Case Note - Avoidance by Incoming Group Insurers - Continuing Misrepresentations & the Sharma Pathway
- Published 21.03.2023
AIA Australia v Sharma (FCAFC 2023)
In the Sharma decision the Full Court of the Federal Court has accepted AIAA’s appeal submission that actionable misrepresentations made in an application for underwritten cover to the outgoing group insurer are not ‘spent’ and continue to be relevantly put to the incoming group insurer which assumes the risk, in a standard group insurance take over scenario.
Such a finding opens the pathway to the incoming group insurer utilising a s29 of the ICA response (if available) pursuant to s27A (3) unbundling and subject to obtaining the relevant underwriting opinion that the misrepresentations were material.
The emergence of this Sharma Pathway is obviously a welcome development for incoming group insurers, many of whom felt that as a consequence of a line of AFCA Determinations and the lower court decision in this matter finding that s29 remedies were not available to incoming group insurers, they were essentially locked out of a remedy for material pre-contractual misrepresentation.
The Life Insured, a doctor, was a member of the Superannuation Fund (the Fund) who prior to March 2011, held default death/terminal illness and income protection cover with the Fund’s then insurer, OnePath. On 22 March 2011, the Life Insured applied to the Fund for additional underwritten death, TPD and income protection cover (the Additional Cover), with the Additional Cover also issued by OnePath.
The application form completed by the Life Insured asked:
‘Have you ever been diagnosed with, had symptoms or signs of, or sought (or intend to seek) medical advice, treatment or investigations for … heart trouble, murmur, chest pain, palpitations?’
The Life Insured answered: ‘No’.
On 21 April 2011, the Life Insured completed a personal statement and declaration in relation to his application for the Additional Cover in which he responded to two further questions:
Have you EVER had any of the following … high blood pressure, chest pain, high cholesterol, stroke, rheumatic fever or any heart or vascular complaint? …
Have you required medical treatment, including surgery, for any illness or injury not mentioned above?
The Life Insured again answered ‘No’ to both questions.
The answers above were false, the Life Insured having previously suffered a heart attack and surgery to insert three stents into his coronary arteries in 1999.
After assessing the Life Insured’s application, on 11 July 2011, OnePath entered into the Additional Cover with the Life Insured.
Subsequently from 1 December 2011, CommInsure became the group life insurer of the Fund agreeing to provide cover for the benefit of members of the Fund under the terms of the OnePath policy. In short, CommInsure issued a new policy of insurance which provided that the cover of an insured member in force under the OnePath policy continued without the member having to take additional steps.
Given this arrangement, the Life Insured did not make any application to CommInsure and was not required to provide further or updated medical information or declarations to CommInsure. CommInsure did not reassess the risk of insured members such as the Life Insured.
Members of the Fund were notified of the change of insurer to CommInsure and members were provided the opportunity to opt out of the change to the new cover. The Life Insured did not opt out, nor did he advise CommInsure of his earlier false representations that were made to OnePath.
In March 2017, the Life Insured lodged a terminal illness claim on the Fund in relation to end-stage ischemic cardiomyopathy. The Life Insured died from heart failure in April 2017.
In May 2017, CommInsure admitted the default cover portion of the terminal illness claim and paid this amount to the Fund.
The underwritten cover was avoided in August 2017 under s29(2) of the Insurance Contracts Act 1984 (Cth) (ICA) on the basis of the fraudulent misrepresentations identified above in the application for the Additional Cover. The Fund agreed with this decision (which was maintained on a number of subsequent occasions). CommInsure otherwise paid the claim for posthumous income protection benefits up to the value of the Life Insured’s default cover.
The Life Insured’s beneficiary lodged a complaint with AFCA in January 2020 challenging CommInsure’s and the Fund’s avoidance decisions. In September 2021, the AFCA panel determined that CommInsure (with AIAA now standing in its place - the business of CommInsure having been transferred to AIAA in April 2021) was not entitled to rely on s29 of the ICA to avoid the Additional Cover, but upheld the decision on the basis that it was fair and reasonable in the circumstances not to pay the Additional Cover amount.
