Key Takeaways

In what appears to be a first for an Australian court, the FCA has focused on the life insurer’s procedure surrounding an avoidance of a life policy under Part IV, Division 3 of the Insurance Contracts Act 1984 (the ICA).

Whilst life insurer avoidance practices have evolved significantly since the 2014 factual matrix considered in this matter, the judgment provides critical guidance for life insurers contemplating avoidance or variation remedies. Specifically, the judgment makes clear that as well as the substantive elements of an avoidance, there is an additional procedural fairness layer that an insurer must get right in order to comply with its duty of utmost good faith obligations.

Brief Facts

ASIC brought proceedings against the life insurer in relation to a case study examined in the Financial Services Royal Commission. ASIC alleged that the life insurer had breached the ICA by failing to act towards the insured under an IP policy with the utmost good faith in accordance with the implied duty arising from s13(1) of the ICA. The allegations arose from the way in which the insurer avoided the relevant policy for non-disclosure.

ASIC also alleged that the life insurer had made false and misleading representations in its dealings with the insured.

The life insurer had entered into an IP policy with the insured in October 2013 after the insured had applied for cover through an intermediary in September 2013. In the telephone application, the insured was asked:

‘Have you ever had or received medical advice or treatment for…Depression, anxiety, panic attacks, stress, psychosis, schizophrenia, bipolar disorder, attempted suicide, chronic fatigue, post-natal depression or any other mental or nervous condition?’

The insured answered ‘No’ to this question and the policy commenced shortly thereafter.

In December 2013, the insured lodged an IP claim for cervical cancer. In response to the claim, the life insurer sent the insured a ‘claims pack’ containing an Initial Disability Claim Form (containing an authority to obtain medical records), a Medicare and Pharmaceutical Benefits Scheme Authority, a claim payment form and an Attending Doctor’s Statement. All of these documents were signed and returned by the insured. The claim form contained the following relevant statement:

‘Please answer all questions fully to ensure that your claim is assessed as quickly as possible. Answers left blank or not fully completed may delay the assessment of your entitlements to benefits.’

The medical authority (in the Initial Disability Claim Form) also contained the following relevant statement:

‘If you do not supply the required information, we may not be able to provide the product or services requested or pay the claim.’

Shortly after receipt of these claim documents from the insured, the life insurer accepted the claim.

Whilst the claim was initially accepted by the life insurer and payments were made to the insured, material received by it during its assessment of the claim (and during its separate investigation into non-disclosure) alerted it to the possibility that the insured had failed to disclose pertinent matters in relation to her mental health which in turn brought into play a possible avoidance remedy under s29 of the ICA.

Despite these concerns, there was no reference to the insurer investigating non-disclosure/misrepresentation issues in its claims acceptance letter.

The life insurer did eventually determine that the insured had made a material non-disclosure with respect to depression and determined to avoid the policy under s29(3) of the ICA. It informed the insured of this decision via telephone on 30 June 2014, as well as advising her that it may seek to recover the claim amounts it had already paid to her under the policy.

Formal correspondence was sent to the insured by the life insurer on 3 July 2014 advising her of the avoidance and the potential recovery of the amounts it had already paid to her under the policy (it is not clear from the judgment whether the policy was avoided in the initial phone call or in this correspondence). The correspondence stated, amongst other things, that the life insurer considered the insured to have breached her duty of good faith, and that:

‘At this stage, we won’t be requesting the payment of this amount; however we reserve any right to request recovery in the future.’

This reservation of rights was again expressed by the life insurer to the insured on subsequent occasions.

The insured disputed the avoidance and the potential recovery by the life insurer and brought a complaint to FOS where the matter eventually settled via a deed of release in which the life insurer agreed to pay the insured $25,000 on top of the benefits it had already paid to her. The parties agreed that the policy remained void from inception.

The matter was subsequently included as a case study in the Royal Commission and, as mentioned above, ASIC took proceedings against the life insurer seeking remedies in relation to the life insurer’s alleged false and misleading representations and alleged breaches of its duty of utmost good faith and the ICA.

