Contributed By Duncan Cotterill
The sources of insurance law in New Zealand are primarily from the law of contract, as well as insurance principles at common law. There are some specific statutes that apply to particular types of insurance (for example, the Life Insurance Act 1908 and Marine Insurance Act 1908). Two other relevant statutes are the following.
Reinsurance contracts are generally regulated by the common law.
Insurance and reinsurance activity in New Zealand is regulated both in terms of conduct and prudential requirements. New Zealand’s Reserve Bank (RBNZ) regulates insurers and reinsurers carrying on insurance business in New Zealand. The Financial Markets Authority (FMA) monitors insurers in relation to the financial advice they give and investment products they sell (including policies of insurance).
Conduct requirements are prescribed by the Financial Advisers Act 2008, which regulates financial advisers providing financial advice relating to insurance policies.
Advisers are required to register on the Financial Service Providers Register (FSPR) (Financial Service Providers (Dispute Resolution and Registration) Act 2008). The FMA supervises the FSPR.
Insurers providing services to retail customers must be members of an approved dispute resolution scheme. This does not apply to reinsurers.
Life insurance policies must comply with the Financial Markets Conduct Act 2013 (policies sold after 1 December 2014).
Codes of conduct apply to most insurers. Almost all life insurers belong to the Financial Services Council, which has a Code of Conduct members must comply with. The Insurance Council of New Zealand (ICNZ), of which most major insurers are members, also has a Fair Insurance Code that requires its members to act ethically and to be financially sound.
The Insurance (Prudential Supervision) Act 2010 (IPSA) sets the regulatory and prudential requirements framework for insurers carrying on business in New Zealand.
Under the IPSA, insurers and reinsurers are treated in the same way, with the regime applying to every “person” carrying on insurance business. A "person" includes a company or association of persons operating or formed in New Zealand. If the “person” meets the registration requirements under the Companies Act 1993, they are also subject to the IPSA regime.
The “carrying on business” test is met if the person acts or has acted as an insurer in New Zealand or elsewhere, and the person must also be liable to a New Zealand policyholder under a contract of insurance.
Insurers carrying on business are also subject to corporate tax and company statutes, as well as consumer protection and anti-money laundering legislation, including as follows:
The RBNZ licenses insurers and reinsurers, and applies the IPSA regime (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance).
A licence is required to carry on insurance business in New Zealand. There are no specifically different licensing requirements between the requirements for writing consumer insurance, SME insurance and corporate insurance.
The insurer must demonstrate to RBNZ that its governance processes and risk management processes are adequate, and that its directors and senior managers are fit and proper (including the appointed actuary).
The RBNZ can issue a licence subject to conditions.
The IPSA regime exempts overseas insurers from compliance with some provisions where its home jurisdiction imposes solvency and fit and proper requirements that are equivalent to those in New Zealand.
There is no distinction in the IPSA regime applying to the underwriting of excess layers or to reinsurance contracts.
General (Non-life) Insurers
Persons carrying on a general (non-life) insurance business in New Zealand are subject to income tax in the same manner as any other taxpayer in business, although specific rules apply to insurers in relation to timing and recognition of income.
General insurance and reinsurance premiums paid offshore to non-resident insurers, with no taxable presence in New Zealand, are taxable at 2.8% of the gross premium amount. Companies or persons paying a premium are treated as being the non-resident insurer’s agent and must obtain a separate Inland Revenue Department (IRD) number and account for the tax on the premium income.
Agency obligations also extend to other New Zealand residents – for example, brokers – who may initially collect premiums for payment to a non-resident insurer. If there is any default, the insured person is responsible for the tax.
The following insurers are required to register for and return goods and services tax (GST) at the rate of 15% on premiums charged to persons that are resident in New Zealand:
However, these insurers are able to recover as a credit the “tax fraction” (3/23) of any payments made for claims under those contracts of insurance.
No GST is payable by GST-registered general insurers on reinsurance premiums paid to non-resident reinsurers.
Life insurance income is generally only taxable in New Zealand to the extent that policies are offered or entered into in New Zealand. The 2.8% of gross premium tax rules that apply to payments of premium to non-resident general insurers do not apply to payments of premium to non-resident life insurers.
Life insurance premiums are exempt from GST, and GST credits cannot be claimed in respect of payments made for claims under contracts for life insurance.
