Consumer Guarantees Act and Insurance Services – Lessons from Sleight

Insurers should be mindful of the Consumer Guarantees Act 1993 (CGA) when providing services to insureds under or outside of policies, making representations about services, and as regards the performance of those services (including by their contractors).

In Sleight v Beckia Holdings Ltd [2020] NZHC 2851 the High Court decided that an insurer providing services relating to an earthquake repair process had breached the CGA guarantee to carry out those services with reasonable care and skill, and this included vicarious liability for certain breaches by its contractor which resulted in defective repairs. An insurer may be liable for damages if it or its contractor fails to comply with the guarantee.

Insurers should also be mindful of the “no contracting out” provisions in the CGA including when settling claims, as contracting out (unless excepted) amounts to an offence under the FairTrading Act 1986 (FTA), for which significant fines may be imposed.

The CGA came into force in 1993. It provides protection to consumers both in relation to the provision of goods, and the provision of services.

Under the CGA consumers are, broadly, people receiving the services for personal, domestic or household use.¹ The Act does not apply to commercial claims.

The CGA sets out statutory guarantees for the supply of goods and services. The Sleight case was concerned with the supply of services. The Act defines “Services” very broadly to include:

Rights … benefits, privileges, or facilities that are, or are to be, provided, granted, or conferred by a supplier; and
… includes … under (iii) a contract of insurance …

Services can be both what is actually provided, and what is “to be provided”. A representation (including a promise, whether in a contract or otherwise) by the service supplier to a consumer as to what will be done is therefore subject to the guarantees that:²

1. The service will be carried out with reasonable care and skill;
2. The service (and any product resulting from it) will be reasonably fit for the purpose made known to the supplier;
3. The service will be completed within a reasonable time;
4. The consumer is not liable to pay more than a reasonable price (where not determined by the contract).

It is not necessary that the service supplier and consumer have a contractual relationship. The CGA captures services provided both under a contract and outside it.

Furthermore, where a service supplier engages someone else to carry out the promised services, and that person’s default results in breach of the reasonable care and skill warranty, the service supplier remains liable to the consumer under the guarantee. The service supplier may therefore be responsible for the negligence of its employees, agents and its independent contractors.³

Under s32(c) CGA a consumer may obtain damages from the supplier for breach of the guarantee:

for any loss or damage to the consumer resulting from the failure … which was reasonably foreseeable as liable to result from the failure.

Under s43(1) the supplier may not contract out of the provisions of the Act, subject to some important exceptions. For current purposes the key exception to s43(1) is s43(7) CGA which relates to agreements to settle or compromise claims under the CGA, discussed below.⁴

It is an offence against s13(i) FTA for a supplier to purport to contract out of the CGA, other than in accordance with the exceptions. Contravention of s13 FTA can render an individual liable for a fine of up to $200,000, and a company up to $600,000.

The Sleights’ property was damaged by the Canterbury Earthquakes and the insurer, IAG, took steps for it to be repaired under its managed repair programme through Hawkins as project manager and Farrells, the builder. The repair was deficient, and the Sleights brought proceedings against Hawkins, Farrells, IAG and QBE (Hawkins’ insurer). The Court held that IAG was liable to indemnify the Sleights for the further costs actually incurred in repairing the home to a “when new” condition. The Court also, however, addressed the merits of other causes of action, including under the CGA.

The Court found IAG was a supplier of services to the Sleights under the CGA in respect of its “out of policy” services consisting of “arranging the reinstatement work to repair the … damage … through the Managed Repair Programme”.⁵ The Sleights were not a party to the contract between Hawkins and IAG and were unaware of its terms. For CGA purposes the relevant services were defined by IAG’s representations to the Sleights about the managed repair programme with Hawkins, IAG’s documents provided after the earthquakes, and the actions that IAG had taken towards implementation.⁶

The Court found that IAG was subject, by virtue of the CGA, to a guarantee that these out-of-policy services would be carried out with “reasonable care and skill”. IAG had to provide the services to the standard of an “ordinary supplier relating to the nature of the service supplied”, not as a builder or contractor involved in the construction industry.⁷ The Court found IAG did not perform the out-of-policy services with reasonable care and skill, noting the following:⁸

1. There was confusion between IAG and Hawkins about whether Hawkins had a responsibility to oversee the quality of the building work;
2. IAG ought to have been aware from its dealings with Hawkins that Hawkins would not, and was not, overseeing quality;
3. IAG knew the builder’s work was of poor quality;
4. IAG’s continued payment of the builder’s invoices, even though it was aware of difficulties with its work – including after the Sleights had terminated their contract with the builder and after IAG had received reports by building surveyors identifying defective work.

The Court also considered that IAG was vicariously liable for Hawkins’ breaches of the CGA.⁹

The Court noted that because of s43 CGA (no contracting out) IAG could not rely on any limitation and exclusion clauses contained in the building contract between the builder and the Sleights (but also expressly for the benefit of IAG).¹⁰

Insurers should be aware of the breadth of the CGA where an insurer is providing claims-handling services to consumers outside (as well as under) the policy terms. The insurer needs to be aware of what services it is providing, or representing that it is, or will provide, and see that reasonable care is exercised in relation to the provided/represented services.