The Case Against the Life Insurer

False and Misleading Representations

ASIC initially alleged that the life insurer made the following false and misleading representations, pursuant to provisions of the Australian Securities and Investments Commission Act 2001 (the ASIC Act) and the Corporations Act 2001 (the Corporations Act), in the claims pack:

• The life insurer had a right to require the insured to provide authorities enabling it to obtain and access all of her medical records (the First Representation); and
• The life insurer had a right to require the insured to provide authorities enabling it to obtain and access all of her other records (e.g. employer records) (the Second Representation).

ASIC subsequently amended its case to delete these allegations and in their place, alleged that the claims pack contained the false and misleading representation(s) that the life insurer had a right to delay processing of the insured’s claim and to withhold payment of benefits to her until she provided a signed authority for medical records and a signed authority for release of Medicare & PBS records (the Third Representation).

Breach of the Duty of Utmost Good Faith

The second part of ASIC’s case was that the life insurer breached the ICA (s13(2)) by failing to act towards the insured with the utmost good faith, by:

• making the Third Representation to the insured which was false and misleading; and
• avoiding the policy in circumstances where:
  • the life insurer requested medical records for the purposes of its non-disclosure investigations, as opposed to assessing the claim, without advising the insured of this use;
  • the avoidance of the policy was not ‘soundly based in medical opinion’ (because of medical opinion which suggested that the life insurer’s underwriter’s view about the extent of the insured’s pre-policy mental health history was incorrect);
  • no notice was given to the insured about the non-disclosure investigation;
  • the life insurer alleged in the avoidance letter that the insured had breached her duty of good faith; and
  • the life insurer indicated in the avoidance letter that it reserved its rights to recover benefits paid under the policy from the insured.

Judgment

Judgment was delivered on 9 March 2021 by Allsop CJ, and his Honour relevantly found:

False and Misleading Representations

• The life insurer made the First Representation, but not the Second Representation. His Honour noted that ‘It is incumbent upon insurers to ensure that if they wish to be able to require such information, they must found their right to do so with clarity’. Ultimately however, given ASIC did not press either representation, these findings would appear to be obiter.
• The life insurer did not make the Third Representation in the claims pack, essentially due to the fact that no right was expressed to delay the claim, but rather the life insurer simply stated that the claim ‘may’ be delayed as a result of the relevant authorities not being completed. His Honour did note however that if the Third Representation had been made, then the representation about the Medicare and PBS records would have been false and misleading on the basis that no such right to delay payment of the claim existed in the terms of the policy.

Breach of the Duty of Utmost Good Faith

Making the Third Representation to the insured which was false and misleading

• The life insurer did not breach its duty of utmost good faith and consequently the ICA in relation to the Third Representation. His Honour stated:

‘For the reasons earlier given that allegation must fail. There was no relevant representation. If there were, I have concluded that it was false as to the execution of the Medicare Australia Authority, but not otherwise. In such circumstances, I do not conclude that it would have been a breach of s 13(2) to make that incorrect representation. There was no suggestion that it was deliberately false or other than innocently made. In the context of an entitlement to require the medical authority and to make the representation in relation to that right, I do not consider requiring associated medical records from Medicare breached any community standards of decency or fairness.’

The avoidance of the policy was not ‘soundly based in medical opinion’ (because of medical opinion which suggested that the life insurer’s underwriter’s view about the extent of the insured’s pre-policy mental health history was incorrect)

• The life insurer did not breach its duty of utmost good faith and consequently the ICA in relation to its avoidance not being ‘soundly based in medical opinion’ (but see his Honour’s comments regarding the failure to consult with the insured on the retrospective underwriting opinion below). His Honour stated:

‘A decision whether to grant cover was an underwriting decision. It was not a question for a medical professional. [The life insurer] had guidelines derived from its reinsurer to assist it. Underwriters must examine these questions, at least at the time of originally writing the insurance, from their own position and perspective. At the point of consideration of a right under s 29(3) there is another context. The question is: Would the cover have been written on any terms? But the attempt to answer must be approached and undertaken with the utmost good faith. I do not consider that in reaching his views, [the underwriter] was so bereft of information or his approach so unreasonable, capricious or arbitrary as to have exhibited a lack of commercial decency and fairness.’