Overseas-based insurers and reinsurers are able to carry on business in New Zealand if they are licensed by the RBNZ (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance and 2.2 The Writing of Insurance and Reinsurance). The RBNZ must be satisfied that the insurer’s ownership and governance structures are appropriate for the size and nature of its business.
The RBNZ’s Governance Guidelines direct it to consider, as relevant, beneficial ownership of an insurer and whether the insurer is part of a group. The RBNZ can also consider the personal behaviour, business conduct and judgement of the individuals who ultimately own the insurance business (including syndicate leads).
Lloyd's of London has a licence with the RBNZ that allows Lloyd’s members to carry on business in New Zealand. Lloyd's members must comply with some aspects of the IPSA regime. However, the RBNZ has a wide power to exempt these underwriters from IPSA requirements.
Fronting is not prohibited in New Zealand but is likely to be subject to scrutiny as part of the RBNZ licensing approval process.
There was relatively little merger and acquisition activity relating to insurance companies in New Zealand in 2020.
The AUD3.3 billion sale of AMP Life to overseas-based Resolution Life was blocked in 2019 by the RBNZ, but was approved in 2020 after the RBNZ was satisfied the New Zealand policyholders would be sufficiently protected.
The distribution of insurance and reinsurance products in New Zealand depends largely on the type of insurance product.
Consumer insurance – including home and contents, motor, boat, health and life insurance – are offered both through intermediaries and direct to the public.
Two unique forms of statutory insurance cover in New Zealand are as follows:
Commercial insurance is heavily intermediated through larger broking houses.
Home and Contents
New Zealand home policies typically insure a property (and the contents within) for accidental loss or damage. These policies are typically written subject to sum-insured limits on floor area and special features following the Canterbury Earthquakes (the former practice was indemnity value). This product is sold both directly to the market by insurers, as well as through intermediaries and major domestic banks (but is underwritten by usual domestic insurers).
New Zealand has a comprehensive public health system, but also a network of private healthcare providers. Policies offered typically provide cover for elective procedures that might otherwise require a lengthy wait for the same procedure in the public system.
Motor policies are offered for both domestic and business use. It is common for insurers to offer policies covering third-party liability, and optional fire, theft and windscreen replacement protection, for a substantially reduced rate than comprehensive replacement insurance.
Life policies – including death, trauma, permanent disability and income protection policies – are primarily offered direct to consumers and through a number of web-based product comparison providers.
Many corporates in New Zealand avail themselves of various combined insurance products available from major insurers. These typically comprise broadform third-party cover, property damage, employer liability, directors and officers cover, and professional liability, as well as business interruption and contractors’ works insurance. A unique feature of New Zealand policies is a no-fault statutory liability cover, which typically provides cover for legal liability for fines or penalties, the costs of defending a prosecution and/or for unintentional breaches of an act of Parliament (note that New Zealand’s health and safety legislation, however, prohibits insuring against a fine).
Both an insurer and an insured owe each other a duty of utmost good faith.
The insured must disclose all material circumstances and not misrepresent facts to the insurer. This duty applies when entering into the insurance contract, as well as during the currency of the insurance policy.
Material circumstances are those a prudent insurer would take into account when calculating the premium, providing terms and conditions to the particular insured or risk, or deciding whether to insure the risk.
The insurer also has an implied obligation to pay claims within a reasonable time of their being lodged. The insurer also must disclose all relevant documents to the insured that relate to the investigation of the claim by the insurer.
See 6.4 Legal Requirements and Distinguishing Features of an Insurance Contract regarding the review of insurance contract law that has been signalled by the New Zealand government. The scope of the review includes the potential reform of disclosure obligations and narrowing the broad remedies available to an insurer for non-disclosure and misrepresentation (and on this point, see 6.2 Failure to Comply with Obligations of an Insurance Contract). The review signalled by the government covers all forms of insurance.
An insurer may avoid an insurance contract ab initio if the insured does not disclose relevant information, or makes a material misrepresentation at policy inception or on renewal.
The ILRA regulates the types of misstatement that an insurer may rely on in avoiding life insurance and other insurance policies. Marine insurance policies are governed by similar principles to the ILRA under the Marine Insurance Act 1908 (MIA).
An insured may bring an action against the insurer for a breach of the duty of utmost good faith. This can arise from failures in claims handling processes.
