In this post we will look at whether the Code is fair or transparent, and whether utmost good faith remains relevant to New Zealand insurance practices.
Is it a Fair code?
There is no definition within the Revised Code explaining what fairness is. In the world of dictionaries there are varying definitions, with the Oxford Dictionary giving this: “Impartial and just treatment or behaviour without favouritism or discrimination”.
1 Using this authoritative definition it is quite obvious the Revised Code is not impartial. The Code has been written by insurers, for insurers. The Revised Code has omitted a large portion of what was asked for in submissions to the Review – changes and provisions that would have make the Code less partial towards insurers.
2 The Revised Code continues to require customers to anticipate and comply with sometimes unclear or unknown requirements. It then allows insurers to penalise them for not complying with the requirements. This cannot be considered just treatment.
An interesting comparison is that between the New Zealand situation and how the U.K. handles disclosure of important information i.e. information both the insurer and the customer must provide to each other to ensure both understand the obligations and risks associated with the policy.
The U.K. Financial Ombudsman Service has published information on how it handles complaints when an insurer forms the view a consumer (customer ) has not disclosed everything they should have (here).
There is a section, what was asked and how it was asked, which includes:
We will then consider whether the questions the insurer asked were clear - and whether the consumer answered them correctly.
We will bear in mind that a consumer can only answer questions to the best of their knowledge and belief - and it may not be reasonable to expect a consumer to have a precise recollection of when certain events happened. So we will look at whether the insurer made it clear that the consumer should check their records rather than guess.
The section that follows, what doesn't need to be disclosed, includes:
We are unlikely to say an insurer should have expected a consumer to provide information if we think:
the insurer did not ask a specific and clear question which - if answered honestly - would have given them that information
the consumer did not know the information or
the consumer could not reasonably have been expected to know.
And we usually say it is not reasonable to expect a consumer to provide:
facts of law
information already known to the insurer - for example, facts the insurer should have noted in a surveyor's report where it had already carried out a property survey
information that we decide the insurer should reasonably be expected to know - for example, where a consumer answers "see your records for claims history" and the insurer does not check them
information that the insurer has waived its right to know
information that reduces the risk to be covered by the policy and
information about convictions spent under the Rehabilitation of Offenders Act 1974.
The Revised Code would be much fairer if it included provisions to cover these situations. Why were they not adopted?
3 The mix of plain English and insurance terms in the Revised Code deliberately favours insurers, discriminating against those not familiar with the world of insurance, business in general, or lacking ability in English.
Could ICNZ have done a better job? Is there another Code that could have been used as a starting point?
The Australian equivalent of the New Zealand document is the Code of Practice. The title is much more accurate and the document itself superior to the New Zealand Code in some areas. A copy can be downloaded fromhere. The recent changes in the U.K. would also have provided a superior model. Why were these not used as a basis for the New Zealand Code? Because they are more customer focussed – an undesirable change to the preferred business model?
There is far too little openness and clarity in the way in which insurers operate.
As mentioned above key words and expressions are undefined and open to convenient insurer interpretation. Beyond the policy there is a lack of transparency covering how some claims are investigated and what information is gathered. Where disputes arise, the insurers’ review agencies operate behind the scenes where the customer cannot see or participate in the process.
1 From the beginning key requirements and concepts are deliberately undefined (e.g. material, properly maintained, reasonable). This leaves the customer uncertain or unaware as to what is required or offered.
Insurers seem capable of determining how such terms are to be used when processing a claim, yet not when asked to define them in advance. A variation on situation ethics perhaps, where - instead of determining meaning based on situation – meaning is obscured to allow it to be defined depending on who will be the beneficiary?
2 Insurers have a track record of hiding their actions through delaying or withholding information requested by customers using the Privacy Act 1993.
While the Revised Code promises that there will be ongoing communication with the customer, the commitment to doing this consistently and openly has yet to be demonstrated. Post-earthquake there were numerous situations where insurers would not fully release information they held when it was requested.
