Key Takeaways

Life insurers are not uncommonly faced with allegations of 'constructive decline' or'rejection' of a claim. That is, the assessment of the claim has not been completed in a timely manner or in such a way that the insurer has discharged its duty of good faith and fair dealing to an insured.

In this decision, the FCA upheld the life insurer’s appeal in relation to a Superannuation Complaints Tribunal (SCT) determination on a number of grounds, including that it ‘constructively rejected’ the claim. The determination was set aside and remitted back to the Tribunal, or other appropriate body (being AFCA) to be determined according to law.

The judgment provides useful guidance for life insurers as to whether a refusal to assess a claim constitutes a ‘constructive decline’ and the manner in which they should go about investigating and assessing whether they are 'on risk'.

Brief Facts

The life insured was a former member of the NSW Police Force (NSWPF) from 29 August 2003 until her discharge on 3 July 2016. By way of her employment, the life insured became a member of the First State Superannuation Scheme which relevantly provided a TPD benefit pursuant to the ‘Blue Ribbon’ Group Life Insurance policy (the PBR Policy).

In 2011, the PBR Policy ceased, with cover transferring from the life insurer (the out-going insurer) to the in–coming insurer. The in-coming life insurer assumed liability for any new claims arising under the PBR Policy from the date of cessation, except for certain claims in respect of which the out-going insurer remained ‘on risk’ pursuant to IFSA terms.

The life insured suffered a back injury on 19 February 2007 and thereafter was placed on permanent restricted duties. In August 2014, she was diagnosed with PTSD and she ceased work with the NSWPF that month.

A claim for TPD was lodged with the in-coming life insurer in March 2016, which was rejected on the basis that it did not consider itself ‘on risk’ in relation to the TPD Claim.

Subsequently, the life insured lodged a TPD claim with the out-going insurer on 18 February 2018. On 27 April 2018, the out-going insurer advised that it believed it was not ‘on risk’ in relation to the TPD Claim, although it indicated that it remained prepared to consider further information if made available and to reassess the claim. This was on the basis that it considered its liability for the life insured’s TPD only arose in respect of her back condition which rendered her to be ‘not at work’ on the working day immediately prior to the ‘takeover date’, or any injury or illness directly or indirectly related thereto.

It was not until 16 April 2019 that the out-going insurer received the life insured’s personnel file from NSWPF which contained further medical evidence as at the takeover date. The out-going insurer subsequently requested further medical information from the life insured and that she attend an IME. The life insured refused to authorise the provision of information or attend the IME until a final determination had been made as to which insurer was ‘on risk’ in relation to her claim. A complaint with the SCT was lodged shortly thereafter.

The SCT found that the out-going insurer ‘constructively rejected’ the life insured’s TPD claim. The out-going insurer appealed this decision to the FCA on the basis that a) the SCT misunderstood and misapplied the concept of a constructive rejection and b) the SCT erred by failing to consider and determine whether the out-going insurer was ‘on risk’ in relation to the life insured’s TPD claim and c) the SCT misconstrued the terms of the PBR Policy.

Judgment

His Honour Justice Derrington accepted all grounds of the out-going life insurer’s appeal and found that the SCT determination should be set aside, relevantly finding that:

Constructive Rejection

• The out-going insurer did not constructively reject the TPD claim. His Honour noted that in assessing whether there had been a constructive decline ‘such a decision is quite different to a mere refusal and involves questions of the insurer’s compliance with the duty of good faith and fair dealing’. His Honour considered that the SCT did not approach the question on the basis that the out-going insurer had not made a decision, but that it had constructively rejected the claim and in those circumstances the SCT ‘failed to, ask itself or answer the question of whether, in the manner in which it dealt with the claim, the insurer breached its duties of good faith and fair dealing’.
• His Honour was satisfied that the SCT conflated the two insurer’s separate assessments of the claim (for example, the SCT did not take into account the fact that the out-going insurer did not receive the claim at the same time as the in-coming insurer) and noted that the life insured did not co-operate with all of the out-going insurer’s attempts to obtain information or have her medically examined (which again the SCT did not consider).

On risk

• The SCT failed to deal with the out-going insurer’s claim that it was not ‘on risk’. His Honour noted that ‘there is nothing in the Tribunal’s reasons which suggests that it directed itself to the submissions raised by the insurer relevant to it not being on risk in respect of the TPD claim. It did not, in terms, ask itself or address the question of, what was the medical condition which caused (the life insured) to be “not at work” on 30 September 2011, or, whether the conditions in respect of which she claimed TPD were directly or indirectly related to that injury’.

The terms of the PBR Policy

• The out-going insurer submitted to the SCT that the life insured did not satisfy the waiting period of the TPD definition as she was not absent from her occupation for six consecutive months due to her back injury or whilst it was ‘on risk’. His Honour noted that the SCT’s approach to this issue was somewhat confused as a result of its failure to appreciate the importance and effect of the IFSA Guidance note on the out-going insurer’s liability.

Implications  

This judgment makes it clear that complex claim scenarios straddling risk periods of multiple insurers and involving multiple medical conditions will patently require careful consideration and detailed factual/medical enquiry. This is particularly so when the insurers involved have gone to considered lengths to document the rules as to how the risk will be allocated to ensure no straddle claimant falls through the cracks.

It follows that despite the overarching obligation to assess insurance claims as speedily as possible consistent with good faith duties, insurers faced with such claims are entitled to a reasonable opportunity to get to the bottom of who is on risk even if this takes a little longer than might otherwise be the case in more straightforward claims.

Moreover, life insureds if they wish to seek relief in respect of such claims are obliged to cooperate with such reasonable insurer investigations even though such investigations may fundamentally speak to which insurer will pay the claim rather than if it will be paid.