Statutory Liability Policy and the rise of pecuniary penalties
When the Statutory Liability Policy first appeared on the New Zealand market in the 1990s, it only covered three named Acts:
- Health and Safety in Employment Act 1992 (as it was called then),
- Fair Trading Act 1986, and
- Resource Management Act 1991.
As competition grew, one insurer reversed that formula and covered all Acts except the Acts named as excluded. That formula became the norm.
The primary purpose of the policy is to cover fines and defence costs arising from convictions for strict liability criminal offences under all Acts, except the excluded Acts. The excluded Acts include those that prohibit hard-core criminal offending.
The cover was controversial at the time because insuring against fines is against public policy as it negates the deterrent effect of a fine. However, the government’s response to date has only been to make the insurance of fines under one Act (which is now called the Health and Safety at Work Act 2015) illegal. By implication, this gave the green light to the insurance of fines under all other Acts traditionally covered by a Statutory Liability Policy.
The payment of money to the government as punishment for committing a criminal act is traditionally called a fine. However, starting with the Commerce Act 1986, a new form of monetary punishment has been created called a ‘pecuniary penalty’. The pecuniary penalty was created to punish certain breaches of the Commerce Act that only needed to be proved to the civil standard (on the balance of probabilities). One of the reasons for this is because it is notoriously difficult to gather sufficient evidence to prove a ‘white collar’ crime to the criminal standard of beyond reasonable doubt.
Several recent Acts that regulate businesses also include pecuniary penalties. They include:
- Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
- Financial Markets Conduct Act 2013
These recent Acts don’t usually appear in the list of excluded Acts under a Statutory Liability Policy. The maximum pecuniary penalties that can be awarded under these Acts are high.
On top of this, the European Union’s General Data Protection Regulation (GDPR) comes into force on 25 May 2018. Article 83 of the Regulation provides for ‘administrative fines’ for breaches up to a maximum of the greater of €20M and 4% of annual global turnover. The Regulation has global reach.
The world has moved on since the creation of the Statutory Liability Policy in the 1990s. The increased prevalence of pecuniary penalties in New Zealand Acts and now the potential for administrative fines under the GDPR may be a concern for underwriters of Statutory Liability Policies.
They should be reviewed to see if either of these forms of monetary punishment could be covered, and if they could be, whether they should be.
Implied Duty to Process a Claim within a Reasonable Time
The Canterbury earthquake claims have raised many unusual legal issues about insurance cover.
One that has arisen in recent years is whether the insured is entitled to any extra redress beyond payment of the contractual entitlement under the policy for the delay in receiving payment.
Ordinarily, property damage claims, whether domestic or commercial, are settled reasonably promptly. However, the Canterbury earthquake sequence created claims on an unprecedented scale in terms of numbers, complexity and cost. September this year will mark 8 years since the first earthquake occurred and yet there are still many unresolved claims.
Are damages available for delay alone?
In a number of recent judgments, the plaintiffs have sought damages from their insurer in some form for the length of time that has elapsed since the insured event occurred. The difficulty with this argument is that they are doing so in circumstances where the claims were accepted from day one. So where is the breach of contract entitling the insured to damages based on delay alone?
All the previous cases in New Zealand where damages have been awarded for delay involve situations where the insurer has declined the claim, in breach of contract. This breach entitled the insured to foreseeable damages, which may involve delay.
However, where the insurer has accepted the claim from day one and there has been no breach of an express term of the policy, what is the legal position?
Tower Insurance cases
This has been clarified for the second time recently (albeit by the same High Court Judge) in the decision of EM Kilduff and others v Tower Insurance Limited  NZHC 704. The decision confirms an earlier decision also involving Tower Insurance Limited that in all insurance contracts there is an implied duty of utmost good faith by both parties. While the scope of that duty has not been set, the duty includes a requirement that insurers process claims within a reasonable time. The Court said, what is a reasonable time:
… must take into account the time required to properly investigate and assess all aspects of the claim. What is “reasonable” will depend on all the relevant circumstances. Factors that may need to be taken into account include the type of insurance, the size and complexity of the claim, the compliance with any relevant statutory or regulatory rules and guidance, and factors outside insurer’s control. Further if the insurer shows that reasonable grounds exist for disputing the claim (whether as to the amount or any sum payable or as to whether anything at all is payable), the insurer does not breach the implied term merely by failing to pay the claim (or the affected part of the claim) while the dispute is continuing. But the conduct of the insurer in handling a claim may be a relevant factor in deciding whether that good faith duty was breached and, if so, when.
Interestingly, in both cases involving Canterbury earthquake claims, the insurer was held to have acted reasonably, despite finality only being achieved 6 or 7 years later.
What does this mean in practice?
Assuming this aspect of the two Tower cases is not overturned on appeal, this means that where an insurer accepts a claim, but disputes the quantum of it, the delay caused by this alone is not a breach of the implied term to pay a claim within a reasonable time if the insurer had reasonable grounds for disputing the quantum.
It also seems to mean that even if the insurer loses the dispute, it is still not in breach so long as its position was reasonably arguable.