The most typical form of redress for an insured where there is a failure to act in good faith is by complaint to a dispute resolution service (see 6.6 Consumer Contracts or Reinsurance Contracts and 9.7 Alternative Dispute Resolution). The dispute resolution service first investigates the complaint, and typically conciliates the issue. Other alternative dispute resolution methods are also used; for example, mediation. If there is no conciliated or mediated outcome, the dispute resolution service will issue a binding decision up to a certain limit.
A broker typically acts on behalf of the insured; for example, at the time of obtaining cover and making a claim. However, at the time of negotiating an insurance contract, the broker may act on behalf of the insurer. In that case, its role as an agent of the insurer is to procure persons to insure with that insurer rather than any other.
Where acting for an insured, brokers have a general duty to exercise reasonable care and skill in all the circumstances, and to act as a reasonable and competent broker would in the insurance market at the same time. Brokers also have a number of other duties that apply at different times and are owed to different parties, including as follows.
A contract of insurance is defined as "a contract involving a transfer of risk and under which a person (insurer) agrees, in return for a premium, to pay to or for the account of another person (policyholder) a sum of money or its equivalent, whether by way of indemnity or otherwise, on the happening of one or more 'uncertain events'" (Section 7(1), IPSA).
Contracts of reinsurance come within the definition of a contract of insurance.
An "uncertain event" means an event about which, from the policyholder's perspective, there is an element of uncertainty as to when or whether it will take place, and that event is beyond the insurer's control (Section 7(2), IPSA).
A contract of insurance is binding if it complies with the following general contractual principles:
There are no prescribed legislative requirements as to the form and content of life insurance policies. In New Zealand, typical market practice is for the contract to be in writing. The policy can only be mortgaged, transferred or assigned if it is in writing.
The requirement for an insurable interest in life insurance and indemnity policies was abolished in New Zealand in 1985 (under the Insurance Law Reform Act 1985).
Third parties cannot generally make a claim under an insurance contract, in accordance with the privity of contract doctrine.
A third party can claim under a contract where the contract allows such a claim or confers a benefit on that third party (Contract and Commercial Law Act 2017, or CCLA); typically such third parties are named on the placing slip or policy schedule (or the terms of a policy may automatically extend cover to parties directly involved in the risk, such as on a contract works (all risks) policy). Many policies exclude the application of the privity provisions of the CCLA.
A third-party plaintiff can claim directly against the insurer of an insolvent insured defendant. An amount equal to the liability incurred by the insured to the third party crystallises as a charge on the insurance monies from the date of the event giving rise to the liability (Section 9, Law Reform Act 1936). A third party claiming in this manner requires the leave of the High Court to commence the claim.
Reinsurance contracts are regulated in the same way as other contracts of insurance under the IPSA regime. The FMA regulates both insurance and reinsurance companies regarding financial advice they give, and certain investment products that they sell.
Insurers are subject to the consumer protection provisions in the Consumer Guarantees Act 1993 and the Fair Trading Act 1986 (FTA). The FTA prohibits unfair contract terms in standard-form consumer contracts.
Arbitration clauses in contracts for consumer insurance are not binding under the ILRA. It is more common for consumers to access the dispute resolution procedures required under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. This ensures that customers have access to a free dispute resolution service if they have a dispute with their insurer. Reinsurers are not required to register.
New Zealand insurers engage in conventional reinsurance rather than ART products and the regulator has yet to pronounce on whether ART would suffice to satisfy the reinsurance requirements demanded of insurers regulated in New Zealand.
In principle, however, New Zealand regulators can grant permission for an insurer to carry on insurance business if it is satisfied that the insurer has sufficient security to meet claims, even without reinsurance.
See 7.1 ART Transactions.
A policy of insurance is a contract between the insurer and the insured, and it is subject to the same rules of interpretation that apply to any contract in New Zealand (see 1.1 Sources of Insurance and Reinsurance Law and 6.4 Legal Requirements and Distinguishing Features of an Insurance Contract).
As a general rule, New Zealand law excludes extrinsic evidence regarding the previous negotiations of the parties where an objective reading shows the parties intended the contract to bear a particular meaning. Words are to be given their ordinary and natural meaning and the policy should be treated as a whole. Other inadmissible evidence in the insurance context includes declarations of subjective intent and premium calculations used by the underwriters. Such evidence may, however, be relevant to the question of whether there was a misrepresentation or mistake vitiating the contract. Evidence relating to the content of earlier insurance contracts between the parties is admissible.
