Regulation of insurance business

New Zealand regulates the conduct of insurance business by legislation. There are separate statutes for non-life insurance and life insurance. The Insurance Companies Deposit Act 1953 and the Insurance Companies (Ratings and Inspections) Act 1994 are concerned with non-life insurance and contain express exclusions of life insurance from their provisions. Life insurance is separately regulated under the Life Insurance Act 1908. As Inter-no-Life offers only life insurance through the internet, the issue of special regulation as an insurer under New Zealand law arises only under the Life Insurance Act.

The principal requirements of the Life Insurance Act are:

• A company "carrying on in New Zealand the business of insurance upon human life or the grant of annuities" must deposit with the Public Trustee NZ$500,000 in cash or approved securities to be held in trust for policyholders (section 8).
• A foreign entity which "issues or is liable under policies of insurance …, or grants annuities, upon human life in New Zealand", before doing business in New Zealand, must appoint in writing a general agent for the service of legal processes (section 34).
• Every policy or other contract issued by a foreign life insurer to persons resident in New Zealand must contain an express term that the insurance company will abide by any decision of the High Court of New Zealand (section 35).

Breaches of legislative requirements may result in penalties both for the insurer and the agent appointed:

• The insurer is liable to a fine of up to $100 per day for each breach and may be prohibited by Ministerial order from transacting business in New Zealand absolutely or for a specified time if breaches continue for 3 months.
• The agent for an insurer who has not complied with the statutory requirements is liable to a fine of up to $500 for each non-compliance.

Whether these requirements apply to the activities of Inter-no-Life depends upon whether it is "carrying on in New Zealand the business" of life or annuity insurance or it is an entity which "issues or is liable under policies of insurance É, or grants annuities, upon human life in New Zealand".

The concept of "carrying on business" has been the subject of consideration by the Courts in New Zealand and influential jurisdictions for more than 100 years. The issue is essentially one of fact in each case but, from the case law, a list of possible factors has emerged:

• Does the foreign company employ any New Zealand resident agents to act on its behalf or manage, administer or deal with property in New Zealand?
• Is any part of management of the business in New Zealand? Is the "brain power" in New Zealand?
• Is there a place of business, staff or infrastructure in New Zealand?
• Has business been solicited in New Zealand?
• Have contracts been entered into with New Zealand resident entities for the supply of services to those entities?
• Have contracts been entered into, wholly or in part, in New Zealand? Have contracts been executed in New Zealand?
• Have negotiations leading to the transaction been conducted in New Zealand?
• Is there a degree of "system" involved in New Zealand?
• Is there a degree of regularity involved in the transactions in New Zealand? Is there a series of repeated transactions in New Zealand?
• Is there an element of continuity in New Zealand? Or was the transaction an isolated occurrence?
• Is there a "permanence" in New Zealand?
• Can a motive of profit be attributed to the undertaking?
• Have bank accounts been opened in New Zealand?
• Have expenses been incurred in New Zealand?
• Will the goods or services be delivered in New Zealand?
• Will the contract be performed in New Zealand?

To be carrying on business in New Zealand the company does not need to have a place of business in New Zealand nor have its central management and control in New Zealand.

The factors have emerged from cases which predate the existence and growth of the internet and electronic commerce. The references to physical presence and activity are not surprising. The New Zealand courts have yet to consider internet insurance in the form of the case study example. In my view, having regard to the intention of the legislation and the new business models which have emerged, the extent of a physical presence would be unlikely to determine the outcome if the present facts now come before a New Zealand court.

The provisions of the Act are clearly aimed at the protection of New Zealand policy holders, especially in relation to policies issued by foreign insurers. A very low threshold is likely to be adopted, consistent with the need to protect local consumers. Possibly even the offer of life insurance to New Zealand persons on a systematic basis (which a permanent website would provide) would be sufficient. Certainly if any policies are issued to New Zealanders, the insurer is likely to be held to be carrying on business in New Zealand.

The threshold for the other requirements is arguably even lower as "doing business" has been held to involve a less systematic pattern of activity than "carrying on business".

On the case study, Inter-Life has offered life insurance policies internationally and without limiting the countries from which it is will accept proposals electronically. Its web-based offers are capable of being received and responded to by New Zealand persons but the case study does not indicate whether any policies have been issued to, or on the lives of, New Zealand residents. The case study also indicates that local law firms have been appointed in "each of the countries of operation" without identifying the countries.

If a local agent has been appointed in New Zealand or if any policies have been issued to, or on the lives of, New Zealand residents, although the position has not been the subject of court determination, Inter-no-Life is likely to be held to be subject to the requirements of the Life Insurance Act. It would appear to be in breach of at least two of the principal requirements (deposit, policy term). Whether it is in breach of the third depends on whether it has appointed a New Zealand agent.

The position is less clear if the extent of its New Zealand activities is merely the publishing of its business promotion on the internet. The New Zealand courts have not decided the application of the Act to internet-based insurance business. It is arguable that the Act does not apply before the issue of a policy in New Zealand but a lower threshold, in the interests of consumer, is possible.

