COMPLIANCE NEWS – INSURERS
SEPTEMBER ISSUE | 2020
This month we look at the Finance and Expenditure Select Committee’s amendments to the Financial Markets (Conduct of Institutions) Amendment Bill, a Court of Appeal decision that clarifies the law on fraudulent claims, a class-action filed against a major Australian bank, and updates to the Insurer Solvency Report.
We also provide our general update on relevant legislation.
FINANCE AND EXPENDITURE COMMITTEE REPORTS ON FINANCIAL MARKETS (CONDUCT OF INSTITUTIONS) AMENDMENT BILL
The Finance and Expenditure Select Committee (Committee) reported on the Financial Markets (Conduct of Institutions) Amendment Bill (Bill) on 7 August 2020. The Bill now awaits its second reading.
To recap, the Bill as introduced would establish a new regime to regulate the conduct of banks, insurers, and non-bank deposit takers. The regime would require those institutions to obtain and operate under a licence to act as a financial institution. It would apply broadly to relevant services and associated products provided by those institutions.
It would further establish a “fair conduct principle” to require financial institutions to treat customers fairly. Financial institutions would be required to establish, implement, and maintain an “effective fair conduct programme” that complies with minimum requirements prescribed in regulations.
Lastly, the Bill as introduced would establish a power to make regulations in respect of performance incentives for staff and others involved in providing relevant services or associated products.
The Bill as reported by the Committee contains several changes that address concerns raised during consultation. The changes can be summarised as follows:
- inserting a power to make regulations that would exempt specific types of financial institution from the requirement to hold a licence. This address concerns about the broad definition of “financial institution” and the variation in market structures. It is also intended to address market participants that are subject to oversight by an umbrella organisation that has developed a longstanding governance structure for overseeing conduct and culture risks.
- extending the latest commencement date from two to three years after the date of Royal assent and extending the maximum period for phasing in the requirement to hold a licence from four years to five.
- inserting a list of factors that are relevant to the concept of fairness to provide additional guidance as to what it means to “treat customers fairly”. The list would be non-exhaustive and flexible enough to incorporate changing products, services, and industry practices.
- limiting the circumstances in which a person is considered to be involved in the provision of a relevant service or associated product for the purpose of regulations that prohibit incentives. This change responds to the industry concern that the wide definition of “intermediary” could include persons, entities, and activities that have limited or no interaction with consumers in circumstances where there is the potential for the kind of harm envisaged by the Bill.
- inserting express high-level requirements for fair conduct programmes (FCP). The requirements relate to the design of FCPs, management of risks of non-compliance, and identifying conduct that does not comply with the fair conduct principle. Originally the Bill simply provided for regulations to be made to prescribe the consent of FCPs. The express requirements have been inserted to provide financial institutions with some certainty as to the content of FCPs.
- changing the requirement to make FCPs publically available to a requirement to provide FCPs to the FMA. This is a response to industry concerns that FCPs may contain commercially sensitive information. The Committee considered providing the FCP to the regulator would sufficiently highlight the importance of the FCP. Instead, a new clause would require financial institutions to make a high-level summary of their FCPs publically available.
- deleting a provision that stated a financial institution or intermediary contravened the requirements to take all reasonable steps to comply with its FCP even if the failure related to only one consumer. This is to prevent the interpretation that a financial institution has failed to take all reasonable steps to comply with its FCP where only one consumer is treated unfairly.
- inserting a requirement that financial institutions include in their FCPs provision for training and supervision of intermediaries. This would replace a duty to ensure intermediaries comply with a financial institutions FCP, which could cause intermediaries to have overlapping duties.
- amending the definition of “consumer credit contract” to exclude credit contracts under which the debtor is a trustee of a family trust and therefore align with the definition in the Credit Contracts and Consumer Finance Act 2002.
- amending the definition of “consumer insurance contract” to clarify that circumstances where an institution is a master policyholder of a contract provides general insurance for the benefit of customers is covered. The change will ensure the definition applies to circumstances where a policyholder has entered into an insurance contract to provide cover for other persons for personal, domestic, or household purposes.
- inserting a requirement that the Minister consider certain matters before making regulations relating to incentives. This would include a requirement that the Minister consider whether matters covered in regulations would be more appropriately dealt with in primary legislation.
There is still room to debate outstanding issues, such as financial institution training and adviser supervision in the House of Representatives.
Please contact us if you have any questions about the Bill.
COURT OF APPEAL DECISION SETTLES LAW ON FRAUDULENT CLAIMS
The Court of Appeal’s decision in Taylor v Asteron Life Limited  NZCA 354 has confirmed that the “fraudulent claims rule” is a term implied by law in every insurance contract such that:
- an insured must act honestly in connection with making a claim; and
- where an insured dishonestly makes a claim that is false in some material respect, the whole of the fraudulent claim will be disallowed.
