FANZ: all life insurance contracts should be consumer contracts
Finance Advice New Zealand (FANZ) is asking the government to define all life, health and disability policies as consumer contracts.
Thursday, June 27th 2024, 8:16AM 
1 Comment
by Jenny Ruth
Appearing before parliament's Finance and Expenditure Committee which is considering the Contracts of Insurance Bill, FANZ chief executive Nick Hakes said there are about 450,000 small businesses in NZ which often require insurance protection for both personal and business reasons.
“The unintended consequence of having a consumer and non-consumer definition in the bill is that different disclosure obligations will apply for the policies which are for personal versus those which are for business purposes,” Hakes said in appearing before the committee on Wednesday.
Currently, a small business owner wanting to take out life insurance to protect both their family and their business “would need to complete one personal statement on health, family history and pastimes and the disclosure obligations are the same,” he told the committee.
Even when used to protect a small business, an insurance contract is currently treated as part of the same contract as that protecting personal interests.
If the two separate proposed disclosure obligations remain in the bill, “the consumer will need to be made aware of their different disclosures duties when applying for their insurance policies,” he said.
“The test of non-disclosure if a claim arises may have a different test applied for the same event,” such as the death of the insured person, based on whether the insurance is a consumer contract or a non-consumer contract.
This would result in “increased complexity for the consumer and barriers to enable business owners who have both business and personal insurance needs to effectively protect themselves against risk. This is contrary to the objectives of the bill,” Hakes told the committee.
In its submission on the bill, FANZ says just 51.3% of New Zealanders have life insurance, ranking NZ poorly with the average of 68.7% of OECD countries overall.
Citing Financial Services Council research in 2022, it says only 11% of respondents said they had income protection insurance, “despite 80% confirming they would have financial difficulty if, because of illness or accident, they were unable to earn a living.”
FANZ believes the proposed amendments covering disclosure duties, utmost good faith and unfair contract terms “will assist in increasing consumer trust and understanding of insurance and therefore help to increase consumer participation rates, resulting in more New Zealanders being insured for death, disablement and ill health,” the submission says.
However, “as the bill is currently drafted, there exists potential for greater complexity for consumers when applying for life insurance policies for personal and business-related purposes, and furthermore create confusion for policyholders in understanding their duties of disclosure.”
The submission cites the example of a tradesman, Jack, in partnership with co-shareholder John, who has a wife and three dependents and is the primary income earner in his household.
Jack would want to use insurance to protect both his family and his business partnership.
Jack would currently have the same disclosure obligations “irrespective of the purpose of the insurance – personal or business – and “the medical underwriting process would not be different based on the policy purpose. The total sum assured being applied for Jack's life, along with his age, would determine the insurer's medical underwriting requirement.”
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I am not a lawyer; however, I wonder whether section 182 of the COIB mightn't address FANZ's concern here?
When read in isolation, the definitions in section 10 seem to entail that business risk products are non-consumer insurance contracts. However, it is perhaps important to note that the definition of "consumer insurance contract" in this section is different from the current definition, found in section 446P of the FMCA (introduced through COFI).
Section 182 proposes the following amendments to the FMCA definition: "entered" is to be replaced with "ordinarily entered" at 446P(1); and "have the benefit" is to be replaced with "would ordinarily have the benefit" at 446P(2)(c).
These amendments would have the effect of creating a class of consumer insurance contracts that are entered into for reasons other than "wholly or predominantly personal, domestic, or household purposes". This seems to fit well with existing product ranges in the life and disability space, where for the most part product types and wordings are by and large aligned between the personal and business suite of products an insurer has on offer.
A life contract is ordinally entered into as a way of transferring personal/domestic/household risk. That same type of contract is sometimes entered into as a way of transfer business risk.
It would be interesting to know the intent behind COIB 182, and whether it is to address concerns like those raised by FANZ. FANZ's submission nicely highlights the importance of clarifying the status of business risk contracts, and the unfortunate implications if they are deemed to be non-consumer insurance contracts.