Misrepresentation, Non-Disclosure and Breach ... - Law Commission

8.33 It may be helpful to illustrate how this definition works. Section 11 would apply to
a clause stating that the car was only insured while it was roadworthy. This
clause purports to exclude or limit the liability of the insurer in certain
circumstances (that the car is unroadworthy) because when a car is
unroadworthy, the risk of a loss increases. An insurer would not be entitled to rely
on this clause if the policyholder proves that the loss was unrelated to the
unroadworthiness. For example, if the car had bald tyres, but was destroyed by a
tree falling on it during a gale, the insured could show that the bald tyres did not
contribute to the gale, and the insurer would be required to pay the claim. In
contrast, the reform would not affect a clause which requires an insured to give
notice of a loss within a given period of time. A failure to give notice could not
increase the risk of a loss occurring, as the clause would only apply once a loss
had happened. Such a clause would not come within the ambit of the
legislation. 11
8.34 In 1998, the New Zealand Law Reform Commission reviewed the way section 11
operates in practice. 12 They expressed concern that the courts had interpreted it
to impose liability on insurers even if the policyholder was in blatant breach of a
term delimiting the risk. 13 They thought that the exclusion should not apply to a
provision which:
(1) defines the age, identity, qualifications or experience of a driver of a
vehicle, a pilot of an aircraft, or an operator of a chattel; or
(2) defines the geographical area in which a loss must occur if the insurer is
to be liable to indemnify the insured; or
(3) excludes loss that occurs while a vehicle, aircraft or other chattel is being
used for commercial purposes other than those permitted by the contract
of insurance.
8.35 In Issue Paper 2, we advocated a similar approach. We thought that the causal
connection test should not apply, for example, where a motor policy specified that
drivers must be aged 30 or over, and the vehicle was driven by a 20 year old.
The insurer should be entitled to refuse the claim, even if the accident was
caused by someone else’s fault. Similarly, if a marine insurance contract
excluded a war risk area, such as the Gulf, the insurer should not be liable for
any loss that took place in the Gulf, even if the location did not cause the loss.
The same should apply if a car insured for private use is being used full-time as a
taxi. There comes a point where the activity generating the loss is so far removed
from the activity covered by the policy that the policy should not apply at all.
11 Similarly, a clause which stated that the contract could be avoided if the premium was not
paid would also not fall within the definition. The failure to pay the premium would not be
likely to increase the risk of a loss.
12 New Zealand Law Commission, Some Problems of Insurance Law (1998) No 46, Ch 1.
13
New Zealand Insurance Co Ltd v Harris [1990] 1 NZLR 10; State Insurance Ltd v Lam
1996, unreported.
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