Most policies written in New Zealand will incorporate the insured’s original proposal by reference.
A warranty is a promise by the insured to do or not do some particular thing (“promissory warranty”) or an undertaking by the insured that a particular fact does or does not exist (“affirmative warranty”). Warranties in an insurance contract do not need to be expressly described as such.
The formal requirements for the creation of a warranty are outlined in Section 36(2) of the Marine Insurance Act 1908, and the general principle is that a warranty is expected to be found on the face of the policy itself.
At common law, warranties had to be strictly complied with. If a warranty was breached, the risk was discharged automatically, and the insurer had the right to repudiate the contract from the time of the breach. The Contractual Remedies Act 1979 and the ILRA restrict an insurer’s common law rights to repudiate a contract or deny liability under it for a breach of a warranty or a condition.
A condition precedent may be created in a number of ways and does not need to be expressly described as such:
These clauses are generally construed narrowly by the courts. The relevant act or omission must fall precisely within the language of the policy for there to be a breach. A breach of a condition precedent entitles the insurer to avoid liability under the policy altogether.
Beyond the complaints procedures dealt with by the dispute resolution services (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance and 6.6 Consumer Contracts or Reinsurance Contracts and 9.7 Alternative Dispute Resolution), the civil courts of New Zealand will typically deal with insurance disputes as follows.
A judge alone hears insurance disputes in the New Zealand courts.
A claim must be brought within six years of the act or omission on which the claim is based, with limited exceptions (including where the claimant has late knowledge).
Policies may include shorter limitation periods. Section 9 of the ILRA prevents an insurer from relying on such a limitation period unless the insurer has suffered prejudice by reason of non-compliance.
See 6.5 Multiple Insured or Potential Beneficiaries. Note that an insured has no direct claim against a reinsurer if the reinsurer refuses to pay, which is because the relationship between the insurer and the reinsurer is a contractual one and not one of assignment, agency or partnership.
Parties are generally free to choose the jurisdiction and choice of law, including as set out in an insurance contract.
In the absence of an express choice of jurisdiction clause, the courts take into account a wide range of (mainly practical) factors in determining jurisdiction, including:
Insurance litigation in New Zealand is typically conducted in the High Court (usually claims over NZD350,000). The District Court may also hear insurance disputes (for claims up to NZD350,000).
Most insurance litigation is resolved through private mediation before it gets to a full hearing in court. Alternatively, a judge may assist parties at a judicial settlement conference.
A typical commercial insurance case heard on the ordinary track in the High Court will take between two and three years from filing to get to a full hearing, assuming there are no significant interlocutory applications to be heard. Complex proceedings will take longer. There is a fast track available, but this is not regularly used.
A party generally has the right (without leave) to appeal to the Court of Appeal, and, in turn (but with leave), the Supreme Court. Appeals or applications for leave to appeal must generally be made within 20 working days of the decision being made.
New Zealand judgments are enforced through the civil courts. The most common form of enforcement against a domestic commercial party is liquidation.
Foreign judgments may be enforced in New Zealand, but require a judicial process in New Zealand first.
Arbitration clauses in commercial insurance and reinsurance contracts are enforceable in New Zealand. Arbitration clauses are not binding in consumer insurance.
An arbitration agreement may be made orally or in writing. It is typically contained as a clause in a contract, or a separate agreement. There is no form of words specifically required under the Arbitration Act 1996 (the Arbitration Act).
In New Zealand, the courts generally endeavour to give effect to the intention of parties to refer disputes to arbitration. Courts will strive to give arbitration clauses a broad interpretation. This policy reflects the objective of the Arbitration Act 1996, which encourages the use of arbitration in New Zealand to resolve disputes.
Under the Arbitration Act, court intervention in the conduct of arbitration is limited. The High Court may intervene in the arbitration process to make interim orders where:
Regardless of the country in which it was made, an arbitral award must be recognised as binding. On a written application to the District Court (for awards of less than NZD350,000) or the High Court (for awards of NZD350,000 or more), arbitral awards must be enforced by entry as a judgment in terms of the award, or by action (Arbitration Act 1996, Second Schedule, Article 35).
