Insurance Litigation 2022 Comparisons

New Zealand's procedural and substantive laws relating to insurance are derived from a mixture of common law and statute.

Statutory Regime: Insurance Contracts

In relation to the substance of insurance contracts, the key statute is the Marine Insurance Act 1908, which follows the Marine Insurance Act 1906 (UK) closely. This statute codified principles of insurance law in New Zealand. Other relevant statutes include the Law Reform Act 1936 and the Insurance Law Reform Acts of 1977 and 1985; these statutes were all introduced to address specific issues arising in the context of insurance.

The New Zealand government is currently undertaking a comprehensive review of insurance law in New Zealand, with the planned introduction of the Insurance Contracts Bill into the House of Representatives in mid-2023. This Bill, if enacted, will consolidate and modernise insurance legislation in New Zealand. Amongst other things, changes are proposed in relation to the duty of disclosure and the position of consumers. The New Zealand regime is seen as being “out of step” with other common law jurisdictions in not having introduced greater protections for consumers in relation to insurance contracts. The changes proposed would reflect changes made in recent years in the UK and Australia through legislation including the Consumer Insurance (Disclosure and Representations) Act 2012 (UK), the Insurance Act 2015 (UK), and the Financial Sector Reform (Hayne Royal Commission Response Act) 2020 (Australia).

In addition to the above review of insurance legislation, parliament has recently enacted the Financial Markets (Conduct of Institutions) Amendment Act 2022 (COFI Act). The COFI Act is expected to come fully into force in 2025. Among other things, the COFI Act introduces a requirement for relevant financial institutions (including insurers providing relevant services) to have in place a “fair conduct programme” to operationalise a new “fair conduct principle”. The fair conduct principle requires financial institutions to treat consumers fairly across the full life cycle of a consumer insurance relationship.

Procedural Regime

Approved dispute resolution schemes for retail clients

The Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPR Act) provides that an insurer who provides financial services (including insurance) to “retail clients” must be a member of an approved dispute resolution scheme. There are currently four approved dispute resolution schemes in New Zealand, including the Insurance and Financial Ombudsman Scheme (IFSO Scheme) which focuses predominantly on insurance disputes. The IFSO Scheme is the most common scheme for insurer membership and can hear claims up to a value of NZD200,000 (or more with the insurer's consent).

The four approved dispute resolution schemes are governed by their own rules, but those rules are subject to certain controls in the FSPR Act. For example, the FSPR Act requires an approved dispute resolution scheme to accept complaints from:

• consumers; and
• businesses that have no more than 19 full-time equivalent employees.

Each of the four approved dispute resolution schemes will only consider a complaint if that complaint has already been raised directly with the insurer member, the insurer member has fully considered the complaint through its own internal process and the complaint remains unresolved. Approved dispute resolution schemes can only consider complaints about their member insurers.

Decisions of an approved dispute resolution scheme are binding on the insurer but not on the complainant unless the complainant accepts the decision. An approved dispute resolution scheme can award compensation for losses suffered because of an insurer's mistake or wrongful conduct.

Resolution of insurance disputes outside of approved dispute resolution schemes

If the statutory scheme under the FSPR Act does not apply, then insurance contract disputes fall to be resolved in accordance with the usual mechanisms for resolution of contractual disputes. These include, for example, negotiation, mediation, litigation or arbitration.

A feature of New Zealand law is that, pursuant to the Insurance Law Reform Act 1977, arbitration clauses contained in consumer insurance policies are not binding on the consumer. However, the parties can still agree to refer a dispute to arbitration after it has arisen. Arbitration clauses remain enforceable for non-consumer insurance contracts and reinsurance contracts.

Should a dispute be litigated, it will be governed by the general rules of civil procedure applicable in the relevant court. These rules are addressed in further detail at 1.2 Litigation Process and Rules on Limitation.

Natural Disaster Insurance

The role of the Earthquake Commission – Toka Tū Ake

The Earthquake Commission Act 1993 establishes a first layer of statutory insurance for residential land and buildings in relation to natural disaster damage up to certain caps set by the legislation. It is unique to New Zealand. The Earthquake Commission is established under the Earthquake Commission Act. It is a Crown entity which is responsible for (amongst other things) administering the scheme and collecting premiums. Proceedings against the Earthquake Commission can be commenced by private action or judicial review.

Insurance disputes relating to the Canterbury Earthquake Sequence between 4 September 2010 and 31 December 2011 (“Canterbury Earthquake Sequence”) can be referred by homeowners to the Canterbury Earthquakes Insurance Tribunal. This is a specialist tribunal with jurisdiction to order the parties to undertake mediation or to adjudicate fully and finally on a dispute before it. Insurers and the Earthquake Commission cannot file claims with the Tribunal but are required to take part in the process. Tribunal decisions may be appealed to the High Court.

If all parties agree, claims arising from the Canterbury Earthquake Sequence may also be addressed through the Greater Christchurch Claims Resolution Service, which offers mediation services and an inquisitorial binding “determination”.

Litigation Process

New Zealand is a unitary state with one system of national courts (District Court, High Court, Court of Appeal and Supreme Court). Proceedings can be brought in either the District Court or High Court, depending on the claim value.

The High Court is the court of first instance for many insurance claims, including most commercial cases, given the District Court only hears claims of up to NZD350,000. The following are relevant to insurance claims.

