Court finds trustee, and not insurer, liable for life insurance cover that had ceased under the PYS changes

  • Newsletter Article
  • Published 29.10.2021
Steer v AMP Life Limited & AMP Superannuation Ltd (SADC 2021)

Key Takeaways 

There had always been concern that the harsher impacts of the Protect Your Super (PYS) legislation, which could lead to lost cover at times when an insured member needs the cover the most, may ultimately be borne out in more disputes. 

The recent judgment in Steer therefore takes on natural significance as appearing to be the first judgment to consider PYS insurance obligations and the consequences of a member not being afforded an opportunity to maintain cover in the context of relevant legislative obligations.  

The judgment makes clear that the courts will closely scrutinise whether a member was provided with an opportunity to maintain cover in PYS inactivity cases and indicates that trustees will be liable for the lost cover where a court considers that an insured member was not given the opportunity to maintain cover prior to it ceasing for inactivity. It is also apparent from Steer that a court will often make an assumption that an insured member would have elected to continue their cover had they been given the opportunity, which, of course, may not always reflect the practical reality of how members respond to PYS notifications.  

Brief Facts

The Applicant in this claim was the executor of the estate of the Deceased member. The Deceased had been insured for death cover in the sum of $259,720.90 under a group insurance policy issued by the insurer to the trustee.

Between 2014 to 2019 the Deceased’s life insurance benefits were maintained and premiums were deducted from her superannuation account by the trustee and paid to the insurer.  

In March 2019, the PYS changes were introduced under the Treasury Laws Amendment Act (Protecting Your Superannuation Package) 2019 (PYS changes). The PYS changes meant that on and after 1 July 2019, trustees must stop providing insurance under a product to any member whose account has been inactive for a continuous period of 16 months or more and who has not opted-in to the cover. This requirement is reflected in s68AAA of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). Section 68AAA(2) provides that a trustee must ensure that the inactive member may elect in writing that the benefit is to be provided.

There were also requirements in the transitional provisions which required a trustee, in respect of inactive accounts, to send a notice in writing to such members before 1 May 2019. This notice was to state that on and after 1 July 2019 a benefit will not be provided to the member by taking out or maintaining insurance if the account was inactive and the member had not elected that the benefit will be provided even though the account was inactive.

The Deceased’s account was inactive at all relevant times in 2019 within the meaning of s68AAA of the SIS Act as it had been inactive since 2014.  

The trustee sent emails to the Deceased on 18 April 2019 and 4 June 2019 in which it advised the Deceased about the PYS changes and her right to make an election to maintain her life insurance cover.  

A third email was sent to the Deceased dated 7 July 2019 and advised her that her cover had been cancelled on the basis the trustee was not able to provide life insurance benefits to her after 1 July 2019.  

All of the above emails were sent to an email address of the Deceased at her previous employer, which the Deceased had not accessed since 2014. The Deceased therefore did not receive the emails.

The trustee had sent the Deceased her annual statements for years prior by post.  At no time had the Deceased communicated with the trustee by email. There was no evidence as to how the trustee came to use the email address in terms of the PYS notices.

The Deceased died on 16 October 2019. Shortly before her death, the trustee sent her a letter on 10 October 2019 advising that it had not received an election from her and would contact her before cancelling the life insurance cover (although the cover had in fact been cancelled effective 1 July). 

The Applicant, as executor for the estate, lodged a death claim on the policy but the insurer refused the claim on the ground the cover had been cancelled prior to the death of the Deceased.  

The Applicant took action against both the trustee and the insurer contending, among other things, that the trustee or insurer were liable for the death benefit despite cover having ended because the deceased was not provided an opportunity to maintain cover before it ceased in breach of various obligations owed by the trustee and insurer.

Judgment 

The central issue in the case was whether the Deceased had effectively been notified of the effect of the PYS changes and given the right of election to maintain cover in accordance with the SIS Act and the transitional provisions.   

The trustee argued that it complied with the notification requirements because it sent the disputed emails to the Deceased. The trustee relied upon s9 of the Electronic Transactions Act 1999 (Cth) (ETA) which provides that where a person is required to give information in writing, that requirement is satisfied when the person gives the information by means of an electronic communication if the person to whom the information is required to be given consents to the information being given by way of electronic communication.

His Honour dismissed the trustee’s arguments that consent to receive communications via the Deceased’s former email address could be inferred noting that the change to electronic communications with the Deceased represented a change to the pre-existing form of communication between the parties and there was no evidence of the Deceased consenting to receive communications electronically. 

The Court found that by not giving that notice to the Deceased and by subsequently cancelling the life insurance benefit, the trustee had:

‘breached its duty to act in the best interests of the Deceased…In effect, [the trustee] has taken away a benefit of the Deceased without providing notice to the Deceased.’

