, essentially, enables insurers to claim reinsurance from the government.

The Australian Government enacted such legislation in the wake of the September 11 attacks in the US. Like there, the intention was to limit the economic fallout of a terrorist event.

Before the September 11 attacks, terrorism coverage was generally not excluded in US policies. But

Cameron Loughlin

Stacey Shortall

“Australia and the US are not the only countries where governments have intervened to fill the gap in terrorism reinsurance.”

are exceeded. There also are terrorism reinsurance schemes in France, Austria, Belgium, Germany, South Africa and Spain.

But not so in New Zealand.

In time, should the risk of a terrorist incident in New Zealand increase, it will be interesting to see whether investment and lending are adversely affected, absent terrorism insurance coverage. It will be equally interesting to see whether our government looks to follow what other governments have established by way of terrorism reinsurance schemes.

For now, however, should a terrorist incident occur here, insurers can rely on exclusions to avoid paying on claims. But it bears noting that such responses may not be well received by premium payers and the wider public. Notably, in the aftermath of the Sydney siege, at least three insurance companies stated that they would not rely on terrorism exclusion clauses but rather pay out claims as a matter of public policy. Let us hope New Zealand insurers need not ever grapple with that issue.

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Reinforcing brokers’ duties

Regulatory oversight of the financial services sector has increased dramatically following the Global Financial Crisis. With the Financial Markets Conduct Act 2013 (FMCA) recently coming into force, this article summarises the current regulatory position applying to insurance brokers’ obligations.

The FMCA, Financial Advisers Act 2008 (FAA) and Fair Trading Act 1986 (FTA) (which has recently been overhauled) all play a part in regulating the insurance broking industry. Regulators are taking a more active role in policing compliance with laws, regulations and professional standards. Brokers need to be more aware of their obligations as a result.

In addition, the FMA has taken over from the Commerce Commission as the primary regulator of misleading or deceptive conduct and unsubstantiated representations in relation to financial products and services, including insurance. While the two regulators will work together if there is overlap in their respective bailiwicks, the FMA now has a clear focus on most aspects of financial services regulation.

One of the FMA’s strategic priorities over the next three years is to ensure that sales processes and advisory services reflect consumers’ best interests. In particular, the FMA is concerned with mis-selling of insurance products, including selling products that do not meet clients’ needs. This priority arises from the increasing number of complaints the FMA has received about insurance sales.

In order to achieve its regulatory objectives, the FMA has wide-ranging powers, which include the ability to publish written warnings, seek pecuniary damages or issue banning orders against brokers, along with criminal proceedings in some cases.

Brokers’ statutory duties The FAA, FMCA and FTA in part codify the common law and impose the following key duties upon brokers:

1. to exercise reasonable care, diligence and skill;

2. not to engage in misleading or deceptive conduct, or conduct that is likely to mislead or deceive; and

3. not to make unsubstanti-ated representations.

Reasonable care, diligence and skill

This broad obligation may be translated into a number of specific duties that arise at different times in the life of an insurance policy:

1. First, a duty to arrange appropriate cover – cover

which adequately meets the client’s needs. Brokers are required to understand client instructions, apply their own skill and judgment in identifying risks, warn the client about any exclusions and ensure that the policy is clear.

2. Secondly, a duty to arrange effective cover – cover which the insurer cannot avoid for non-disclosure or misrep-resentation. It is especially important that brokers ensure that their clients are aware of the obligation to make full and accurate disclosure to the insurer. The broker must also pass on any material client information to insurers.

3. Thirdly, a duty to ensure that cover remains effective – this may involve advising the client about the requirements of coverage and notifying risks. This duty is especially important if the broker occupies a special relationship with the client where he or she is able to exercise a broad discretion about their insurance needs or in cases where the client is especially vulnerable.

4. Fourthly, in some cases there is a duty to assist the insured with a claim if one arises.

5. Lastly, there is a duty to advise the client that cover is expiring and to seek instructions regarding renewal.

Misleading or deceptive conduct

Brokers will be liable for misleading or deceptive conduct, or conduct

Regulatory oversight of the insurance broking industry has increased and the FMA is focussing on the mis-selling of insurance products. Coupled with the Financial Markets Conduct Act and amendments to the Fair Trading Act, this means that it is timely to examine some key aspects of brokers’ duties.

“The FMA now has a clear focus on most aspects of financial services regulation.”

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that is likely to mislead or deceive, not only if they make false or misleading statements, but may also be liable if they:

1. stay silent on a material issue; or

2. tell a half-truth.

A salient example is where a client is advised to change policies at renewal. Brokers should provide a clear, reasonable and balanced comparison of the client’s existing policy with the recommended new policy. The FMA has reminded brokers that it would be misleading only to highlight the benefits of changing policies without mentioning any disadvantages.