• The High Court has a specialist “commercial panel”, comprising judges with specific expertise in commercial cases as well as certain specific procedural rules, for hearing complex commercial cases.
• The High Court has a dedicated “Earthquake List”, which was created to hear insurance claims arising out of the Canterbury Earthquake Sequence. Where a case is on the Earthquake List, it will generally receive fast track case management. Furthermore, issues which have wider precedential value may be addressed urgently in order to inform the settlement process for similar cases. Generally, the tail of claims following the Canterbury Earthquake Sequence has reduced markedly over recent years.
• The High Court is experienced in hearing complex insurance claims. This experience has been enhanced because of the large number of insurance claims arising out of the Canterbury Earthquake Sequence. These claims have not been limited to disputes between policyholders and insurers/the Earthquake Commission but have also included claims between one or more insurers and the Earthquake Commission, and also others involved in the insurance response.

The New Zealand court system is adversarial and the claimant in a civil matter must prove their case “on the balance of probabilities”.

The procedure applying in each court is prescribed by the court's respective rules (the High Court Rules 2016 or District Court Rules 2014). Broadly, both sets of rules provide for a process as follows:

• the claimant will file a statement of claim setting out the basis of their claim and the relief sought;
• the defendant will file a statement of defence (and any counterclaim);
• the court will hold a case management conference, at which the judge will make procedural directions (eg, for the provision of discovery and timetabling);
• parties can file interlocutory applications, including for interim relief;
• the court will order discovery of relevant documents;
• the parties will exchange briefs of evidence (which include expert reports), common bundles and chronologies;
• the matter will be set down for trial and, if not settled, will proceed to trial before a judge; and
• judgment will be delivered and costs may be awarded (usually against the unsuccessful party on a “scale” rather than indemnity basis – see further in 2.3 Unique features of Litigation Procedure).

Statutory appeal rights exist from the District Court to the High Court, and from the High Court to the Court of Appeal. Appeal to the Supreme Court is by leave of the Supreme Court only.

In practice, many disputes are settled before reaching trial.

Rules on Limitation

Under the Limitation Act 2010, the general rule is that "money claims" must be brought within six years of the date of the act or omission on which the claim is based. In cases involving “late knowledge”, the claim must be brought within the earlier of three years of the late knowledge date or 15 years after the date of the act or omission on which the claim is based.

For acts or omissions occurring prior to 1 January 2011, limitation falls to be determined under the previous legislation, the Limitation Act 1950. This also provided, generally, for a limitation period of six years, though running from the accrual of the relevant cause of action rather than from the act or omission on which the claim is based.

In relation to first party insurance, the “orthodox” position in New Zealand is that the limitation period begins to run from the date on which the insured peril occurs. However, there is a lack of authoritative statement on this question, and the rule has been subject to a certain amount of criticism. In Inicio Ltd v Tower Insurance Ltd ((2020) NZHC 90), the insurer was content for the case to proceed on the basis that the limitation period ran from the date of the alleged breach of the policy, rather than the date on which the peril occurred.

In relation to liability insurance, the general rule is that the limitation period commences as soon as liability to the third party has been quantified and ascertained.

Insurance policies may stipulate a shorter or longer limitation period. However, the Insurance Law Reform Act 1977 provides that a shortened limitation period can only be relied on in very limited circumstances (generally, where the insurer has been prejudiced by the failure of the policyholder to comply).

Alternative dispute resolution (ADR) is prevalent in New Zealand and actively encouraged by the judiciary. ADR can take various forms, for example a private dispute resolution scheme, mediation, arbitration or judicial settlement conferences. 

As explained in 1.1 Statutory and Procedural Regime, all insurers must be members of an approved dispute resolution scheme if they provide insurance to retail clients. 

Mediation

Mediation is commonly used in New Zealand, including in the insurance context. Parties seek to resolve their dispute by agreement with the assistance of an independent mediator. Various mediators are available in the New Zealand market to facilitate private mediations. Mediation can occur at any stage of a dispute.

Arbitration

The Arbitration Act 1996 sets out the framework for the arbitration of disputes in New Zealand. The Act is based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law. Arbitration has the advantage of being private but is not necessarily a significantly cheaper option in New Zealand than formal court proceedings. 

As noted in 1.1 Statutory and Procedural Regime, the Law Reform Act 1977 provides that arbitration clauses are not binding in consumer insurance contracts. The parties may still agree, however, to submit the dispute to arbitration once the dispute has arisen. The New Zealand courts will enforce arbitration agreements in non-consumer insurance contracts. However, it is more common for insurance disputes in New Zealand to be resolved by litigation than arbitration.

Judicial Settlement Conference

The District and High Court Rules encourage parties to attempt to resolve disputes by utilising a judicial settlement conference process available through the courts. This is similar to a private mediation, but it is facilitated and chaired by a judge.

Finally, and as noted in 1.1 Statutory and Procedural Regime, homeowners may refer insurance disputes arising out of the Canterbury Earthquake Sequence to the Canterbury Earthquakes Insurance Tribunal or to the Greater Christchurch Claims Resolution Service.

Jurisdiction

The rules in New Zealand regarding jurisdiction over defendants based overseas are based on service, using a model very similar to that in the UK. New Zealand courts also have the discretion to stay proceedings if another forum would clearly be more appropriate.

If the parties to an insurance contract have not included an express jurisdiction clause, the relevant New Zealand court will determine whether it is the appropriate forum. An important consideration for the court (although not determinative) is the proper law of the contract. If the contract is governed by the law of New Zealand, then a New Zealand court is reasonably likely to determine that New Zealand is the appropriate forum for the dispute to be resolved.