The life insurer requested medical records for the purposes of its non-disclosure investigations, as opposed to assessing the claim, without advising the insured of this

• The life insurer had not breached its duty of utmost good faith and consequently the ICA in relation to its request for medical records which it intended to use for its non-disclosure investigations. His Honour formed this view on the basis that ASIC did not make any case about the life insurer’s use of the authorities for the purpose of non-disclosure investigations (as opposed to the mere ‘requesting’ of material), and ASIC’s case in this regard hinged on the Third Representation being made out. His Honour did however suggest that if there was an allegation about the use of the authorities by the life insurer, it would have been made out. Note his Honour’s comments:

‘If an insurer wishes to have a contractual right to require an insured to provide it with information or authorities to obtain information to investigate facts which may give it a right or remedy to avoid or vary the contract or refuse to pay an otherwise valid claim because of non-disclosure or misrepresentation, then, subject to the operation of the term implied by s 13(1) of the Insurance Contracts Act, it may well need a specific contractual provision.’

No notice was given to the insured about the non-disclosure investigation

• The life insurer breached its duty of utmost good faith and consequently the ICA by forming the required retrospective underwriting opinion under s29(3) of the ICA without allowing the insured the opportunity to put an opposing view as to what the underwriting decision would have been had the true facts been known, i.e. the insured ‘would have had the opportunity to put all the medical notes into a proper human context’. It is important to note that his Honour did not find that this failure rendered the underwriting opinion invalid.
• Connected to this failure to consult with the insured on the retrospective underwriting opinion, was the fact that the disclosure investigations were being conducted covertly without the knowledge of the insured. This too represented a breach of the life insurer’s duty of utmost good faith and consequently the ICA. Note his Honour’s comments:

‘The difficulty is that this was not some theoretical underwriting decision. It was one, affected by the obligation of the utmost good faith, whereby the underwriter was seeking to identify what would have happened earlier if a question had been answered differently. That involved collecting and assessing, as nearly as possible, the information that would have been brought forth, or information as close to it as possible, at the earlier point of time.

…

…In these circumstances, a decision to assess what would have been done a year before would begin with getting the most reliable evidence as to what would have happened at that time. This would include informing the Second Insured of the insurer’s concerns and giving her an opportunity to put to the insurer what she considered she should, perhaps with relevant advice. This would best mimic what would have happened had disclosure been made in 2013. This was not catered for in fairness and decency by having some internal review function after a considered decision to avoid.’

The life insurer indicated in the avoidance letter that it reserved its rights to recover benefits paid under the policy from the insured

• The life insurer breached its duty of utmost good faith and consequently the ICA by threatening the possibility of the recovery of benefits it had paid to the insured under the policy after it had commenced its non-disclosure investigation. His Honour stated:

‘Likewise, there was a lack of decency and fairness in the threat of recovery of over $24,000. The payments were all made after the commencement of an investigation by [the life insurer] into the validity of the policy on the grounds of possible non-disclosure or misrepresentation. In the light of the failure to tell the Second Insured of the investigation (with the possible consequences of obligation to repay, should there be an avoidance) she had no reason to believe that she could not spend these modest sums in sustaining herself. She was given no opportunity to arrange her affairs to protect herself.

In these circumstances, to threaten the possibility of recovery of such a sum against a woman of modest means suffering a catastrophic illness was harsh and unfair and lacked a degree of common decency. The knowledge of a possible future avoidance in circumstances of a possible change of position by expenditure of the payee would, to a reasonable and fair person in the position of [the life insurer], reveal a likely weakness in any right of recovery.’