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Protection of consumer rights

The regulatory provisions discussed above are a specific form of consumer protection in the area of life and annuity insurance. In addition, New Zealand has more general consumer protection legislation.

The Consumer Guarantees Act 1993 imposes, for the benefit of consumers, guarantees in respect of the supply of goods and services and provides remedies for their breach. Life insurance falls into the definition of "service". The statutory guarantees, by law, form part of any offer of life insurance to New Zealand resident consumers and cannot be excluded by contract.

The statutory guarantees are that the services:

• Will be carried out with reasonable care and skill (s.28)
• Will be reasonably fit for any particular purpose and of such a nature and quality as is reasonably expected to achieve any particular result made known by the consumer to the supplier (s.29)
• Will be completed in a reasonable time where the time has not already been fixed by contract or left to be determined by contracts or by a course of dealing between the parties (s.30)
• Will cost no more than a reasonable price in any case where the price is not determined by contract or left to be determined by contracts or by a course of dealing by the parties between the parties (s.31)
• If a failure under any guarantee can be remedied, the consumer may require the seller to remedy it within a reasonable time. If the supplier does not remedy the failure at all or within a reasonable time, the consumer may have the failure remedied elsewhere and recover from the supplier the reasonable costs incurred in so doing or cancel the contract. If the failure cannot be remedied or is of a substantial nature, the consumer may: Cancel the contract.
• Obtain damages for a reduction in the value of the service supplied below what was charged.
• In any case, obtain damages for consequential loss or damage which was reasonably foreseeable as liable to result from the failure.
• On the case study, Inter-no-Life may face an allegation that its investment activities (exclusive trading on Nasdaq) lack reasonable skill and care. No other potential failure to meet the statutory guarantees arises.

The Fair Trading Act 1986 is concerned with misleading conduct in trade. Inter-no-Life's activities will be regarded as "trade". The Act covers conduct in New Zealand and extends to conduct outside New Zealand by any person resident or carrying on business in New Zealand to the extent that such conduct relates to the supply of goods and services in New Zealand.

It might be argued that web publishing by Inter-no-Life to persons in New Zealand is conduct in New Zealand. Under similar Australian legislation, a telephone or fax communication with a party in Australia has been held to be conduct in Australia and a New Zealand court is likely to reach a similar conclusion. It is doubtful however that the extension from a one-to-one communication to web publishing is a sound one.

Even if publishing a web page which is received in New Zealand is not conduct in New Zealand but outside New Zealand, it may be caught by the extension. The web page offering insurance worldwide except Cyprus relates to the possible supply of services in New Zealand. Whether the extension applies will depend upon whether a New Zealand court regards Inter-no-Life as carrying on business in New Zealand within the meaning of the Fair Trading Act. As in the case of the Life Insurance Act, the issue is factual, applying legislation intended to protect consumers. There is a risk that Infer-no-Life's activities will be held to be subject to the Fair Trading Act but there is no instance to date of court action against foreign parties for web site content received in New Zealand.

If the Fair Trading Act applies to Inter-no-Life's web activities, there would appear to be possible breaches of the Act in relation to the use of the Dior appearance, the claims about the cost and comprehensive nature of the cover offered and the information on AIDS in Australia in respect of:

• Section 9, by engaging in conduct in trade that is misleading or deceptive or is likely to mislead or deceive
• Section 11, by engaging in conduct in trade that is liable to mislead the public as to the nature, characteristics, suitability for a purpose or quantity of services
• Section 13(b), by falsely representing that its service is of a particular kind, standard, quality or quantity
• Section 13(e), by falsely representing that its services have any sponsorship, approval, endorsement, performance characteristics, accessories, uses or benefits
• Section 13(g), by making a false or misleading representation with respect to the price of any service
• Section 13(h), by making a false or misleading representation concerning the need for any services.

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Jurisdiction and governing law

The case study does not indicate that the Inter-no-Life policy contains jurisdiction or governing law terms. As indicated above, if the activities of Inter-no-Life are subject to the Life Insurance Act, there is a legislative requirement that the policy contain a provision whereby the company agrees to abide by any decision of the New Zealand court and the company is required to have a local agent for the purposes of accepting service of legal proceedings.

Under New Zealand procedural law, New Zealand proceedings can be served in New Zealand on a foreign corporation in certain circumstances which include service on an agent authorised to accept service. Service of New Zealand proceedings outside New Zealand is permitted without leave in a lengthy list of circumstances, including proceedings:

• relating to a contract made in New Zealand, to be wholly or partly performed in New Zealand or, by its terms or by implication, to be governed by New Zealand law
• relating to a breach in New Zealand of a contract wherever formed
• to compel or restrain the performance of any act in New Zealand
• seeking damages for any act or omission done in New Zealand
• against a person who has submitted to the jurisdiction of the New Zealand court.

The Life Insurance Act requirements are intended to provide a basis for New Zealand jurisdiction and to simplify access to it. If there has been a breach of those requirements, a court may be prepared to imply the obligations in any event to assist a New Zealand plaintiff. Having regard to the matters listed above, it is likely that the New Zealand court will regard itself as having jurisdiction in respect of any dispute arising in respect of a policy issued to a New Zealand resident, whether or not it holds it to have been made or entered into in New Zealand.

