Rob Stock: The unfair business of utmost good faith with insurers
OPINION: Dealings between powerful financial services companies and little people are riven with double standards and a crushing power imbalance.
We've seen a lot of that since the Canterbury earthquakes left families battling to get their homes properly fixed.
The case of Christchurch architect Greg Young and Tower insurance was a case in point.
Young's house was damaged in the Canterbury earthquakes of 2010 and 2011.
Tower wanted to repair. The man said only a rebuild was possible.
Cue long and gruelling court fight.
Long story short: In December High Court found Tower was wrong, Young was right.
The High Court judgment revealed Tower had kept secret a short report it had commissioned which said Young was right that his home should be rebuilt.
Not revealing that report to Young was a breach of good faith by Tower to its policyholder, the High Court found.
High Court judge David Gendall said: "The plaintiff alleges that withholding the June 2011 report ... which, although only a brief report, did recommend a rebuild of the house, is a serious breach of the defendant's obligation of good faith. I agree."
His victory makes Young an unwitting consumer champion.
His battle has established a precedent insurers must take notice of.
But there's another story here.
Imagine what would have happened if Tower had caught Young hiding something from it, breaching his duty of utmost good faith to it.
The Insurance Council of New Zealand, says on its website: "An insurance policy is a contract of 'utmost good faith' between the insurer and the customer. The insurer is required to observe and honour the contract conditions. The customer is required to disclose to the insurer all material facts that could affect the risk."
One contract condition is to co-operate at claims time, which certainly does not include concealing important information.
Failing to act with utmost good faith may "jeopardise" a policyholder's insurance cover, says the Insurance Council, which is a lobbying group for insurers.
What does jeopardise mean?
Well, when an insurer finds a policyholder has failed to act in the utmost good faith, it may be in its rights to "avoid" its policy, which means to tear it up.
In addition, it may decide to enter the policyholder's name on the Insurance Claims Register, which insurers check before deciding whether to issue policies.
Effectively, it is a black list developed by insurers to protect themselves from dishonest people, but it is an unregulated register.
They are dubbed an insurance fraudster and may not be able to get insurance again.
If you can't get insurance, you can't get a mortgage.
Had Young not acted in utmost good faith, as the High Court found Tower had, he would have been in an awful lot of trouble.
What happens to an insurer which has breached the duty of utmost good faith?
It has a moment of embarrassment, and then moves on with its commercial life.
It has strengthened my belief that New Zealand needs a specialist insurance court to deal rapidly and publicly with disputes, a court that can impose meaningful penalties on insurers who fail to act in good faith.
It's time to make it easier for the little guy.
▪ Treat insurers with caution
▪ Stand your ground
▪ Know your obligations