His Honour further held that the trustee breached its duty to act in the best interests of the Deceased by failing to comply with s68AAA of the SIS Act. His Honour found that s68AAA imposes an obligation on the trustee to ensure that the member is given an election and:   

It can only ensure that a member is given an election if the member receives notification of the right to make an election. If the member does not receive notice, they cannot make an election.  In the present case, I have found that the Deceased did not receive the disputed emails that were sent to the WEA email address. It follows that [the trustee] has not ensured that the Deceased has had an election…Clearly, it was in the best interests of the Deceased that she be given an election to continue to receive the benefit.  

Interestingly, His Honour also commented that the ETA does not apply to s68AAA of the SIS Act, but did apply to the transitional provisions, though in the end that finding does not appear to be critical to his conclusion.  

Whilst His Honour found that the trustee had breached the best interests duty, he dismissed all allegations against the insurer as well as the other allegations made against the trustee. 

These other findings are worthy of comment and include: 

  • Misleading and deceptive conduct - Whilst the sending of the 10 October letter was misleading because it indicated that the Deceased still had cover, His Honour found that the letter did not cause any loss to the Deceased because it was never received (the Deceased having been in hospital and subsequently passing away on 16 October). 
     
  • The insurer breached cancellation requirements -  His Honour considered that the Applicant’s claim that the insurer did not comply with the cancellation procedures in either s210 of the Life Insurance Act 1995 (Cth) or s59(3) of the Insurance Contracts Act 1984 (Cth) was flawed because the insurer did not cancel the cover, rather, ‘life insurance benefits were cancelled or surrendered by [the trustee]’. Of course, such a finding reflects that cover ending due to ‘inactivity’ is essentially an end of cover event and not a cancellation of any underlying policy.   
     
  • Duty of utmost good faith -  The insurer was found not to have breached this duty in: providing notification to the Deceased about PYS changes (as this obligation rested with the trustee); not considering whether it was justified in cancelling the policy (as it was the trustee who undertook that act), and refusing to pay the claim (as cover had ended). 

His Honour also dismissed an argument that the trustee owed a duty of utmost good faith, finding that the contract was clearly between the insurer and the trustee and there was no contract of insurance between the trustee and the Deceased.  

  • Unconscionability – The Court found no evidence of any behaviour of the trustee meeting the test of unconscionability. His Honour noted that merely sending the emails of notification to the wrong address is not of itself unconscionable.

Having found the trustee and not the insurer liable, there was a live issue as to how damages should be assessed.

Assessment of Damages  

His Honour found that the breach of duty by the trustee caused the Deceased to lose the opportunity to elect to continue to maintain her death cover.  Given it was a breach of a duty involving the loss of opportunity, His Honour held that the value of the lost opportunity must be determined.

The value of the lost opportunity was determined to be the whole life cover sum insured of $259,720.97 on the basis His Honour considered the Deceased would have elected to maintain cover had she been given the opportunity. 

Some of the factors which His Honour felt supported the conclusion that the Deceased would have elected to maintain her life cover included:   

  1. The Deceased continued to pay premiums right up to the end of June 2019 (His Honour acknowledged that such premiums were deducted automatically from her account, the member statement showed the premiums deducted).
     
  2. The election itself would have cost the Deceased nothing.
     
  3. Her health was deteriorating so it would be illogical to allow the cover to lapse having maintained it for a long time.
     
  4. The cost of premiums was insignificant to the amount in the account balance.
     
  5. The Deceased had previously claimed a TPD benefit and knew the value of insurance. 

Implications

Despite the decision in Steer being a decision of the SADC, the case is significant in representing the first decision to consider the PYS insurance obligations of a trustee and demonstrates how closely the courts will consider PYS communications to members. The scrutiny will encompass both the content of the notification and where it was sent.  

The Court also confirmed that it will ultimately be the trustee and not the insurer responsible for insurance cover that ceases due to ‘inactivity’ in accordance with s68AAA of the SIS Act where an insured member was not given an adequate opportunity to opt in to maintaining cover despite being inactive.      

Trustees should continue to ensure they have a robust process for PYS/PMIF notifications which ensure that a member is allowed the opportunity to elect to maintain cover prior to that cover ending due to a PYS or PMIF end of cover event, including that the notification is sent in a way that meets the SIS Act requirements. 

Finally, it is clear that, despite a member’s periods of inactivity, a court will lean towards a finding that a member would have maintained their cover if provided with the opportunity, especially when faced with an insured event that occurs soon after cover ceases. This makes it even more critical for a trustee to establish that the PYS notifications and the opportunity to maintain cover were provided in a way that meets the s68AAA requirements.