Where a contract of insurance expressly provides for the courts of New Zealand to have jurisdiction, the New Zealand courts will almost invariably give effect to what has been agreed (subject to certain limited exceptions).

New Zealand courts will generally stay proceedings in circumstances where the parties have agreed that an overseas court has exclusive jurisdiction, but have nevertheless brought proceedings in New Zealand. Even if this happens, however, the New Zealand courts may assume jurisdiction in certain limited circumstances; for example, where the relief sought can only be granted by a New Zealand court.

Special rules apply to jurisdictional questions between New Zealand and Australia under the Trans-Tasman Proceedings Act 2010 (TTPA).

Choice of Law

The position in relation to choice of law in New Zealand is broadly consistent with that under English common law. Choice of law may be determined by:

• giving effect to an express choice of law clause in a contract of insurance;
• giving effect to an implied choice of law in the contract of insurance; or
• considering which law has the closest connecting factors to the contract of insurance, including the place where the contract was agreed, the location of the subject matter, and the domicile of the parties.

New Zealand courts will almost always give effect to express choice of law clauses, subject to certain limited exceptions. For example, the Insurance Law Reform Act 1977 prevents contracting out. It is possible that if a contract stipulated a choice of law other than that of New Zealand, and the contract would otherwise have been subject to the Insurance Law Reform Act 1977, the choice of law clause could be viewed as “contracting out”, such that a New Zealand court would not give effect to that clause. However, this point is yet to be determined by the New Zealand courts.

Foreign judgments can be enforced in New Zealand by or against insurers under four different regimes.

• Registering the judgment under the TTPA. The TTPA applies only to judgments obtained in Australia from superior or inferior courts.
• Registering the judgment under the Reciprocal Enforcement of Judgments Act 1934 (REJA). The REJA applies to judgments of senior courts from certain countries set out in regulations (predominantly Commonwealth countries).
• Filing a memorial of the judgment under Section 172 of the Senior Courts Act 2016. That section applies to judgments from Commonwealth countries (except where the judgment is registrable under the REJA).
• Bringing an action at common law (for judgments from other countries, most notably the United States).

In each case, it is necessary for a judgment to be final and conclusive as between the parties.

Enforcement is available for monetary and some non-monetary judgments. A defendant may apply to set aside registration of a foreign judgment or resist enforcement. Whether the defendant can successfully do so will depend on the facts and the method of recognition. For example, registration may be set aside, or enforcement resisted, if the judgment was obtained by fraud or if enforcement would be contrary to New Zealand public policy.

Insurers should be aware of the following particular features of litigating in New Zealand.

Costs

In court proceedings, the usual rule is that the unsuccessful party pays costs to the successful party. Costs are typically fixed by reference to a court “scale”, which sets daily recovery rates (which vary depending on the complexity of the proceeding) and time allocations for various steps in the proceeding. In commercial cases, the level of costs awarded through the court scale typically results in a significant under-recovery of actual costs.

Courts retain discretion in awarding costs and can take into account the conduct of the parties (including Calderbank offers, where the court may take into account whether a party has obtained a more or less successful outcome than a previous settlement offer) and whether a party was only successful in part. A court can award increased or indemnity costs in certain circumstances, for example where this is warranted as a result of the conduct of the unsuccessful party.

Earthquake List

New Zealand does not have a “general insurance list” for the prioritisation of resolution of insurance claims. As discussed in 1.2 Litigation Process and Rules of Limitation, New Zealand does, however, have an Earthquake List that prioritises claims relating to the Canterbury Earthquake Sequence. Many of these claims relate to or are to be made against private insurers. It is likely that a similar list would be established if an event of such a scale were to occur in the future. For further detail on the unique features of earthquake and other natural disaster insurance litigation in New Zealand, see 1.1 Statutory and Procedural Regime.

Accident Compensation Scheme

New Zealand has a unique statutory scheme under the Accident Compensation Act 2001, which applies to personal injury in New Zealand. This scheme provides no-fault compensation for personal injury, and includes a statutory bar preventing individuals from pursuing claims in relation to personal injury (save in relation to very limited circumstances). As a result, there is little personal injury litigation in New Zealand.

The New Zealand courts will typically enforce arbitration clauses in commercial contracts of insurance and reinsurance, other than contracts of insurance with consumers. They usually do so by ordering a stay of court proceedings where the parties are subject to mandatory arbitration requirements. 

As set out in 1.1 Statutory and Procedural Regime, under the Insurance Law Reform Act 1977, provisions requiring the arbitration of disputes in insurance contracts with consumers are not binding. However, parties may separately agree to use arbitration to resolve a dispute after it has arisen.

New Zealand has been a party to the New York Convention since 1983, and this is enshrined in domestic law. A party to an arbitral award, irrespective of the country in which it was made, may apply to the courts under the Arbitration Act 1996 to have the award entered as a court judgment. On application and subject to certain exceptions, the court must enter the award as a judgment, and it can then be enforced as such.

Arbitration is not a common form of dispute resolution for consumer insurance contracts, because (as discussed) the Insurance Law Reform Act 1977 nullifies arbitration clauses in consumer insurance contracts – see 1.3 Alternative Dispute Resolution. While the parties may still agree to resolve a dispute by arbitration, this is uncommon under consumer insurance contracts.

