High Court rules late notification relief does not apply to a discretionary mutual

What happens if you notify your insurer of a claim, but you’re out of time? In a recent case, an insured said it was entitled to claim $73 million from its insurer, even though it notified the claim more than 4 years too late. Well, a quirk of NZ insurance law means that the insurer may still be on the hook, despite what the policy says. How can that be?

For many years, councils across New Zealand were members of Riskpool, a not-for-profit mutual set up to provide professional indemnity cover to councils. Councils were required to notify Riskpool of claims made against them in each fund year.

Professional indemnity policies typically work this way. They are “claims made and notified” policies: they only cover a claim made against an insured in a policy year if it is notified in that policy year. Triggering cover based on when a claim is made and notified, rather than when the underlying event occurs, provides more certainty to underwriters and reduces the risk of long-tail exposures.

In 2015 and 2016, the owners of the Oaks buildings in Queenstown sued the Queenstown Lakes District Council, alleging that the Council carelessly inspected the buildings during construction. The Council didn’t notify Riskpool of a claim at the time. It delayed for more than 4 years, finally notifying Riskpool in 2020. The failure was an internal oversight: the Council accepted that “different parties within Council were not talking with each other”.

Riskpool’s claims manager rejected the claim as out of time. The Council accepted that its claim was late but still sued Riskpool for wrongly declining the claim.

Enter section 9 of the Insurance Law Reform Act 1977. It says that a time limit for claiming under an insurance policy only applies if the insurer has been so prejudiced that it would be inequitable to allow the insured to claim.

On its face, section 9 applies to all insurance policies, and the Court of Appeal has ruled that this includes claims made policies. Unless an insurer can show prejudice, section 9 removes the requirement for a claim to be notified within the policy period – the very essence of a claims made and notified policy.

Section 9 was a real problem for Riskpool. It accepted that it would not be prejudiced by a claim out of time, because, if section 9 applied, its reinsurers would respond. As the judge said, “if s 9 applies, that is the end of the case”.

It was a big “if”. The Court ruled that Riskpool was a discretionary mutual, not an insurer, and so section 9 did not apply to it at all.

But what about insureds and insurers to whom section 9 does apply? Change is coming. The new Contracts of Insurance Act amends the law from November 2027, nearly 30 years after a change was first recommended by the Law Commission. The new version of section 9 will not apply to claims notified more than 90 days after the end of the policy period.