What do I have to do to cancel this policy?

• The obligation of good faith is an implied term of an insurance contract.
• Insurance contracts must be cancelled in accordance with s 37 Contract and Commercial Law Act 2017 (CCLA).
• Be clear when you wish to cancel a contract. It is better to cancel in writing and arguably useful to refer to s 37 CCLA.
• It is an open question whether CCLA affects the current law relating to avoidance of an insurance policy.

An insured may do something that breaches the fundamental obligation of good faith that underpins all insurance contracts.  In those circumstances, the insurer may wish to bring an end to the insurance contract and its obligations.  There has been some controversy over whether the CCLA applies to cancellation of an insurance contract or the common law applies. Taylor provides some answers.

The CCLA sets out the law generally for cancellation of contracts.  Prior to the CCLA, or rather its predecessor the Contractual Remedies Act, the common law governed cancellation.  Section 37 CCLA allows cancellation of contracts when the term breached is essential to the contract.  A term can be impliedly essential.

On 7 May 2019 Cooke J decided in Taylor v Asteron Life Limited [2019] NZHC 978 that the CCLA applied to insurance contracts, so the only way such a contract could be properly cancelled was by following s 37.  His Honour then had to determine if Asteron had properly cancelled the insurance contract by applying the law as set out in s 37.  Cooke J held that the contract between Taylor and Asteron had as an implied essential term the duty of good faith.  He found that, “almost by definition in this type of contract, the performance of a term of this kind is essential to the other party.”  He held that if the insured breaches the duty of good faith, the insurer is entitled to cancel the insurance contract under s 37.

The fact that the CCLA applies to cancellation of insurance policies cuts both ways.  The Court’s decision that the CCLA applied to cancellation meant Asteron was bound by all the relevant sections, including that requiring it to make it known to the insured that the policy was cancelled.  While cancellation can be oral, by conduct, or in writing, the Court found that Asteron had been ambiguous about cancellation.  It only removed that ambiguity when it served its briefs of evidence for trial.  The case emphasises the need to be clear in communications with the insured that a policy is cancelled.

This case reaffirms that Insurers must also be careful not to affirm an insurance contract with knowledge of the insured’s breach of good faith.  If they do, s 38 CCLA means they cannot rely on the breach for a later cancellation.

Cancellation is not to be confused with avoiding a policy.  Where the insured breaches their duty of good faith by misleading the insurer when providing information prior to the formation of the insurance contract, the insurer can avoid the policy.  The insurer must refund all premiums paid by the insured and the insurance contract is treated as though it never existed – it is void ab initio (void from the beginning).  If the contract never existed, then there is nothing to which the CCLA can apply – there is no contract to breach or cancel.  Whether this continues to be the position given Taylor remains to be seen.

[Read the decision in full]