This is one of those cases where the law produced an interesting result that suggests a broader law reform discussion may be useful.
The deceased member failed to disclose two medical conditions (depression and a form of blood cancer) when she applied for death cover in 2009 as a current member of the fund. After this initial cover commenced, the trustee changed insurers and the new insurer wished to avoid payment of the death benefit due to interactions that had occurred between the former insurer and the deceased member.
The case involved answering the following questions:
- Did the deceased member fail to comply with the duty of disclosure?
- Did the deceased member actually make a fraudulent disclosure?
- Was the insurer entitled to avoid cover? and
- Were the trustee’s and insurer’s decisions fair and reasonable in the circumstances?
Whether the deceased failed to comply with the duty of disclosure required an analysis of recent case law opining on the duty as set out in section 21 of the Act. AFCA noted that Sharma v LGSS Pty Ltd  FCA 167 establishes that section 21 did not apply to a person seeking cover under a group insurance arrangement in 2009. This was because the section applied to the ‘insured’ as the contracting party. In a superannuation group insurance arrangement, the trustee is the insured policy owner while the deceased was the life insured.
AFCA also noted that section 32 of the Act did not apply at the time the deceased completed her application for cover as it only applied to a ‘proposed fund member’ and here the deceased was already a fund member having joined the fund in 2003. She was actually simply a proposed life insured, but not a proposed fund member. This meant the deceased had no duty of disclosure at the time she applied for cover. (It is worth noting amendments to this section took effect in 2014.)
AFCA then turned its attention to whether the deceased had made a fraudulent misrepresentation which involved analysing the facts to determine whether the deceased made a representation knowingly without a belief in its truth or recklessly not caring whether it was true or not. After a careful review of medical records, AFCA held the deceased had made a fraudulent misrepresentation to the previous insurer at least with respect to one of the questions she answered in her application form. However, whether the fraudulent misrepresentation could be carried over to the current insurer required further careful statutory analysis.
Section 29 of the Act permits an insurer to avoid paying out a claim if a person who became the insured made a misrepresentation to the insurer before the contract commenced. If the misrepresentation was fraudulent, the insurer can avoid cover at any time, subject to meeting some other requirements of the section.
Section 25 of the Act provides that where the misrepresentation was made by the proposed life insured (in this case, the deceased) before the contract was entered into, the Act has effect as if the misrepresentation had been made by the insured (that is, the trustee in the superannuation context).
Section 27A(3) of the Act also operates so an insurer can avoid cover with respect to a particular life insured under a group insurance arrangement if that person made a fraudulent misrepresentation. It does this by, in effect, treating each life insured as a separate contract for the purpose of determining the insurer’s rights.
The insurer provided a retrospective underwriting opinion from the previous insurer, as evidence the previous insurer would have declined cover if it had known about the deceased’s actual medical conditions (that is, but for the fraudulent misrepresentations). This evidence did not assist. This was because the law only applied where the deceased had made the misrepresentation to the actual insurance company wishing to avoid cover, not a previous insurance company. Basically, the language in section 29 does not treat a misrepresentation to one insurer as a misrepresentation to another insurer. While arguments can be made that the law may need to change, (for example, Financial Service Council insurance takeover terms are common practice across the superannuation industry) – AFCA cannot make a determination contrary to law. So if change is required – this task needs to be done by Parliament changing the law and the superannuation and insurance industries lobbying for that to happen.
The final issue for AFCA to reflect on was whether the decisions of the trustee and insurer were fair and reasonable. Here the insurer had no statutory right to avoid paying out the claim to the trustee so its decision was clearly not fair and reasonable in the circumstances. The trustee had supported the insurer and pointed out to AFCA that the effect of the insurer not being able to decline the claim in these circumstances would have a detrimental effect on premiums given a deficient claim would be required to be paid. The argument was not persuasive. The trustee’s actions in supporting the insurer were also not fair and reasonable.
Case number 613562 & 619820, dated 11 July 2019
The member had taken out income protection insurance (IP) through her superannuation fund which involved completing an on-line application form and answering various questions about her medical history. A year later, she claimed under the policy and the insurer investigated her medical history. Thereupon, the insurer discovered new medical information resulting in it deciding to not pay out the claim on the grounds of misrepresentation and non-disclosure. The trustee accepted the insurer’s avoidance of the cover and so both the trustee’s and the insurer’s decisions were under review at AFCA for their fairness and reasonableness.
The member’s medical records indicated she had, over a number of years, a history of hospitalisation for schizophrenia, had admitted to cannabis use during one of those hospital visits and had one atypical pap smear result. Notwithstanding this medical history, the member had answered ‘no’ to three questions on the application form concerning psychological/emotional conditions, drug use and cancer.
The member argued she had never received any written information confirming she had a mental disorder and her reasons for being admitted to hospital differed to the medical records. Her reason for applying for IP cover related to a back injury after an accident and, therefore, the questions she had answered in the negative were of no real consequence to the insurer’s decision to provide IP cover.
AFCA found nothing to suggest the medical records and reports obtained by the insurer were inaccurate. It held that the “starting position is that medical records are accurate unless there is convincing evidence to the contrary”.
The insurer provided a retrospective underwriting opinion, assuming correct answers to the three questions had been provided. This underwriting opinion was evidence that it would have declined the cover at the outset if the member had not made misrepresentations about her health conditions.
In the application form, the insurer gave prominent notice of the duty of disclosure and required the member to acknowledge this duty before proceeding with the application.
The above factual matrix meant the insurer had a right under section 29 of the Insurance Contracts Act 1984 (Cth) to avoid the claim. Fraud did not need to be proved as the claim was being made within the first three years of cover commencing.
AFCA then had to consider if the trustee and insurer’s respective decisions were fair and reasonable in their operation.
First, in respect of the insurer, AFCA noted it had done everything in its power to identify and notify the member of the duty of disclosure, the questions on the application form were clear and unambiguous, its decision to avoid cover was consistent with its underwriting principles and did not ‘single out’ the member and it had refunded the premiums. On this basis, the insurer’s decision to avoid the claim was fair and reasonable in its application to the member.
Secondly, in respect of the trustee, its duty is to ensure the insurer acted lawfully and in accordance with policy terms. The trustee must pursue claims (as the policy owner) if it disagrees with the insurer. In this case, the trustee had a claims committee that had independently reviewed the insurer’s decision and decided it was correct. For these reasons, the trustee’s decision to agree with the insurer was also fair and reasonable in its operation to the member.
Case number 608800 & 614004, dated 14 June 2019