(By Maria Hook and Jack Wass)
Last week Parliament passed the Contracts of Insurance Act 2024, which includes some interesting provisions relating to the conflict of laws. The purpose of this note is to provide a brief discussion of these provisions. In the interests of full disclosure, we should point out that we made several submissions on the Bill.
Third party claims against insurers in cross-border cases
Part 3, subpart 6 of the Act deals with third party claims against insurers. It reforms the law previously found in s 9 of the Law Reform Act 1936, which was uncertain and unsatisfactory, particularly in cases that had an international element. Overseas authorities were divided on whether third party claims are to be characterised as contractual, tortious or proprietary for the purposes of identifying the applicable law. In Ludgater Holdings Ltd v Gerling Australia Insurance Co Pty Ltd [2010] NZSC 49, [2010] 3 NZLR 713, the Supreme Court applied the lex situs, on the basis that s 9 of the Law Reform Act 1936 had the effect of imposing a proprietary charge over the insurance monies.
The Act now specifies the territorial scope of the legislation by defining who qualifies as a “specified policyholder” in s 86(2). In essence, specified policyholders are policyholders that are subject to insolvency in New Zealand. This means that subpart 6 applies if the insolvency event underpinning the right of direct action is taking place in New Zealand.
This departure from the lex situs approach in Ludgater is both necessary and appropriate, for two reasons. First, unlike the now-repealed s 9 of the Law Reform Act, the new rules do not create a property right in the insurance debt. Second, the approach addresses concerns raised by the Supreme Court in Ludgater that New Zealand law should not be applied in a way that might interfere with foreign insolvency proceedings (at [23], [29]). The new right of action is designed to modify the ordinary rules that would apply in insolvency or administration proceedings. Those are matters that are generally governed by the law of the forum. It makes sense, therefore, to characterise the right of direct action in a way that aligns with such proceedings for conflict of laws purposes. A precedent for this approach is the Third Parties (Rights Against Insurers) Act 2010 (UK), which applies if the insolvency event underpinning the right of direct action is taking place in England (see, more generally, Louise Merrett “Direct action” in Jürgen Basedow and others (eds) Encyclopedia of Private International Law (Edward Elgar, 2017) 531 at 537).
Any doubt whether s 86 may still be subject to common law (or other) choice of law rules has been removed by s 97, which clarifies that the application of subpart 6 does not depend on another choice of law rule being satisfied:
97 Cases with overseas element
(1) The application of this subpart does not depend on any of the following (except to the extent that any of the following is required under section 86(2)):
(a) whether or not the insured liability was incurred in, or under the law of, New Zealand:
(b) where any of the parties are domiciled or living:
(c) whether or not the contract of insurance (or a part of it) is governed by the law of New Zealand:
(d) the place where sums due under the contract of insurance are payable.
(2) However, this section does not prevent a court from having regard to a matter referred to in subsection (1) when it is deciding whether to give or refuse leave under section 88.
However, the fact that the claim involves a specified policyholder within the meaning of s 86(2) does not mean that the New Zealand court must apply the Act in every cross-border case that comes before it. The court’s exercise of cross-border jurisdiction under subpart 6 is not mandatory. The court has a discretion to decline jurisdiction if there is an insufficient connection to New Zealand and a third party claim would be better resolved in another country – for example, because there are already insolvency or administration proceedings taking place overseas that would be recognised as a foreign main proceeding (particularly where an order from the New Zealand court would have the potential to interfere with that insolvency), or because the underlying facts have a tenuous connection to New Zealand (for example, where the claim related to activities of the policyholder overseas). Thus, s 88 provides that a proceeding may only be brought with the leave of the court, and that the court “may refuse to give leave if it considers that New Zealand is not the appropriate forum for the proceeding” (s 88(2)).
The inclusion of s 88(2) may not have been strictly necessary, considering that the court has a general discretion to decline jurisdiction under the common law doctrine of forum (non) conveniens. However, s 88(2) makes it clear that the question of appropriate forum is distinct from the question whether s 86(2) applies on its terms. The fact that a case falls within s 86(2) is not a pointer that New Zealand is necessarily the appropriate forum.
Law applicable to insurance contracts
The Act includes a general provision on the law governing insurance contracts. Section 7 clarifies that insurance contracts continue to be subject to existing common law choice of law rules, except that choice of law clauses in consumer insurance contracts are of no effect.