Commercial and wholesale insurance contracts are not subject to the same restrictions regarding arbitration clauses as those that apply to consumer contracts. However, arbitration clauses are not commonplace in insurance contracts in New Zealand. It is more common for insurance contract disputes in New Zealand to be resolved through the court process. 

Arbitration clauses are common in reinsurance contracts. 

Arbitral Rules

As discussed in 1.3 Alternative Dispute Resolution, the Arbitration Act 1996 sets out the framework for the arbitration of disputes in New Zealand. 

The rules at Schedule 1 to the Arbitration Act apply by default to arbitrations in New Zealand. Additional rules are contained in Schedule 2 to the Act. Those rules do not apply to “international arbitrations” unless the parties to the arbitration agree that they should apply. Conversely, the rules at Schedule 2 apply to all other arbitrations unless the parties agree that they should not apply.

Except where otherwise agreed by the parties, the Arbitration Act provides that arbitral proceedings must be conducted in private.

Pursuant to Section 34 of Schedule 1 to the Arbitration Act, a party can make an application to the High Court to set aside an arbitral award. The High Court will only do this, however, on certain limited grounds. These include if the arbitration agreement was not valid as a matter of law, if a party to the arbitration did not have proper notice, if the subject matter of the dispute is not capable of settlement by arbitration under the laws of New Zealand, or if the award is in conflict with public policy.

Section 4 of Schedule 2 to the Arbitration Act provides that a party can appeal to the High Court on any question of law arising out of an award if the parties to the arbitration have agreed that this is permitted (either before the making of the award or after it), or with leave of the High Court. On determination of the appeal, the High Court can confirm, vary, set aside or remit the award back to the arbitral tribunal for further consideration. 

Some arbitration agreements to which New Zealand-based entities are party (particularly where the counterparty is offshore and/or where the contract is governed by foreign law) provide for disputes to be resolved in accordance with the rules of international arbitral bodies such as the International Chamber of Commerce or the Singapore International Arbitration Centre.

While New Zealand law generally seeks to uphold contractual autonomy between an insurer and a policyholder, terms may be implied into such contracts by the courts if either the proper interpretation of the policy is that the parties intended the term to be part of their bargain, or it is necessary to give business efficacy to the contract. New Zealand also recognises the “default rule”, which provides that contractual discretions must not be exercised arbitrarily or capriciously.

Key terms which are implied into insurance contracts under New Zealand law include the following.

• Utmost good faith – New Zealand courts recognise that a contract of insurance is a contract based on utmost good faith. There is High Court authority to the effect that this duty goes beyond the pre-contractual stage. The exact scope of the duty is yet to be settled. However, it has historically been recognised that prior to conclusion of an insurance contract, an insured must disclose to the insurer every material circumstance known to the insured, or which ought to be known to the insured, regardless of whether the insurer has asked for that information. A circumstance is material if it would influence the judgment of a prudent insurer in fixing the premium or determining whether to take the risk. Once the contract has been concluded, an insurer must also pay claims within a reasonable time and disclose to the insured documents relevant to the investigation of the claim. An insurer must also act reasonably, fairly and transparently towards an insured. 
• Subrogation – it is an implied term of most insurance contracts in New Zealand that insurers have a right of subrogation against third parties following indemnification of the insured. This does not apply to contracts of life assurance or contracts of personal accident insurance.
• Marine insurance – the Marine Insurance Act 1908 specifies warranties to be implied into marine insurance contracts. These include that the vessel is seaworthy and that the adventure is lawful.
• Consumer insurance policies are also subject to certain protections under consumer protection legislation in New Zealand. For example, obligations are imposed on the providers of goods and services (including insurance contracts) under the Consumer Guarantees Act 1986. This includes such things as an implied guarantee that services will be carried out with reasonable skill and care. Other consumer protection provisions are contained within the Financial Markets Conduct Act 2013, and the Fair Trading Act 1986 (FTA). 

As discussed at 1.1 Statutory and Procedural Regime, it is proposed that a new Insurance Contracts Bill will limit the duty of disclosure as follows:

• for consumers, to take reasonable care not to make a misrepresentation; or
• for non-consumers, to make a fair representation of risk (which broadly requires disclosure of material circumstances that the policyholder knows or ought to know).

This represents a change from the current common law position.

As discussed in 4.1 Implied Terms, as the law currently stands, the insured must disclose to the insurer, before the contract is concluded, every material circumstance known to the insured, and the insured is deemed to know every material circumstance which, in the ordinary course of business, ought to be known by the insured. If an insured fails to disclose a material circumstance, then the insurer may avoid the contract of insurance.

Every material representation made by an insured or its agent prior to the contract being concluded must also be true. If it is not true, then the insurer may avoid the contract. This remedy for misrepresentation is, however, subject to the following.

• By reason of the Insurance Law Reform Act 1977, an insurer is only entitled to avoid a contract of insurance if a pre-contractual statement has been made which is untrue and if the statement was “substantially incorrect” and “material”. Additional limitations also apply in relation to the ability of an insurer to avoid a contract of life assurance for pre-contractual misrepresentations.
• It is uncertain whether, pursuant to the Contract and Commercial Law Act 2017, the appropriate remedy for misrepresentation in relation to non-marine contracts is cancellation of the contract and damages rather than avoidance of the contract ab initio. This is yet to be determined by the New Zealand courts.