An appeal from AFCA’s determination to the Federal Court was made by the Life Insured’s beneficiary, which allowed the appeal, set aside the AFCA determination and remitted the matter back to AFCA for re-determination. The decision by the Federal Court had the effect of meaning an incoming group insurer could not avoid cover entered into by a life insured with the outgoing group insurer, even if the life insured had made misrepresentations to that outgoing insurer.
AIAA appealed the Federal Court decision to the Full Court of the Federal Court.
The AFCA Determination
AFCA made the following findings:
- The Life Insured fraudulently misrepresented his medical history in both his application for the Additional Cover and in his personal statement;
- These fraudulent misrepresentations were made to the outgoing insurer, OnePath, not to CommInsure. The absence of any misrepresentation to it in relation to the Additional Cover meant that CommInsure could not exercise the s29(2) remedy;
- Notwithstanding the fact that no s29(2) remedy was available to CommInsure, it still found that it was fair and reasonable for CommInsure not to pay the Additional Cover benefits on the basis that:
- Section 33 of the ICA did not bar CommInsure from exercising common law rights in relation to the fraudulent misrepresentations;
- The fraudulent misrepresentations were continuing and the Life Insured would have contemplated that OnePath and subsequent insurers would have relied on his fraudulent misrepresentations for the purposes of offering cover;
- CommInsure had relied on the misrepresentations (i.e. it would not have issued the Additional Cover had it known the true facts);
- As a result, a range of ‘rights in common law and equity to recover any loss that it incurs from paying out additional insurance benefits obtained by the deceased’s fraudulent misrepresentation, due to its detrimental reliance on the those misrepresentation(s)’ arose to CommInsure.
AFCA did not spell out precisely what cause of action CommInsure had at common law but did mention the tort of deceit as one such remedy.
The Primary Judge’s Decision
The primary judge agreed with AFCA that s29 did not apply in that the relevant misrepresentation must be made to an identifiable insurer at an identifiable point in time (i.e. OnePath) before the insurance cover is entered into, and not a subsequent insurer which assumes the risk at a later point in time. In other words, the ‘insurer’ referred to in s29(1) must be the same ‘insurer’ as referred to in s29(2) and in this case, the misrepresentation referred to in s29(1)(b) was made to OnePath not CommInsure.
It was also found that AFCA misunderstood the effect of s33 of the ICA and it should have found that this section operated as a code which limited the rights of AIAA/CommInsure in relation to the fraudulent misrepresentations to the ICA. This meant its finding as to possible common law rights was incorrect.
On this basis, the primary judge allowed the appeal but referred the matter to AFCA for it to determine the matter again in light of his judgment.
The Full Court’s Decision
AIAA’s primary argument on appeal was that AFCA’s finding that the relevant misrepresentations by the Life Insured were fraudulent, were continuing (and thus made to CommInsure) and were material to CommInsure’s decision to accept the risk, were sufficient to enliven the s29(2) remedy and that accordingly, it was not necessary to look outside the ICA for alternative remedies. The Full Court accepted this proposition.
In terms of the critical continuing misrepresentation point, it noted:
It is well established that for a fraudulent misrepresentation to be actionable it is not necessary that it should be made to a particular person; it can be made to a group to which the plaintiff belongs so that the plaintiff is one of those intended to be deceived.
And the Full Court then said:
…for now it can be said that as a matter of law it is possible that Dr Sharma’s misrepresentations made initially to HESTA and OnePath could be regarded as also being made to CommInsure. Mrs Sharma’s answer to that would be that once acted on by OnePath, the misrepresentations could have no continuing effect to later be relied on by CommInsure. It is to that issue that we now turn.