The life insurer alleged in the avoidance letter that the insured had breached her duty of good faith

• Finally, the life insurer breached its duty of utmost good faith and consequently the ICA by alleging that the Insured ‘acted without good faith’. In this regard his Honour noted ‘there was not the slightest evidence of dishonesty or sharp practice in the conduct’ of the insured. Of course, there is authority to suggest that it is possible to breach the duty of utmost good faith by failing to make proper disclosure notwithstanding the limitations imposed by s12 of the ICA¹. Presumably ‘dishonesty or sharp practice’ in such non-disclosure would make it more likely that a breach of the duty of utmost good faith has occurred in such circumstances but it is not essential.

Implications

This judgment deals with a factual matrix which occurred in 2014 and insurer non-disclosure related practices have evolved significantly in the intervening years and are now of course subject to LICOP.²

Despite its historical nature, the judgment is highly useful in that it provides authoritative guidance to life insurers as to the manner in which they should go about investigating and exercising remedies in relation to pre-contractual non-disclosure in order to comply with their duty of utmost good faith. In other words, not only must the substance of the avoidance be correct, but life insurers must also ensure the process is demonstrably fair.  

Specifically, the judgment indicates that utmost good faith compliance would require:

• At the earliest possible opportunity, life insurers to inform insureds if they are conducting non-disclosure or misrepresentation investigations.
• The use of Authorities to obtain information which make it clear that the documents sought could also be used to investigate the possibility of pre-contractual non-disclosure or misrepresentation.
• Before making a decision on non-disclosure or misrepresentation and the application of a s29 remedy, life insurers to provide the insured with an outline of their investigations and their preliminary thinking and invite the insured to respond. Such a process is already prescribed in section 5.20 of the LICOP, however, life insurers need to review their section 5.20 letters to ensure they are also compliant with this judgment.
• Traditional ‘retro’ s29 underwriting opinions to be preliminary only until such time as any feedback from the insured in response to the section 5.20 letter is obtained and considered.
• Great care to be taken when informing insureds as to rights in relation to the recovery of monies paid under avoided policies. The right of an insurer to recover monies paid under an avoided policy (subject to various defences) is hardly controversial and indeed has long been accepted.³ It is highly unlikely this judgment should be seen as contradicting this entitlement. Rather, it seems to us that this judgment indicates that in circumstances where a legitimate defence to a potential recovery is evident to the life insurer, such as say a change of position defence or a clear waiver, a life insurer should be highly judicious and considered in the manner in which it asserts a right to recover monies paid under an avoided policy.
• Not making an assertion that the insured has breached the duty of utmost good faith. Whilst as we have indicated above there is authority to suggest that a relevant failure to disclose under s21 of the ICA may also constitute a breach of the duty of utmost good faith, given the findings made in this judgment in relation to this issue, it would be prudent to avoid making such an assertion noting that in any event, the s21 breach is the only breach that needs to be asserted for the purposes of a s29 remedy.

Finally, as far as the false and misleading aspect of the judgment is concerned, some technical features of the judgment and the way that ASIC’s case was framed mean there are limited specific takeaways on this point. Having said this, the high-level implication on this point is that care should be taken by life insurers when making assertions about what material they are entitled to require from a claimant. In particular, if an insurer requires a claimant to complete a particular form or authority, then the basis of the requirement must be readily identifiable (whether it is contained in a policy term or elsewhere). That basis must also indicate what use the insurer will put the information to, whether it be to assess the claim, or the alternative purpose of investigating non-disclosure or misrepresentation.

¹CIC Insurance Ltd v Barwon Region Water Authority (VSCA 1998)

² For example, s5.20 of the LICOP mandates the use of ‘show cause’ letters in circumstances where an insurer is considering an avoidance, a practice which if adopted may have allayed many of the concerns of the Court.

³Dr Gregory Moore v The National Mutual Life Association of Australasia Limited (NSWSC 2011)