As discussed at 1.1 Statutory and Procedural Regime, the New Zealand government is currently in deliberation over an Insurance Contracts Bill. If enacted, as outlined at 4.1 Implied Terms, this legislation would limit the duty of disclosure on insureds:

• for consumers, the duty would be to take reasonable care not to make a misrepresentation; or
• for non-consumers, the duty would be to make a fair representation of risk.

The remedies for breach of the applicable duty of disclosure would also change. In summary:

• in the event of a deliberate or reckless breach of duty by the insured, the insurer would be able to avoid the contract of insurance and would not be required to return any premiums paid;
• if the breach of duty was not deliberate or reckless but the insurer would not have entered into the contract of insurance but for the breach, the insurer would be entitled to avoid the contract of insurance but would be required to return the premiums paid; or
• if the breach of duty was not deliberate or reckless but the insurer would only have entered into the contract of insurance on different terms, the contract of insurance will be deemed to be amended to reflect those terms.

The FTA contains protections against unfair contract terms in standard form “consumer contracts” and “small trade contracts”. There are currently exemptions under the FTA related to insurance contracts. A term in an insurance contract cannot be declared unfair which relates to the duty of utmost good faith or which specifies requirements for disclosure or relates to the effect of non-disclosure or misrepresentation by the insured. If the Insurance Contracts Bill is passed into law, these exemptions would no longer apply and alternative safeguards would be introduced.

COVID-19

New Zealand has not seen a significant increase in COVID-19-related insurance claims over the past 12 months. This is principally because of a communicable disease exclusion which has been included in business interruption insurance in New Zealand for a number of years (including pre-pandemic). This has significantly limited the scope for insureds to pursue indemnification for COVID-19-related losses.

Earthquake Litigation

While some claims relating to the Canterbury Earthquake Sequence are still being resolved, the majority of policy coverage disputes against the Earthquake Commission and/or insurers have now concluded.

D&O Insurance

While not yet a trend in coverage disputes, one recent significant dispute relating to the collapse of a large property and construction company has given rise to an important question around allocation of insurance cover. In this case, four directors of a company were ordered to pay significant sums of money to unsecured creditors of the company. However, the basis of liability differed between the directors, as did the sums of money they were ordered to pay. The liabilities imposed on the directors (in total) also exceeded by some margin the limit of liability under the applicable D&O policy. It was uncertain how the insurance monies that were available should be allocated between the directors. This has led boards of directors to consider both whether their D&O insurance policies have sufficient policy limits and whether the “allocation of loss” provisions in those policies are sufficiently clear in their application.

In relation to coverage disputes that do not qualify for an approved dispute resolution scheme (see 4.5 Position if Insured Party is Viewed as a Consumer), the majority of disputes are resolved through private settlement. This often follows engagement of the parties in an alternative dispute resolution mechanism. Mediation is commonly used. If not resolved, then insurance coverage disputes in New Zealand are typically resolved by the courts rather than through arbitration.

Coverage disputes in relation to reinsurance contracts are commonly resolved by arbitration.

As set out at 1.1 Statutory and Procedural Regime, insurers that provide insurance to retail customers are required to be members of an approved dispute resolution scheme. Many consumer insurance issues are resolved through one of these schemes.

There are two main situations where a third party can enforce an insurance contract or bring a claim against an insurer in connection with an insurance contract. These are as follows.

Contract and Commercial Law Act 2017 (Third Party Contract Rights)

Sections 12 and 13 of the Contract and Commercial Law Act 2017 permit a third party to enforce a contract of insurance or bring a claim against an insurer in connection with an insurance contract where the parties to the insurance contract intended to create an obligation enforceable against the insurer by the third party.

The third party must be able to demonstrate the following.

• Promise: that there was a promise contained in a deed or contract.
• Benefit: that the promise conferred a benefit on the third party. This includes any advantage, immunity, limitation or qualification of a right or obligation, and any extension or improvement of a right. Immunity appears to envisage a release from liability and has been held to include both an exclusion of liability under an exclusion and an immunity by way of positive grant or endorsement to the policy.
• Intention: that the promise was intended to confer a benefit enforceable by the third party.
• Designation: that the third party has been “designated” by name, description or reference to a class. Designation is most readily achieved by the insurance contract expressly identifying the third party by name, but could also be achieved through description of a class such as all subsidiaries of an insured company.

Where the above requirements are met, the third party will be entitled to seek damages, specific performance and/or an injunction, as if it were a party to the contract.

Law Reform Act 1936 (Liability Insurance)

Section 9 of the Law Reform Act 1936 concerns liability insurance. Where a contract of insurance indemnifies an assured against liability for compensation or damages, on the occurrence of the event that gives rise to the claim for compensation or damages, a charge is imposed on the insurance monies for the amount of the liability. This gives a third party who has a claim against an assured a measure of protection and is of particular importance where the assured has died insolvent, is bankrupt or has been put into liquidation. Section 9 broadly permits a third party suffering a loss as a result of the actions of an assured party to claim directly against the insurer (although the leave of the court is required in some circumstances).

The Insurance Contracts Bill proposes to replace Section 9 of the Law Reform Act 1936 with new provisions that would allow third parties to claim directly against the insurer in circumstances where an insured was insolvent or dead. Leave of the court would be required. As drafted, the Bill would not apply to contracts for reinsurance.

Trusts Act 2019

Although not strictly concerned with enforcement of insurance contracts by third parties, Section 87 of the Trusts Act 2019 provides that if a trustee pays the premiums of an insurance contract for trust property, and the trustee is not reimbursed from the trust property for those premiums, the trustee has a lien on the insurance money for the amount of the premiums paid.