The District Court Rules 2014 and the High Court Rules 2016 outline the procedure for recognising and enforcing arbitral awards.
New Zealand is party to a number of international conventions, which are transposed into New Zealand’s Arbitration Act.
Alternative dispute resolution plays a significant role in the resolution of commercial insurance disputes in New Zealand, in particular, mediation (see 9.3 Litigation Process)
Consumer insurance disputes tend to be resolved by scheme dispute resolution providers. Insurers must have an internal dispute resolution process that must be followed first. If resolution is not achieved, a consumer may refer the complaint to the relevant dispute resolution scheme.
There are four approved schemes currently operating in New Zealand.
Insurers in New Zealand do not typically face punitive damages claims. It is possible for general damages to be awarded for the late payment of claims if insurers improperly delay settling claims, which would be at a nominal amount, but this is not typical.
Insurers may exercise the rights of the insured in pursuing a third party for the insurer’s loss in meeting the indemnity under its contract of insurance. There is no need to have a separate clause entitling subrogation, as this is an implied term in insurance contracts. However, the contract itself may also expressly state such a term.
Insurtech developments in New Zealand are limited to date. Some insurers have developed web-based apps for their clients to access, but which are typically only portals to access basic information and submit claims.
There are some recent notable insurtech product innovations.
The RBNZ does not have a formal position on insurtech issues. The products described in 10.1 Insurtech Developments require compliance with privacy laws, which are regulated by the Privacy Commissioner.
Cyber risks to institutions such as insurers are increasing. The RBNZ recently published a consultation document in October 2020 on cyber resilience, which aims to raise awareness among boards and senior management, and to promote accountability for managing cyber risk within institutions (including insurers). The RBNZ has also issued draft guidance on cyber resilience, intending to ensure insurers have a sound risk management and auditing framework in place to assess, monitor and respond to cyber risks.
The New Zealand courts are taking a strict approach to environmental liability, particularly given how damaging the consequences of a pollution incident can be on the environment. Insurance providers in New Zealand are beginning to offer cover for environmental liability, which can include cover for risks such as bodily injury, property damage and/or environmental damage caused by sudden or gradual pollution incidents arising from the insured’s property or that occur when the insured is providing services. These types of policies can also cover the cost of emergency response, where there is a legal obligation to contain and/or remediate environmental contamination.
A policy unique to New Zealand and Australia is cover for statutory liability. This policy provides cover for legal liability for fines, penalties or reparation, and for costs of defending a prosecution, for unintentional breaches of an act of Parliament. The theme in coverage and exclusion clauses is that strict liability offences are covered, as these offences require no intent or negligence to prove a contravention. Intentional and reckless behaviour is therefore specifically excluded, as is continuous offending. Liability under specific acts is also excluded, such as the Crimes Act 1961.
UAV Operators Liability
Rapidly emerging and developing technologies have demanded a new form of insurance for operators of unmanned aerial vehicles (UAVs) in New Zealand. Insurance providers are now offering tailored cover for these operators that address specific risks associated with this area of technology. For example, the policy may cover damage to the UAV itself (including the airframe, launch station and ground control system), third-party liability, statutory liability and potential risks in relation to privacy.
The New Zealand market is responding to emerging risks by offering new products into the market such as cyber, environmental and UAV operator liability cover, as outlined in 11.1 Emerging Risks Affecting the Insurance Market.
COVID-19 significantly slowed the operation of the courts in New Zealand in 2020.
While the courts were considered an “essential service”, a typical insurance litigation claim was not considered as a priority proceeding. This has resulted in a substantial backlog of non-priority cases, though courts are steadily addressing this backlog.
COVID-19 has also caused delays in insurance law reform, as follows.
In addition, at the start of December 2020, the New Zealand Law Commission released an issues paper asking whether New Zealand should have class actions and litigation funding, and, if so, how these should be regulated. New Zealand does not currently have legislation that provides a framework for class actions or commercial litigation funding. In the absence of formal frameworks, the courts and opposing parties have sought to navigate these two issues and establish rules for much of the past decade, particularly on claims against companies and directors following the Global Financial Crisis. The Law Commission aims to develop recommendations to the Minister of Justice by mid-May 2021.
See 12.1 Developments Impacting on Insurers or Insurance Products.