However, a fraudulent claim does not entitle an insurer to cancel or avoid the entire policy or recover payments made in respect of other legitimate claims under the policy.
Mr Taylor was a self-employed insurance broker who suffered a medical condition and became unable to work from 23 December 2009. He made a claim under his income protection policy (Policy) with Asteron Life Limited (Asteron). Asteron accepted his claim and started making payments.
Mr Taylor provided Asteron with progress reports on the current state of his medical conditions in accordance with the Policy. In 2014 Asteron made repeated requests to Mr Taylor for certain financial information. On 20 August 2014 Mr Taylor provided some financial information, but not the accounts for his insurance broking business. The information appeared to show commissions from the insurance broking business being channelled through another company.
Asteron queried the commissions, which totalled $551,491. Asteron explained Mr Taylor’s entitlement under the Policy was subject to a deduction for the income he earned while working, and that it would not make any further payments until it could reconcile his claim.
In December 2015 Mr Taylor commenced High Court proceedings against Asteron seeking:
- a declaration that he was entitled to continuing benefits under the policy; and
- an order requiring Asteron to pay benefits under the policy and arrears from September 2014.
Asteron denied Mr Taylor was entitled to any further payments. It alleged Mr Taylor had breached his duty of utmost good faith by making false statements about the extent to which he had worked in the relevant period. Asteron counterclaimed seeking repayment of all sums previously paid under the policy.
Mr Taylor’s Policy provided two benefits, a “Total Disability Benefit” and a “Partial Disability Benefit”. Both benefits were subject to deductions in respect of income Mr Taylor earned. “Totally disabled” meant Mr Taylor was unable to work in his usual occupation for more than 10 hours per week. “Partially disabled” meant Mr Taylor was working in any occupation but, directly because of his medical condition, could only work to a limited extent such that his “monthly earned income” was 75 per cent less than his insured income.
Mr Taylor did not call medical evidence to establish his condition. Documentary evidence and evidence provided by three of Mr Taylor’s employees who were subpoenaed by Asteron showed Mr Taylor worked extensively in the business during the relevant period. The High Court found that Mr Taylor was not “totally disabled” within the meaning of the policy.
Whether Mr Taylor was still “partially disabled” depended upon the interpretation of “monthly earned income”. The High Court considered it meant Mr Taylor’s monthly pre-tax earnings from his business. Mr Taylor initially presented financial statements for his insurance broking business that falsely represented that the business was trading at a loss. Mr Taylor later presented correct financial statements for the business that showed his income was at a level that resulted in full abatement of any amounts otherwise due under the Policy.
Mr Taylor’s primary claims were dismissed on that basis.
The High Court then considered the legal framework for addressing Asteron’s right to cancel or avoid an insurance contract on the basis of a breach of the duty of good faith. It considered the duty of good faith was an implied term of the insurance contract and therefore addressed Asteron’s claim by reference the Contract and Commercial Law Act 2017 (CCLA). The High Court found Mr Taylor had not acted in good faith and that Asteron could recover all payments under the Policy as a result of Mr Taylor’s representations.
Court of Appeal
Mr Taylor appealed on the basis that the High Court erred in several respects, including by finding that he was not “totally disabled”, that he made deliberate misrepresentations, and that Asteron was entitled to cancel the Policy and a refund of all amounts paid under the Policy.
Reviewing the High Court’s approach to whether Mr Taylor was “totally disabled”, the Court of Appeal considered Asteron had failed to establish that Mr Taylor was not “totally disabled” from December 2009 to 22 July 2010, but had established he was not “totally disabled” from 23 July 2010 onwards. The Judge had accepted that there was a period immediately following Mr Taylor’s medical condition when he was not able to work 10 hours per week. Further, the Judge was not prepared to find that the statements in Mr Taylor’s initial claim for the 23 December 2009 to July 2010 period were false.
The Court of Appeal then engaged in a lengthy discussion about the source of the insured’s duty of good faith when making claims where an insurance contract is silent on the point, in other words, the “fraudulent claims rule”. After surveying English case law, the Court of Appeal considered the fraudulent claims rule is accommodated within the general principles of contract law, and should be seen as an implied term in all insurance contracts such that:
- an insured must act honestly in connection with making a claim; and
- if the insured fails to do so, and dishonestly makes a claim that is false in some material respect, the whole of the fraudulent claim will be disallowed.
That means an insurer’s entitlement to cancel an insurance policy for breach of the “fraudulent claims rule” is governed by the CCLA. Absent an express term providing for cancellation, an insurer can cancel a policy if a term is breached and that term is either essential or the consequences of breach are substantial. Importantly, the Court of Appeal held that where the fraudulent claims rule is implied into an insurance contract, it is implicit the implied term is essential to the insurer.