There is no concept of bad faith in the insurance context under New Zealand law. However, as set out at 4.1 Implied Terms, insurance contracts are contracts of “utmost good faith” and this imposes certain obligations on insurers and insureds in their dealings with one another.

There is no statutory scheme that imposes penalties on insurers for late payment of claims.

However, an insurer could be liable for compensatory damages to an insured for late payment of a claim in certain circumstances, including the following examples.

• A failure to pay a claim within a reasonable time period might amount to a breach of the duty of good faith. Damages can be awarded for breaches of the implied duty of utmost good faith, but no New Zealand court has awarded damages for delay on this basis.
• Alternatively, a delay may be so extreme as to amount to a declinature, in which case an insurer may be liable in contract as if it had expressly (and wrongly) declined the claim.
• An insured who succeeds in a claim against an insurer in the courts will generally be entitled to interest on the judgment award. Not paying a claim which should have been paid could therefore result in an insurer having to pay interest which would not otherwise have accrued.

It is commonly accepted in New Zealand that a broker acts as the agent of the insured in arranging insurance cover with an insurer.

The Marine Insurance Act 1908 provides that every material representation made by an insured or its agent in negotiations for a contract must be true. Accordingly, where a broker acts as agent for an insured, the insured is bound by the broker's representations.

In New Zealand, brokers are also required to adhere to the Insurance Intermediaries Act 1994. This stipulates certain duties of brokers to their clients.

Delegated underwriting and claims handling authority arrangements are relatively common in New Zealand. While these types of arrangements may in theory give rise to litigated issues, disputes concerning delegated underwriting or claims handling authority have not to date been prevalent in New Zealand.

There is no general duty or implied term for insurers to fund defence costs in New Zealand. Rather, an express term in an insurance policy is required. 

Cover for defence costs is regularly included in a number of different types of insurance policy seen in New Zealand. These include for the following types of policies: professional indemnity, directors' and officers', trustees' liability, statutory liability, information technology (or cyber) liability, and public and products liability. 

A particular feature of insurance contracts in New Zealand concerns Section 9 of the Law Reform Act 1936. As discussed in 4.6 Third-Party Enforcement of Insurance Contracts, this provides for a statutory charge over amounts payable under an insurance contract when an event occurs which gives rise to a claim for damages or compensation and such damages or compensation are covered under the contract of insurance. The statutory charge takes effect at the date of the claim.

The New Zealand Supreme Court has held that where such a charge exists over an insurance contract with a single limit, the insurance amount cannot be used to fund defence costs. This has necessitated insurers developing alternative policy structures in order to ensure that insureds can have their defence costs funded; for example, by “ring-fencing” defence cost limits.

As discussed, the draft Insurance Contracts Bill proposes that Section 9 of the Law Reform Act 1936 is replaced with alternative provisions which would allow third parties to claim directly against an insurer in circumstances where an insured was insolvent or dead. This would be with leave of the court. 

If the changes proposed in the Insurance Contracts Bill are adopted, then it could be expected to simplify the provision of cover for defence costs in New Zealand.

In terms of trends more generally, the New Zealand market has seen a reduction in recent years of insurer appetite for underwriting cyber and D&O risks. Although it is not expected that defence costs cover would be withdrawn in relation to these risks, insureds may continue to face a hard market for such cover in terms of premiums, retentions, and limits.

The disproportionate cost of litigation is becoming the focus of some concern from the government and the courts. 

The Rules Committee, which is responsible for New Zealand's court rules, has proposed a comprehensive reform to civil procedure in New Zealand with a focus on streamlining the cost of bringing claims in the District Court and High Court. It is not clear whether these proposals will come into force, or whether they will be successful in reducing the time and cost of litigation. Improving access to justice will, in any event, remain a focus for the government and the courts.

In relation to class actions, the Law Commission has recently recommended the introduction of a statutory class actions regime. If enacted, this may streamline some procedural matters relating to group litigation, as procedural matters are presently determined as they arise by the courts.

Claimants in New Zealand can buy protection against adverse costs risk in two ways. 

First, a claimant could obtain third party litigation funding. Litigation funding is accepted in New Zealand and has received approval from the courts in various proceedings, including class actions. Where a litigation funder is involved, the funding agreement will typically allocate costs risk between the funder and claimant (or claimant group).

Second, adverse costs insurance or “After the Event” (ATE) insurance is available. The Court of Appeal has recognised the enforceability of such insurance in New Zealand, and courts have noted its utility in promoting access to justice (by reducing the financial risk to claimants). However, ATE insurance is not yet used widely in New Zealand.

As set out at 4.1 Implied Terms, New Zealand law implies the right of subrogation into most insurance contracts, excluding those for life or personal accident insurance. Subrogation provides the insurer with a right to assume both the insured's position and its rights in actions to recover losses from third parties. Specific rights of subrogation may also be included in insurance contracts as express provisions.

The right of subrogation in New Zealand is broad; it applies to total and partial loss, irrespective of the precise nature of the third party's liability, and to actions in both tort and contract. The right to subrogation does not arise until the insurer has indemnified the insured for the loss caused by the third party.

As discussed in 4.1 Implied Terms, an insurer has an implied right at common law to pursue a subrogated claim in the name of the insured. It is also common for contracts of insurance to include an express provision confirming rights of subrogation.