In the absence of an express or implied term as to governing law, the place where a contract is made is regarded as an important factor in determining the governing law. Generally, New Zealand law regards a contract as formed when and where communication of acceptance is received. In cases of instantaneous modes of communication such as telephone, fax or telex, the contract is formed when and where the acceptance is received. In the case of mail delivery, the postal acceptance rule may deem acceptance to occur when and where the acceptance is posted. If the postal acceptance rule applies to internet communication, it would change the time and place of contract formation. A contract of life insurance is usually formed by the insurer (based, in this case, in Cyprus) accepting the proposal of the insured (resident, in this case, in New Zealand).

If the transaction is not governed by the postal acceptance exception, the contract will be formed in New Zealand when the New Zealand insured receives notice of acceptance from the insurer.

The New Zealand courts have not determined, in the case of either an internet email exchange or a communication by web form, whether the communication is governed by the postal acceptance rule or the point at which acceptance is received. Differing views have been expressed by commentators and the issues are currently being considered by the Law Commission which may recommend legislation. In international sales of goods, the Sale of Goods (United Nations Convention) Act 1994 adopts the Vienna Convention and requires receipt of acceptance by the offeror for the formation of a contract of sale.

In the absence of a contrary legislative provision, in my view, a New Zealand court is unlikely to extend the postal acceptance rule to internet communication generally and is even less likely to do so in cases of web-form completion which are more closely analogous to direct instantaneous communication (such as telephone) than to postal communication (which more closely resembles email).

A New Zealand court is likely to conclude that the Inter-no-Life contract of life insurance with a New Zealand resident insured was formed in New Zealand (on the receipt of acceptance from Inter-no-Life by the insured), governed by New Zealand law and subject to the jurisdiction of the New Zealand courts.

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Taxation

The principal forms of tax in New Zealand are income tax and Goods and Services Tax.

Income tax liability can arise from either tax residency or income source. On the case study facts, Inter-no-Life is unlikely to be liable for income tax on a residency basis but it will be subject to New Zealand tax law in respect of income derived from New Zealand. A non-resident life insurer will be liable to pay income tax on gross income received from policies offered or entered into in New Zealand (s.CN3, Income Tax 1993) unless there is an applicable Double Tax Agreement between New Zealand and the insurer's country of residence. There is no Double Tax Agreement between New Zealand and Cyprus. Inter-no-Life will be liable for New Zealand income tax on the policies issued to New Zealand residents. The calculation of assessable income depends upon the effect of apportionment provisions.

Goods and Services Tax (GST) is not payable on "financial services" which are the subject of express exemption. Life insurance is generally included in the exemption but is subject to an exception in relation to cover for fatal accidents. In this case, whether the exception for financial services applies is not determinative. The view of the Inland Revenue Department is that life insurance offered to non-resident life insurers is not subject to GST.

Inter-no-Life's policies will not be subject to GST.

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Protection of privacy rights

New Zealand protects privacy rights through the Privacy Act 1993 which regulates the collection, use and disclosure of personal information by agencies, whether public or private sector. Regulation is provided in the form of 12 information privacy principles.

The principle relevant to the case study is principle 5 which states:

Storage and security of personal information

An agency that holds personal information shall ensure:

(a) That the information is protected, by such security safeguards as it is reasonable in the circumstances to take, against:
(i) loss; and
(ii) access, use, modification or disclosure, except with the authority of the agency that holds the information; and
(iii) other misuse; and
(b) that if it is necessary for the information to be given to a person in connection with the provision of a service to the agency, everything reasonably within the power of the agency is done to prevent unauthorised use or unauthorised disclosure of the information.

It is doubtful that the provision of the Privacy Act 1993 apply to Inter-no-Life. "Agency" is defined broadly and with detailed expansion for clarification. Significantly the detailed provisions are, without exception, obviously New Zealand institutions. Nothing in the definition of "agency" indicates an intention to regulate overseas data collection even if it relates to New Zealand persons.

The single specific provision in respect of information held overseas supports that conclusion. Section 10 provides that, for the purposes of principle 5 (among others), information held by an agency includes information that is held outside New Zealand by that agency, where that information has been transferred out of New Zealand by that agency or any other agency. No such provision would be necessary if "agency" was intended to apply to overseas parties. The extension of the obligation in section 10 is expressly limited to information transferred out of New Zealand by an agency, the intention being to prevent avoidance of the obligations of the Act by New Zealand agencies by the simple expedient of moving the information offshore. The section does not extend to information received and collected overseas by a foreign party.

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Conclusion

Most of the principal conclusions advanced on the issues identified are necessarily tentative. New Zealand law, whether in the form of legislation or case law, has not dealt expressly with the issues raised by internet commerce, either generally or with reference to insurance. In the absence of express legislation or case law, my conclusions are based on an assessment of the likely outcome if a case were taken at present, applying principles of statutory interpretation and decided cases which are possibly analogous. These, and other issues relating to e commerce, will become clearer over time, either as a result of legislative reform or case law.

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