Nor was the misrepresentation ‘spent’ as asserted by the Life Insured’s representative. Rather:
The learned author of Handley KR, Spencer Bower & Handley Actionable Misrepresentation (5th ed, 2014, LexisNexis) at [4.09] cites a number of cases where representations, even if acted on, are considered to be continuing and capable of being acted on again and, in that sense, not spent. For example, in Smith v Kay  EngR 38; (1859) 7 HL Cas 750, bills procured by misrepresentation were replaced by a bond. In answer to the argument that the plaintiff was not induced to execute the bond by any false statement, Lord Cranworth stated (at 769) that the representation was a continuing representation that does not end when made, but continues on.
The crucial conclusion was then made in paragraph 61 of the judgment:
The point is that on the factual findings of AFCA, albeit that they were made in the context of a discussion of common law and equitable remedies in order to underpin a finding of “fair and reasonable”, Dr Sharma made continuing misrepresentations to CommInsure as a member of a class of persons who could be expected to act on the misrepresentations. Those misrepresentations were made, in a continuing sense, by the life insured “during the negotiations for a contract of life insurance [and] before it was entered into” (the ICA, s 25), the relevant contract being the new cover between HESTA as insured and CommInsure as insurer with effect from 1 December 2011. Therefore, s 29(1)(b), when read with s 27A, was satisfied in that the misrepresentations were made to the insurer before the relevant “unbundled” contract was entered into. Also, s29 was not disapplied by s29(1)(c) because, on AFCA’s finding, CommInsure would not have entered into the contract in respect of Dr Sharma’s additional cover had Dr Sharma not misrepresented his relevant cardiac history. On that basis, CommInsure could rely on s29(2) directly to avoid the contract of insurance insofar as it related to Dr Sharma’s additional cover in reliance on the fraudulent misrepresentations made to it.
And then at paragraph 62:
There is no identifiable error by AFCA on a question of law in making the factual findings that underpin the conclusion that Dr Sharma made continuing misrepresentations to CommInsure that CommInsure was entitled to rely on in avoiding cover under s29(2).
In other words, AFCA’s finding on the facts were sound and they should not be displaced. What it did not grasp however was that these same findings permitted a s29(2) response on the basis that the misrepresentations were continuing and were relevantly put to, and were actionable by, CommInsure.
On this basis the appeal was allowed and the original AFCA finding to dismiss the claim for the Additional Cover benefits was upheld.
Access to the remedial provisions of Part IV, Division 3 of the ICA for pre-contractual non-disclosure and misrepresentation is obviously an important aspect of the ability of life insurers to maintain sustainable and competitive insurance offerings, particularly in the group insurance space.
It had appeared following a string of AFCA determinations (see for example 613562 and 619820) and the initial Federal Court decision in this matter, that this access in so far as it related to group insurers assuming another insurer’s risk, had been effectively denied. This denial arose as a result of the necessary business practice of offering members’ seamless transition from one group insurer to the next and the wording of Division 3 which generally, is unsuited to many of the underlying concepts of modern group insurance.
As a result, the initial Federal Court decision had widespread ramifications for changeover of group insurance scenarios including pricing.
This judgment by the Full Court of the Federal Court would appear to restore this access for incoming group insurers in that its sets out a pathway for such insurers, holding a risk inherited from the outgoing insurer which is tainted by material misrepresentation, to action a s29 remedy on the basis of the concept of a continuing misrepresentation. That is, the continuing misrepresentation while initially put to the outgoing insurer, continues and is also put to the incoming insurer which in turn, opens the pathway to a s29 response via s27A unbundling and subject to the usual underwriting tests.
Apart from historical instances where this pathway will be useful, clearly it would be prudent for life insurers and funds entering into new group arrangements to review and potentially modify their relevant communications to remind members that previous representations made to an earlier insurer will be continuing.
Please reach out to Turks for guidance on any issues arising from this important judgment including the product issues and any question regarding how the duty of disclosure (as it existed from the inception of s31A from 28 December 2015 onwards) is impacted.