COVID-19

The pandemic has not had a significant direct effect on insurance-related litigation in New Zealand. Overseas, the main pandemic-related insurance litigation has been in relation to business interruption losses. As discussed in 4.3 Significant Trends in Policy Coverage Disputes, in New Zealand, a large proportion of business interruption policies include an “Infectious Diseases” clause, which excludes cover for business interruption arising in connection with a notifiable infectious disease under the Health Act 1956 or the Biosecurity Act 1993. That includes COVID-19. In addition, New Zealand's response to COVID-19 has meant that lockdowns have been relatively modest in length in most parts of the country in comparison with international counterparts.

Earthquakes

The most significant event in the insurance market in recent history has been the Canterbury Earthquake Sequence. As set out at 4.3 Significant Trends in Policy Coverage Disputes above, the earthquakes led to a significant volume of litigation in New Zealand, much of which is now resolved (although some is still working its way through the dispute resolution system). Other earthquakes (for example, the Seddon earthquake in 2013 and the Kaikōura earthquake in 2016) have also contributed to the number of disputed insurance claims.

COVID-19

There may be an increase in insurance related litigation arising out of COVID-19. For example, there could be an increase in employment practices liability claims due to companies restructuring or downsizing due to the economic impacts of COVID-19, or for failure to provide a safe working environment. However, the pandemic is more likely to have indirect effects on the New Zealand insurance market as it drives worldwide inflation and uncertainty.

Insolvency Events – D&O

The inflation and economic downturn which have followed COVID-19 and Russia's invasion of Ukraine can be anticipated to lead to an increased risk exposure for directors in New Zealand. More insolvency events can also be anticipated. As discussed, in recent years, the New Zealand courts have been prepared to impose significant liabilities on directors for continuing to trade whilst insolvent. There is also some evidence of financial mismanagement/insolvency exclusions reappearing in the Australasian market (last seen following the global financial crisis of the late 2000s). The combination of all of these factors could lead to increased D&O litigation in the period to come.

Class Actions

New Zealand does not have a codified procedure for class actions. However, Rule 4.24 of the High Court Rules provides that persons having the same interest in the subject matter of a proceeding may bring a proceeding against the same defendant. This has been interpreted expansively by the New Zealand courts in recent years as permitting class actions, including class actions on an “opt-out” basis, which means that plaintiffs do not have to build a class of plaintiffs on an “opt-in” basis. The combination of a more mature class action environment in a period of economic uncertainty could lead to an increase in the number of “high value” claims in New Zealand. These claims could affect insurers. 

Earthquakes and Other Natural Disasters

The risk of earthquakes in New Zealand is relatively high due to New Zealand's seismic location. Further significant earthquakes would lead to further insurance litigation, similar to that seen after the Canterbury Earthquake Sequence (although potentially on a smaller scale as the Canterbury litigation has resolved several issues, including in relation to cover provided by the Earthquake Commission). New Zealand is also susceptible to other natural disaster events, such as flooding and tsunamis.

There has not been an insurance-related test case in relation to COVID-19 in New Zealand. However, the test cases in Australia and the United Kingdom are likely to be relevant to any such case brought in New Zealand, as well as to any law reform or market changes as a result.

There have been a number of significant cases in relation to the Earthquake Commission and private insurers following the Canterbury Earthquake Sequence. Examples include the following.

• Kraal v EQC & Allianz New Zealand Ltd ((2015) NZCA 13), in which the Court of Appeal confirmed that “physical loss or damage” for the purposes of natural disaster insurance required a physical disturbance to the property and did not extend to a claim for losses relating to the imposition of a regulatory notice prohibiting occupation/building.
• Xu v IAG New Zealand Ltd ((2019) NZSC 68), in which the Supreme Court confirmed that the insured's entitlement to a replacement benefit under an insurance contract cannot be assigned to a third party (noting that this decision turned to an extent on the precise wording of the contract involved that made the reinstatement right personal to the insured).
• A number of cases that have clarified the standard of repair required where insurance policies (or the Earthquake Commission Act 1993) provide for repair or replacement of residential buildings. These decisions include discussion of circumstances in which repair is required to an “as new” or “when new” standard.
• Vero Insurance New Zealand Ltd v Morrison ((2015) NZCA 246), in which the Court of Appeal considered the use of modelling to determine the apportionment of damage where there were multiple earthquakes causing damage to the same property. The Court in that case determined that modelling evidence was relevant and admissible, but considered that it had been given too much weight by the trial judge because of limitations within it.

COVID-19 has had an indirect impact on the insurance market in New Zealand, with increased inflation and supply chain disruption affecting a variety of sectors. The economic impact of COVID-19 has driven up the costs of insurance claims. For example, reinstatement timeframes have been significantly prolonged due to the lack of supply of building materials and equipment. This overall disruption has driven up the cost of premiums. Insurers are also introducing more extensive exclusions for communicable disease.

Increases have also been seen in premiums sought by insurers for underwriting of cybersecurity risks along with limitations placed by insurers on the scope of cover provided. Cybersecurity risks are seen by insurers as having increased because of increased working from home by employees. The uncertain geo-political environment at present is also a factor. 

As discussed above at 7.2 Forecast for the Next 12 Months, there is some evidence of financial mismanagement/insolvency exclusions reappearing in the Australasian D&O market. This market is already “hard” for insureds.  A particular feature in recent years has been high premiums for “Side C” cover and sub-limits. This is a consequence of the class action culture in Australia. The current economic outlook, and a more mature class action environment in New Zealand, is unlikely to contribute to a softening of the market.

