New Zealand needs a law change to stop people "ruining their lives" by not disclosing relevant information to their insurers, the Insurance and Financial Services Ombudsman says.
Karen Stevens said about 11 per cent of the 272 complaints her office received in the last financial year included non-disclosure as a problem.
She said the number was dropping, but not fast enough.
"For the 22 years we have provided a dispute resolution service, a constant stream of people have contacted us because their insurance claim has been declined, or their entire policy avoided because they left out information on the insurance application," she said.
"While some cases are clear, and people have deliberately failed to provide information they were asked for, in many cases people unintentionally leave out information, because they have forgotten, or they do not realise it is so important. The most common things people don't disclose are their pre-existing medical conditions, convictions, and claims history."
Customers are legally required to disclose all information that a prudent underwriter would consider material to the risk of the insurance.
But Stevens said many people did not understand what that meant.
"Because most consumers do not understand how dire the consequences of non-disclosure are and generally don't read the documents, they are unaware of the extent of the duty.
"Our real concern from the complaints we see is that consumers still don't appreciate that they need to tell the insurer about everything – not just what they think is relevant."
It was not until they tried to claim and were turned down because the insurer discovered something relevant in their medical history, for example, that they realised a problem.
Stevens said, once a person's policy had been avoided by one company, it could leave them unable to get cover from any other insurer, for anything. That could then make it hard to get a mortgage or take out finance on a car.
Providers of house, contents and vehicle insurance have signed up to a Fair Insurance Code, which requires their response to non-disclosure to be reasonable.
But Stevens said industry self-regulation was insufficient.
"As Insurance and Financial Services Ombudsman, I would like to see the law on non-disclosure changed to assist consumers who unintentionally leave out information when they apply for insurance," she said.
"A review of the law on non-disclosure is long overdue. We need legislation to bring us more in line with the law in Australia and the UK – preferably an Insurance Contracts Act to bring all insurance law together. This would help prevent many consumers from finding themselves in the difficult situation of being uninsured, or potentially, uninsurable."
Susan Taylor, chief executive of Financial Services Complaints Ltd, said most cases her office saw related to travel insurance.
People had often forgotten to disclose pre-existing medical conditions. "If they are travelling and require medical attention or have to cancel before they go because they have suffered a medical event, their claim is declined because they failed to disclose. We see a number of those cases."
She said in many situations, the insurance had been bought online. She said insurers could do more to highlight what was required.