A very recent non-earthquake case in point is that of an insurer inappropriately claiming legal privilege for information sought by a customer. It took a complaint to the Privacy Commissioner for the customer to be able to get access to that information (the case note is here).
3 In a range of areas insurers have responded to claims by finding breaches of the policy and disallowing the claim and, on occasions, cancelling the policy. These can be disproportionate actions and have caused ongoing criticism. The Revised Code attempts to improve on this by stating )Para. 20:
If you do not tell us something that would have affected our decision to insure you or the terms under which we insure you, we may refuse to pay all or part of your claim, or we may even cancel your insurance from the start date of your policy. We will respond reasonably in relation to what you did not disclose.
How transparent is this? What does “respond reasonably” mean in the last sentence?
FAQ 7, 3rd paragraph tells us that this is a reflection of Australian and U.K. developments and that ICNZ is “effectively moving toward the legislative changes elsewhere”. In response to an article on insurancebusinessonline.co.nz (here) the CEO of ICNZ elaborates further:
“Our guidelines to members on the ‘reasonable’ response to non-disclosure cite UK law in this area and reasonableness will be determined by the independent Dispute Resolution Schemes.”
In saying this, there is no indication of the guidelines to be used. Do they exist? If so, where are they? Why not publish them?
The U.K. has already taken a public position on what responding reasonably means by simply dividing these situations into three categories. The following approach is excerpted from the U.K. Financial Ombudsman’s website (here).
If we decide that the consumer took reasonable care, we generally say that the insurer should disregard the misrepresentation. This means that if the insurer has avoided the policy, it should be reinstated as it originally was. And if the insurer accepts the claim, it should be settled in full.
If we think the consumer did not take reasonable care when answering, we usually consider a "proportionate" response to be appropriate. There is a section about proportionate responses below.[Note: in Schedule 1 of the U.K. legislation mentioned a few paragraphs below there is a formula for determining the appropriate value of the claim]
But where we consider that a misrepresentation was deliberate or reckless, we may say it is reasonable for the insurer to avoid the policy. [Note: in some cases the premiums might be refunded to the customer].
This seems quite enlightened, compared to the New Zealand Fair Insurance Code, and one wonders why it was not adopted in full and published in the Revised Code. In light of this, the ICNZ view that the Revised Code is “effectively moving towards the legislative changes elsewhere” seems just empty words – more puffery?
It is also interesting that ICNZ have made no mention of the U.K.’s Consumer Insurance (Disclosure and Representations) Act 2012 which has replaced the concept of utmost good faith. It is a much more fair and reasonable approach to information disclosure, the obligations of the parties, and how non-disclosure is to be handled. ICNZ have not mentioned this in association with their desire to keep utmost good faith as a mainstay of their Fair Insurance Code, Where is the transparency?
4 The way the insurers' independent review authorities conduct themselves lacks transparency (and capacity). Taking the ISO as an example, once a complaint reaches them their review process is done behind closed doors. The customer cannot go to the ISO and explain the issues, the ISO just looks at the paperwork, checks what has happened against the policy document and makes a decision. The customer has no idea what was considered, how well the ISO understood the complaint, and had no opportunity to put their case.
Utmost Good Faith
Much has been said about this. Perhaps all that is left is to repeat that practically all of the utmost good faith disclosure requirement falls on the customer. Insurers, meanwhile, enjoy a great advantage from minimal obligations, taking comfort and protection behind the highly evolved predatory aspects of the utmost good faith principles.
As in the U.K. this concept needs to be replaced with statutory provisions that are fair to both parties, and provide a transparent mechanism for dealing with disputes about disclosure.
Changes are needed, and insurers cannot be entrusted with this. Following the U.K. lead with their Consumer Insurance (Disclosure and Representations) Act 2012 would be a very good place to start.
Next post: insurer conduct and honesty.