The increasing risk of a significant earthquake event in Wellington has had a direct impact on the risk appetite for insurers in the region. Ongoing litigation in New Zealand surrounding external wall cladding has also made it increasingly difficult for insureds to obtain insurance on reasonable terms for buildings which are cladded in relevant material. 

Finally, in New Zealand, historically home insurance policies often provided uncapped “as-new” replacement cover (ie, new for old). This is generally no longer available following the substantial liabilities from the Canterbury Earthquake Sequence. Instead, cover will be capped at a specified sum agreed between the parties at the outset of the contract.

Impact of ESG factors on Underwriting of Insurance Risks

ESG factors, including climate change, are increasingly factoring into insurers' decision-making as to the underwriting and pricing of risk.

In relation to climate change, many assets in New Zealand are susceptible to damage as a result of climate change, most significantly as a result of flooding. As extreme weather events increase over the coming years, this could give rise to significant liabilities for insurers. Accordingly, insurers are increasingly considering the impacts of climate change on their portfolios and adopting pricing and limitations on cover which reflect the risks associated with extreme weather events. Recent examples of this include the introduction of risk-based pricing models for flood risks of individual homes, and the proposed introduction of such models in relation to risks from coastal erosion.

Two developments in particular are worth noting. 

Development of options for home flood insurance

The New Zealand government recently published its first National Adaptation Plan, which sets out a range of existing and planned policies to support New Zealanders in adapting to the impacts of climate change. As part of that plan, and reflecting the increased risk of flooding to both the insurance market and New Zealanders more broadly, the New Zealand government has commenced work to develop options for home flood insurance. This work includes exploring options to support access to and promote affordability of home flood insurance, and the development of options ensuring home flood insurance will continue to support community resilience.

At this stage, it is unclear what options will result from the process outlined above. However, it may be that the resulting proposals will impact the underwriting of insurance contracts where homes are susceptible to flooding.

Mandatory climate-related disclosures

In 2021, New Zealand passed legislation that introduces a mandatory climate-related reporting regime applying to approximately 200 of the largest financial market participants, including many insurers. The scheme requires organisations to assess and disclose climate-related risks and opportunities in line with climate standards published by the External Reporting Board. On the current trajectory, organisations covered by the scheme will be required to produce their first reports in financial reporting periods starting in 2023.

The new mandatory climate-related reporting regime is expected to further influence insurers to take climate-related risks (and opportunities) into account when making decisions about which risks to insure, and at what price. For example, the new regime requires reporting entities to undertake scenario analysis to determine the impacts on their businesses of different levels of warming as a result of climate change. Undertaking this exercise is likely to give insurers a deeper insight into the risks impacting their portfolios, and accordingly impact future underwriting decisions.

Impact of ESG Factors on Insurance Litigation

To date, there have not been any significant cases involving ESG factors in the insurance context. However, climate change matters are increasingly being litigated and this trend is expected to continue over the coming years. For example, at the time of writing, the Supreme Court has just heard an appeal in the case of Smith v Fonterra Co-operative Group Ltd (2021 NZCA 552). The Supreme Court was asked to consider the actionability of climate change-related claims in tort and as a public nuisance, and whether a novel duty of care to cease contributing to climate change is cognisable at law. 

Damage to property as a result of extreme weather events is also likely to increase the volume of insurance litigation and raise new issues for consideration by the courts.

As discussed at 1.1 Statutory and Procedural Regime, the most significant recent development in relation to insurance in New Zealand has been the New Zealand government's review of insurance law. This has included the publication in February 2022 of an “exposure draft” of the Insurance Contracts Bill on which submissions were sought. A finalised version of the Bill is currently expected be introduced into the House of Representatives in mid-2023. If enacted, such a Bill will significantly reform insurance law in New Zealand and bring it into line with developments seen in recent years in the UK and Australia. The exposure draft anticipates a period of up to three years from royal assent for the Bill to fully come into force (although it could be sooner if the government wishes).

The proposals in the draft Bill include the following.

• Amending the duty of disclosure placed on insureds prior to conclusion of contracts. In particular, replacing the current duty with separate disclosure duties for consumers and non-consumers (the duty of consumers being to “take reasonable care not to make a misrepresentation to the insurer”, and the duty of non-consumers being to make a “fair presentation” of the risk).
• The introduction of proportional remedies in the event of a material non-disclosure by an insured.
• The abolition of “basis of the contract” clauses in insurance policies.
• The abolition of the statutory charge over insurance monies under Section 9 of the Law Reform Act 1936.
• Strengthening consumer protections in relation to unfair contractual terms – although the scope and extent of this is yet to be determined.
• The introduction of a requirement that consumer policies be written and presented in clear terms.
• Empowering the Financial Markets Authority to monitor and enforce compliance.

The intention is that the Insurance Contracts Bill will (if enacted) sit alongside other legislative changes relevant to insurers' treatment of consumers in New Zealand. As set out above at 1.1 Statutory and Procedural Regime, this includes the Financial Markets (Conduct of Institutions) Amendment Act 2022 (COFI Act) which is expected to come fully into force in 2025. Among other things, the COFI Act introduces a requirement for relevant financial institutions (including insurers providing relevant services) to have in place a “fair conduct programme” to operationalise a new “fair conduct principle”. The fair conduct principle requires financial institutions to treat consumers fairly across the full life cycle of a consumer insurance relationship (for example, across product design, sales, communications and policy maintenance, claims, complaints-handling and termination).