The member died in May 2013 from a heroin overdose at the age of 38. While he had been clean from drug use for five years prior to the overdose, he had become drug addicted at the age of 25 with sporadic treatment until 2005, when he was treated with naltrexone pellets inserted under the skin. He was drug free until 2008, when he again received further naltrexone treatment for addiction. At this time, he was also diagnosed with Hepatitis C, and treated with anti-viral drugs for two years which were successful.
The case involves a significant insured death benefit which had been cancelled in April 2013 because of unpaid premiums, but had been reinstated the following month. The application for the reinstated cover had been facilitated with the assistance of a financial advisor who spoke the member’s birth language.
The original insurance was taken out in 2010 and to obtain cover the member completed a “Personal Statement” which required him to answer the following questions:
- “Have you ever used illegal drugs? and
- Have you ever had symptoms of, been told you had or received advice or treatment from any health professionals including but not limited to doctors, specialists, counsellors or chiropractors for any of the following:
- Hepatitis, cirrhosis or any other liver or gall bladder disorder?”
The member answered “no” to these questions. The same questions appeared in the 2013 re-instatement application done via a tele-underwriting interview, and again the member answered “no”.
The insurer denied the claim (and the fund trustee agreed), on the grounds the member failed to disclose relevant information which would have caused the insurer to not enter into the contract. But did this contract commence in 2010 or 2013? Was the insurer entitled to deny the claim under the Insurance Contracts Act 1984 (Act) and, if so, which test of avoidance applied? This technical question resulted in the insurer hedging its bets and submitting it was entitled to avoid cover under section 29(3) of the Act, but if that was wrong, it was entitled to avoid cover under section 29(2) of the Act.
Section 29 applies when a member fails to comply with their duty of disclosure or makes a misrepresentation to the insurer before the contract commences. If the failure to disclose or misrepresentation is fraudulent, the insurer can avoid the contract under section 29(2). If fraud is not part of the factual matrix, the insurer can only avoid the contract within three years of the insurance commencing (section 29(3)).
So was the 2013 reinstatement a new contract or a continuation of the old 2010 contract? On this point, the Tribunal did not agree with the insurer. It held that while the 2010 contract was validly cancelled under the requirements of the Act, the language used in the insurer’s letter to the member for reinstatement of cover effectively put him back into the position he would have been prior to cancellation. This meant that to avoid cover, the insurer had to meet the higher test of fraud. The Tribunal did hold, however, that in determining whether there was ‘fraud’, the insurer was entitled to rely on facts as they emerged in 2013 when the cover was reinstated.
So what amounts to fraud? On this point, the Tribunal quoted from Peter Mann’s text – Mann’s Annotated Insurance Contracts Act 6th Edition at [29.20.2] that:
“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.”
The spouse of the deceased member argued that English was not the member’s first language and he was unable to understand the meaning of the illegal drugs and hepatitis questions. This was rejected by the Tribunal as the financial advisor was able to communicate fluently with the member in his birth language.
There was also evidence before the Tribunal that in 2008 when the member undertook his second naltrexone treatment he was required to sign a consent form stating:
- he had been using heroin for seven years
- he was at high risk of overdose which would be fatal in the next few months
- he had been treated for heroin addiction two times
- he was aware that if he continued to use opiates he would be in danger of an overdose with the result being death.
In these circumstances, the Tribunal held that by answering ‘no’ to the ‘illegal drugs’ question some five years later, the member ‘knowingly withheld relevant matters or gave information knowing it was false or was reckless without regard to the truth.’
In relation to the question concerning hepatitis, the Tribunal noted that Hepatitis C is a notifiable infectious disease, so by answering ‘no’ to a question about treatment for hepatitis, the member made a fraudulent misrepresentation.
The insurer was, therefore, acting fairly and reasonably in denying the claim under section 29(2) of the Act, and the Trustee was similarly acting fairly and reasonably when accepting the insurer’s decision.
Case number – D19-20 27
The member ceased working with her employer due to her poor mental health. As is often the case with mental illness, it creeps up on individuals with no clear date as to when the member first sought medical help in a way that satisfied the salary continuance insurance policy terms (SCI). While it was eventually agreed the SCI was payable, there remained a list of issues for review by the Tribunal. One of those issues concerned the member’s disclosure to the insurer.
As a consequence of the extended discussions between the parties before the SCI was considered payable, the member received in one financial year two lump sum payments instead of monthly SCI payments. That had taxation implications for the member, and she wanted compensation from the insurer for the loss she had suffered. It was pointed out, and agreed by the Tribunal, that the insurer had no choice but to pay her the two lump sums in the one year as under the policy it was required to make any back payments to the member as soon as practicable.
The member was willing to settle the tax dispute for 50 per cent of what she claimed was her loss but the insurer (and the trustee agreed with this decision) wanted the member to provide the insurer with actual evidence of:
- any tax debt she received from the Australian Tax Office as a result of the two lump sum SCI payments
- income tax returns and notices of assessment for the relevant financial years
- her accountant’s statement and/or calculations of the taxes paid.
The Tribunal held that the insurer’s offer to further review the tax compensation claim on receipt of substantiating evidence was fair and reasonable in it operation to the member. It is not the insurer’s responsibility to calculate the member’s loss, but rather it is the responsibility of the member to “substantiate the level of additional personal taxation she has paid as a result of the SCI” lump sum payments, and to furnish this evidence to the insurer through the trustee. For this reason, the Tribunal affirmed the insurer and the trustee’s decisions on tax compensation as being fair and reasonable to the member.
Case number – D19-20 19