Unsubstantiated representations

An unsubstantiated representation is a statement that is not made on reasonable grounds, regardless of whether it is false or misleading. The Commerce Commission has published the following practical tips to help avoid unsubstanti-ated representations:

1. do not make claims that are not based on reasonable grounds;

2. rely on facts, figures and credible sources of information, not guesses and unsupported opinions; and

3. keep documentation or other information you have gathered in the process of sourcing a good or service.

Brokers who engage in misleading or deceptive conduct or make unsubstantiated representations to their clients or to an insurer may be exposed

Zane Kennedy

Nick Frith

to regulatory scrutiny. We understand that some insurance brokers have already been investigated but relevant details have not yet been publicised.

Consequences of breachThe FMA has wide-ranging powers to deal with breaches of obligations, including the ability to impose penalties of three times the amount of the gain made or loss avoided (up to $1,000,000 in the case of an individual and $5,000,000 in any other case).

The Commerce Commission can also enforce the FTA by bringing criminal proceedings that may result in fines of up to $200,000 for an individual and $600,000 for a company.

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In each issue we examine recent case law, and what it could mean for you.

Under the microscope: Canterbury earthquake decisions

T he Canterbury earthquake

litigation continues to produce new caselaw. This month we discuss two recent cases.

Government told to reconsider offers to uninsured property owners• Quake Outcasts v

Minister for Canterbury Earthquake Recovery

Being unable to access a home does not constitute physical loss of the home• Kraal v The Earthquake

Commission

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Case study one: Government told to reconsider offers to uninsured property owners in the red zoneThe Supreme Court recently decided, in a majority judgment, that Canterbury Earthquake Recovery Authority’s (CERA) offers to uninsured owners of red zone properties to purchase their properties at 50% of the 2007 rateable value were unlawful.

Quake Outcasts v Minister for Canterbury Earthquake RecoveryThe decision in Quake Outcasts v Minister for Canterbury Earthquake Recovery was given on 13 March 2015.

The Minister for Canterbury Earthquake Recovery designated the red zone. CERA made 50% offers to uninsured landowners. A group of uninsured red zone property owners sought judicial review of those decisions on the basis that the Minister and CERA had not complied with the Canterbury Earthquake Recovery Act. The Minister argued the Crown did not have to comply with the Act, as it had a residual power to designate the red zone outside the Act. The Supreme Court disagreed because that power had been ousted by the Act. The Crown should have made zoning decisions under the Act and in accordance with the recovery strategy.

The Court also held that, in making the 50% offers solely on the basis that the owners were uninsured, CERA had not made that assessment in compliance with the purposes of the Act. Although the insurance status

of the property owners should not have been the governing factor in the quantum of offers, it was a relevant consideration in conjunction with other factors.

Accordingly, the 50% offers made to owners of uninsured red zoned properties were unlawful. However, the Supreme Court saw no benefit in declaring the red zone decision unlawful. Many property owners in the red zone had accepted offers from CERA which would have been brought into question if the red zone designation was invalidated.

CERA will now need to reconsider its offers to the uninsured “outcasts”, taking into account a number of factors in addition to their uninsured status.

Case study two: Being legally unable to access a home does not constitute physical loss of the home In Kraal v The Earthquake Commission the Court of Appeal has upheld the High Court decision that being legally unable to access one’s home does not constitute ‘physical loss or damage’ to the property.

Kraal v The Earthquake CommissionAfter the second Canterbury Earthquake the plaintiffs’ home, in the Port Hills area, was at risk of damage by rock fall. The Council issued a notice under the Building Act 2004 forcing the plaintiffs to vacate their home and not to return. The plaintiffs sought compensation under the Act and claimed from their private insurer, Allianz. They argued that prevention of access constituted “physical loss or damage” sufficient

to trigger cover under the Act and under their insurance policy.

The High Court last year, and now the Court of Appeal, found against the homeowners. The Act provides that residential buildings are insured for “physical loss or damage” arising from certain natural disasters. Because the homeowners were merely prevented from accessing their home, the home had not suffered the “damage” or “loss” required by the Act. A claim for recovery of a reduction in the market value of the house was also found to be outside the ambit of the Act. The Act was held to require loss by disturbance to the physical materials or the structure of the building arising from a natural disaster.

Similarly, the plaintiffs’ claim for insurance cover from Allianz failed, on the basis that deprivation of access did not constitute “physical loss or damage” as required by the policy. In the context of the policy, this meant physical harm to the building.

The Court’s ruling will help to guide insurers’ treatment of insured properties that cannot be accessed because of a threat of damage not yet constituting physical damage. However, as policy wording differs from insurer to insurer, it must be noted that the Court’s decision was in the context of the particular wording of the Allianz policy in the context of the Act.

Toby Gee Iva Rosic

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Toby GeeSpecial Counsel

Andrew HornePartner

Neil MillarPartner

For more information, please contact us: E: covertocover@minterellison.co.nz w: www.minterellison.co.nz/insurance

Stacey ShortallPartner

Jeremy MuirPartner

Kara DalySpecial Counsel

Lloyd KavanaghPartner

Zane KennedyPartner

Oliver MeechPartner

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