Therefore, if an insured makes a dishonest claim, an insurer is entitled to damages for any loss caused by that breach, and it is entitled to cancel the contract under the CCLA. However, cancellation under the CCLA operates prospectively, and does not entitle an insurer to recover other payments already made under the insurance contract.
Where a fraudulent claim is made, and an insurer cancels the policy:
- the policy is terminated with effect from the date of cancellation;
- the insurer is not obliged to pay the fraudulent claim by virtue of the fraudulent claims rule being an implied term of the insurance contract; and
- the cancellation does not affect other claims made under the policy before the date of cancellation. Cancellation does not affect the insured’s right to retain payments from an earlier claim. If an earlier claim has not been paid, it must be settled in accordance with the policy as normal.
The balance of the issues in the proceeding were resolved such that Asteron was still entitled to recover its payments under the Policy. These payments were reduced by $51,835.64 to reflect the initial period where Mr Taylor was in fact ”totally disabled”.
Please contact us if you have any questions about Taylor v Asteron Life Limited or the fraudulent claims rule.
LARGE AUSTRALIAN BANK SUED FOR INSURANCE ADVICE
The Commonwealth Bank of Australia (CBA) is facing a class-action lawsuit in respect of insurance advice provided by its subsidiaries’ financial advisers.
Shine Lawyers has filed proceedings against Commonwealth Financial Planning Limited (CFPL)and Financial Wisdom Limited (FWL), as well as the Colonial Mutual Life Assurance Society. CBA says the lawsuit related to CommInsure life insurance policies recommended by financial advisers appointed by CFPL and FWL. A spokesperson for Shine Lawyers has said the claims relate to customers being charged excessive life insurance premiums.
Shine Lawyers argues that all three financial service providers behaved unfairly and illegally. They allege the relevant advisers did not act in their clients’ best interests by failing to inform them that they could obtain substantially similar or better insurance policies from alternative insurers for lower premiums.
These proceedings highlight problems characteristic of the current moves towards increased conduct regulation of banks and insurers in both Australia and New Zealand. Shine Lawyers is alleging that financial advisers were incentivised by commissions and other financial and non-financial benefits to recommend CommInsure insurance.
Please contact us if you have any questions about the class action against CBA or the conduct regulation of banks and insurers generally.
UPDATES TO INSURER SOLVENCY RETURN
The Reserve Bank of New Zealand (Reserve Bank)has released new versions of the Insurer Solvency Return and the Guide to Completing the Insurer Solvency Return. Both can be found on this webpage.
The updated Insurer Solvency Return includes new fields for projecting solvency with and without capital movements.
The Guide to Completing the Insurer Solvency Return consequently contains new instructions to make future solvency projections on two bases, one including expected capital movements and one excluding any such movements. Future solvency projections should also consider accounting standards likely to prevail at those future dates, but only to the extent their impact on solvency calculations is known with a high degree of certainty.
Data collected by the Insurer Solvency Return is collected under the authority of notices issued in accordance with section 121 of the Insurance (Prudential Supervision) Act 2010. Reporting requirements for each insurer are specified in their respective section 121 notice or notices.
Please contact us if you have any questions about the Insurer Solvency Return.
Financial Markets (Conduct of Institutions) Amendment Bill
As explained above, the Finance and Expenditure Select Committee reported on the Financial Markets (Conduct of Institutions) Amendment Bill on 7 August. The Bill now awaits its second reading.
Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill
The Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill had its first reading on 21 July 2020. It will be considered by the Governance and Administration Select Committee. There has been no activity in respect of the Bill since 22 July.
Fair Trading Amendment Bill
The Fair Trading Amendment Bill passed its first reading on 12 February 2020. The Economic Development, Science, and Innovation Committee is considering the Bill. Submissions closed on 26 April 2020. There has been no activity in respect of the Bill since 13 February 2020.
Insurance Contract Law Review
The Ministry of Business, Innovation and Employment is completing a review of New Zealand’s insurance contract law. The purpose of the review is to ensure insurance markets work well and enable individuals and businesses to effectively protect themselves against risk. The Minister of Commerce and Consumer Affairs Hon Kris Faafoi has explained he considers the review a priority.
There has been no visual activity in respect of the review since April 2019.
Review of the Insurance (Prudential Supervision) Act 2010
The Reserve Bank of New Zealand has paused work on the review of the Insurance (Prudential Supervision) Act 2010 in light of COVID-19.
Disclaimer: The information contained in this newsletter is provided for general purposes only, and should not be construed as legal advice on any matter.
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