When can an insurance company avoid paying out a claim on the grounds the member has made a fraudulent misrepresentation when completing the application for the underwritten cover?
The insurer’s right to avoid the contract of insurance is found in section 29(2) of the Insurance Contracts Act 1984 (Cth) (ICA) and, in this case, the member complained to the Tribunal, lost that first decision and then appealed to the Federal Court. The Court found the Tribunal had erred in law and sent the matter back to the Tribunal for further consideration.
The member was unable to work due initially due to a major depressive disorder which then developed into schizophrenia. The first symptoms of depression probably commenced in 2006 and the first medical consultation was May 2007. In March 2007, the member applied for $1,080,000 total and permanent disablement cover. The written application included the following questions:
“Have you ever had high blood pressure, heart or vascular disease, chest pain, rheumatic fever, stroke, diabetes, kidney, bladder, liver or bowel disease, asthma or any lung disease, blood disorder, epilepsy or fits, multiple sclerosis, tumour or cancer?” and
“Have you ever had any mental disorder, depression, stress, anxiety or chronic fatigue or any eye, ear or skin disorder?”
The member answered ‘no’ to both of these questions. Interestingly, the application also contained a declaration which contained the following wording:
“…I consent to my personal information (including health and sensitive information) being collected, used or disclosed by [Former Insurer] or its external service providers/contractors as contemplated in this form, including collecting it from or disclosing it to any medical practitioner or third party as required to assess, verify or process my application. This consent applies to any health and sensitive information [Former Insurer] collects on this form or future forms in relation to this insurance.”
In 2000 the member’s wife died of an ectopic pregnancy and malpractice at the hospital that was treating her. This resulted in the member having to leave work to look after his young family. He also commenced legal proceedings in relation to his wife’s death which included a nervous shock claim. At this time, he was an outpatient at a community mental health centre who assisted him in coping with his grief. He was prescribed medication for depression. Evidence was the depression settled and, in time, he returned to part-time work whereupon he became a member of the fund.
The insurer agreed to pay the automatic default cover but denied the underwritten cover on the grounds the member had not disclosed in his application the medication for depression he took after his wife’s death. There was also medical evidence that the member had tachycardia and had been taking medication for that condition for some time.
The Tribunal had to consider the test for what amounts to a fraudulent misrepresentation. Here it quoted from Mann’s Annotated Insurance Contracts Act 6th Edition at [29.20.2] that:
“…It is well settled as to what constitutes a fraudulent misrepresentation. A statement is made fraudulently if it is made with knowledge of its falsity or without belief in its truth or recklessly, not caring whether it is true or false. This formulation, which dates back to Derry v Peek (1889) 14 App Cas 337 at 347 has been adopted in cases concerning s 29(2) …”.
The Tribunal also noted the decision of the NSW Court of Appeal in Dawes Underwriting Australia Pty Ltd v Roth  NSWCA 152 where the Court found that the test to prove fraud is a “high hurdle but that is the nature of an allegation of fraud which involves a mental element not required in the case of carelessness or negligence”.
The member’s answering of the questions noted above in the negative underpinned the insurer’s view that the member had made fraudulent misrepresentations entitling it to deny the claim. The Tribunal carefully analysed the precise wording of each question and relevantly noted that they grouped unrelated medical conditions together like ‘heart disease’ with ‘liver or bowel disease’ and this made it difficult for a prudent person seeking cover to respond accurately. The second question grouped ‘depression’ with an ‘eye or skin disorder’. The questions themselves lacked both internal and external logic and were confusing.
The Tribunal also found that if a prudent person completing the application for cover was confused by the medical questions they would take comfort from reading in the declaration that “to the extent they might have carelessly omitted a relevant representation, the subsequent compulsory ‘Medical Examination by own Doctor’ – pursuant to an insurer provided ‘medical examiner’s report’ as well as a ‘resting ECG’ would rectify any omissions”. Further, the form made it clear that the insurance company was effectively being given ‘carte blanche’, from a legal perspective, to fully utilise its investigative powers. In these circumstances, while the Tribunal agreed the member had answered the relevant questions incorrectly, as he had consulted with medical or allied health professional for claimed medical conditions, he had also given an explanation as to why this had occurred. For example, he did not regard tachycardia as heart disease or feeling terribly sad after his wife’s death as a mental disorder. In these circumstances, the high hurdle of fraudulent misrepresentation had not been made out. The necessary mental element was simply not there on the facts to make a finding of fraud.
The Tribunal substituted its own decision and effectively ordered the insurer to pay out the claim with interest in accordance with section 57 of the ICA.
The insurance company refused to pay out under an income disability policy initially on the grounds the member’s disability did not stop him coming back to work. Later they refused to pay on the grounds he did not have a valid “Well Control Certificate” which was compulsory paperwork under the terms of his employment.
In February 2015 the member commenced employment on an offshore oil rig on a four weeks on four weeks off ‘fly in fly out’ basis. He was employed as a rig manager and tool pusher which involved supervising up to twenty people and working long days with some heavy lifting. In October 2015, he hurt his shoulder at home and this injury got progressively worse over time. He consulted a chiropractor but with his symptoms not improving he failed to return to his next shift in March 2016.
The insurer and, by extension, the trustee were essentially arguing the member had failed to satisfy the definition of ‘temporary incapacity’ contained in regulation 6.01 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulation). That definition requires the member to cease to work because of ill-health, whether physical or mental. The insurer argued that the member had ceased work due to the lack of necessary paperwork not his shoulder injury and, therefore, he did not satisfy the SIS Regulation.
The Tribunal held that the insurer’s contentions were misconceived as the SIS Regulation is not an additional hurdle to satisfy over and above the hurdles in the policy. Rather, the starting point is to determine if under the policy terms the trustee (as owner of the policy) is entitled to payment. If the member’s ill-health satisfies the policy terms, the insurer pays the trustee, who—knowing the member meets the SIS Regulation—can lawfully release the monthly benefit to the member.
The Tribunal then reviewed the medical evidence against the policy definition and concluded the shoulder injury fulfilled both the requirements of the definition in the policy and, by way of completeness, the definition of temporary incapacity in the SIS Regulation.
The Tribunal substituted its own decision for that of the insurer and trustee effectively requiring the payment to the member of the insured benefit together with interest in accordance with section 57 of the ICA.