Thus, s 7(1)(a)-(b) provides that the Act “applies to a contract of insurance if the contract is governed by the law of New Zealand or would be governed by the law of New Zealand but for a choice of law provision in the contract”. Subsection (1)(b) removes the parties’ ability to select the law governing their insurance contract. However, according to subsection (2), subsection (1)(b) “does not apply to a non-consumer insurance contract”. This means that parties to a non-consumer insurance contract are still able to select the governing law. The meaning of “non-consumer insurance contract” is defined in s 10 as a contract of insurance entered into by a policyholder that is not “a contract of insurance ordinarily entered into by a policyholder wholly or predominantly for personal, domestic, or household purposes”.
The Act will only be applicable if the proper law of the contract is New Zealand law. This means that the overall effectiveness of s 7 depends on the common law choice of law rules for contracts. In the absence of party choice, the proper law is the law with the closest and most real connection to the contract. There is no specific choice of law rule for consumer contracts, so there is no guarantee that New Zealand law will apply to contracts with New Zealand consumers. However, it is reasonable to expect that courts will have particular regard to the policyholder’s place of residence in determining the law with the closest and most real connection to the contract (but cf Mary Keyes “Improving Australian Private International Law” in Andrew Dickinson, Mary Keyes and Thomas John (eds) Australian Private International Law for the 21st Century: Facing Outwards (Bloomsbury, 2017) 15 at 33-34).
On the face of it, s 7 seems to be concerned only with express choices of law (because it refers to a “choice of law provision”). However, it should be immaterial for the purposes of s 7(1)(b) whether the parties have entered into an express or implied choice of law agreement. It is unlikely that a court would entertain an implied choice of law in these circumstances (based on, for example, a foreign jurisdiction clause): cf Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418 at 437.
It should be noted that the original version of s 7 provided for a wider exclusion of party autonomy, which would have rendered choice of law clauses ineffective in all insurance contracts except for reinsurance contracts. This would have amounted to a significant restriction of party autonomy (see, eg, Akai Pty Ltd v People’s Insurance Co Ltd [1998] 1 Lloyd’s Rep 90, where the English High Court granted an anti-suit injunction restraining the Australian proceedings under the Australian Insurance Contracts Act 1984 in order to give effect to the parties’ choice of English law and jurisdiction). The change to the scope of s 7 was made at the Select Committee stage (“to ensure that commercial parties retain autonomy to choose which law governs their contracts”). On the other hand, Parliament did not consider that the limitation on party autonomy should also cover small trade contracts (cf the extension of the UCT regime in the Fair Trading Act to small trade insurance contracts: Contracts of Insurance (Repeals and Amendments) Act 2024, ss 10-11). This was a defensible balance to strike. By comparison, the European approach has been to allow a free choice of law in non-consumer insurance contracts covering “large risks” (and a more limited choice in other insurance contracts): Regulation 593/2008 on the law applicable to contractual obligations [2008] OJ L177/6, art 7(2).
‘No contracting out’: jurisdiction agreements in consumer insurance contracts
Section 166 states that the provisions of the Act “have effect despite any provision to the contrary in any contract of insurance or other agreement”. The section does not clarify its scope with respect to choice of law agreements and jurisdiction agreements. In light of the implicit recognition of party autonomy in non-consumer insurance contracts in s 7, s 166 cannot have been intended to exclude the effect of such agreements in non-consumer insurance contracts even if their ultimate effect is to “contract out” of the Act. In other words, courts will be able to give effect to choice of law agreements and jurisdiction agreements in non-consumer contracts despite s 166.
What is less clear is whether s 166 is intended to invalidate foreign jurisdiction agreements in consumer insurance contracts (that would ultimately lead to the application of foreign law contrary to s 7(1)(b)). Section 67 provides that arbitration clauses in consumer insurance contracts are not binding, but there is no equivalent section for jurisdiction clauses. The effect of ‘no contracting out’ provisions on jurisdiction agreements is rarely clear-cut and can involve difficult questions of statutory interpretation: see The Conflict of Laws in New Zealand at [4.73], [2.397]. In Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418, the High Court of Australia considered that an English jurisdiction clause was invalid under a ‘no contracting out’ provision in the Insurance Contracts Act 1984 because the English court would have given effect to the parties’ choice of English law, in circumstances where the Act excluded the parties ability to select a foreign proper law.
The better view may be that the Act does not directly regulate the effectiveness of jurisdiction clauses in consumer insurance contracts, but that a court would ordinarily exercise its discretion to decline enforcement of such clauses, at least where this would be necessary to give effect to the consumer protection policy reflected in s 7: see Advanced Cardiovascular Systems Inc v Universal Specialties Ltd [1997] 1 NZLR 186 (CA) at 190–191.