Where the insurer represents that it is providing certain services, and then gets others to carry out those services to consumers, the services still need to be provided with reasonable care. The insurer will be liable for a breach of the guarantee, not only if its servants or agents fail to exercise reasonable care, but also if its independent contractors fail to do so.

Particular consideration needs to be given to s43 CGA, the “no contracting out” clause, and also to s13(i) FTA and the possible significant penalties under s40 FTA. As noted earlier, these arise where a service supplier is found to have purported to contract out of provisions of the CGA where an exception does not apply.

There are a number of situations this could impact on. The obvious one is terms of agreements prior to the provision of the services. The other is a settlement and discharge either at the conclusion of the handling of a claim, or as part of the resolution of a post-claim dispute between insurer and insured.

Arrangements Prior to the Provision of Services

In Sleight, the agreements containing provisions excluding/limiting the liability of IAG (and Hawkins) were between the Sleights and Farrells. The clauses applied to benefit IAG (and Hawkins) under the Contracts Privity provisions of the Contract and Commercial Law Act 2017.¹¹ The Court found, however, that as a result of s43(1) CGA, IAG (and Hawkins) could not rely on these clauses in defence of the CGA claims.

Discharge and Settlement Agreements

Section 43(1) CGA (the “no contracting out” provision) is subject to certain exceptions, including s43(7) which says that:

Nothing in [s43(1)] prevents a consumer who has a claim under this Act from agreeing to settle or compromise that claim.

In an insurance context, an agreement “to settle or compromise” a claim may be in a discharge form (by deed) where there is no dispute between insurer and insured, or in a settlement and discharge deed following resolution of a dispute between the parties.

In both cases there may be a clause in the deed to the effect, for example, that:

Payment settles all obligations, howsoever arising, in contract and tort [or in negligence], in equity and under statute

Or

Payment settles all claims, whatsoever, for which the insurer may be directly or indirectly liable arising from the damage.

Putting aside the potential application of s43(7), these clauses would be ineffective under s43(1) insofar as they purport to discharge the insurer’s liability under the CGA. They could also amount to purporting to contract out of the guarantees under the Act, with the attendant offence and potential fine under the FTA.

Section 43(7) CGA on its face says that a consumer can agree to settle claims under the CGA. There is nothing in s43(7) which indicates that the consumer needs to be aware of any claim, or to have made a claim under the CGA, prior to agreeing to settle it. All that is required is that the consumer “has a claim”. That is to say that a claim exists at the time of the settlement.

The question then is whether the reference to “agreeing to settle or compromise that claim [i.e. a claim under the CGA]” requires an explicit reference to claims under the CGA in the settlement agreement, or can be by a generic reference to say “all claims howsoever arising” or “all claims under statute”. Section 43(7) is open to interpretation on this point. However, given it is consumer protection legislation, it is possible a Court would find that there needs to be a specific reference.

Adding some weight to this view are the obiter comments of the Supreme Court in Prattley v Vero¹² concerning whether a generic settlement provision in a deed of settlement and discharge engaged s6(1)(c) of the Contractual Mistakes Act (CMA).¹³ The settlement term in that case referred to full and final settlement of any claims both existing and future and known or unknown.

Section 6(1) CMA¹⁴ provided that the Court may grant relief to a party under the Contractual Mistakes Act where certain criteria were met and:

(c) where the contract expressly or by implication makes provision for the risk of mistakes, the party seeking relief or the party through or under whom relief is sought … is not obliged by a term of the contract to assume the risk that his belief about the matter in question might be mistaken. (emphasis added)

So the question was whether the generic settlement term (claims existing and future, known or unknown) was a term of the contract that obliged the insured to assume the risk that they were mistaken. The Supreme Court expressed the view that a generic settlement clause may not be sufficient to engage s6(1)(c) and that “some specificity” was required. The Court’s reference to “specificity” suggests that a specific reference to the CMA, or to the parties assuming the risk that they were mistaken, may have been needed.

There is, therefore, some doubt whether a generic settlement clause in a deed of discharge, or deed of discharge and settlement, will be sufficient to engage the exception to s43(1) set out in s43(7) CGA. If it is not sufficient, the discharge/settlement will not be effective to settle any claims under the CGA.

The decision of the High Court in Sleight has highlighted the application of the CGA to services provided by an insurer. Insurers need to be mindful of the CGA when providing services under policies, making representations about services to be provided outside the policy, and as regards the performance of those services (including by its contractors). They also need to take care not to purport to contract out of the CGA guarantees, save where an exception applies, including because this could result in the imposition of large fines under the FTA. Settlement agreements are excepted. However, care is needed to ensure that the settlement term is well drafted and complies with the requirements of the exception.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.