Key Takeaways

If an insurer asks about drug use in an application for insurance, it is no defence to an allegation of non-disclosure or misrepresentation to argue that the non-disclosed/misrepresented drug use was recreational or within socially accepted norms, and therefore irrelevant to the insurer’s decision.

In spite of the increasing prevalence of widespread recreational use of illicit drugs, the courts remain unwilling to lump such behaviour under the umbrella of recreational alcohol or tobacco use.

Brief Facts

The life insured was a successful fund manager and a recreational user of cocaine (amongst other things). In November 2014, he took out $2.5m of life insurance with the insurer but did not disclose his drug habits in the application for cover. He did tell the insurer about a recent health check he had undergone due to ‘age’ but as it turned out, it was actually due to a recent cocaine binge.

The cover was called upon by the life insured’s wife and beneficiary after the life insured died in circumstances which suggested he was involved in a string of frauds and other criminal enterprises. The key questions in the application for insurance were:

Do you take, or have you ever taken drugs or medications on a regular or ongoing basis?

and

Have you ever used…any drugs not prescribed for you…or have you ever received advice, counselling or treatment for drug dependence?

During the course of assessing the claim, the insurer obtained various pieces of evidence which demonstrated that – contrary to his ‘No’ answer to the questions about drug use – the life insured in fact had a long and demonstrable history of heavy cocaine use (subsequently described by Hammerschlag J as ‘non-trivial’), as well as ‘ice’.

It also turned out that the life insured was a moderate smoker (contrary to what he told the insurer) although ultimately this played no material role in the avoidance or the proceedings. The insurer’s underwriters determined that, had they known about the history of heavy illicit drug use, they wouldn’t have offered any cover at all. Accordingly, the insurer avoided the policy for fraudulent non-disclosure/misrepresentation under s29(2) of the Insurance Contracts Act 1984 (Cth) (the ICA) and this was challenged by the beneficiary in the NSWSC.

Judgment

Hammerschlag J found for the insurer, upheld the avoidance under s29(2) of the ICA and dismissed the summons. There being consensus between the parties as to the insurer’s retrospective underwriting position, the key issues revolved around whether the life insured misrepresented or failed to disclose his heavy drug use and – if he did – whether he did so fraudulently.

The theme of the beneficiary’s argument was that the life insured’s use of illicit drugs prior to the application for insurance was ‘recreational, occasional, irregular and sporadic’. In this context, it was argued that:

‘…the structure of the Application conveys that the insurer was not materially interested in knowing about a proponent’s recreational drug use, or the occasional cigarette, and it was open to a reasonable person in [the life insured’s] position to so think’.

The beneficiary also noted that the application for insurance did not use the word ‘recreational’ in the question about drug use, and that the life insured’s disclosure of other matters in the application – such as his sister’s Multiple Sclerosis (MS) – meant that there was no fraudulent intent in any non-disclosure or misrepresentation.

The insurer’s argument was, simply, that the life insured’s illicit drug use was far heavier than made out by the beneficiary in her evidence and that his failure to bring these matters to their attention was plainly fraudulent.

Hammerschlag J agreed with the insurer that the life insured’s pre-policy illicit drug use was more than ‘recreational, occasional, irregular, sporadic or socially acceptable’. Importantly, his Honour also stated:

‘But even to give it that description does not mean that he was not a regular or a non-trivial user of illicit drugs. He plainly used illicit drugs on multiple occasions not restricted to when Catriona was there.’

Noting that the life insured was an ‘educated and sophisticated man’, his Honour effectively held that it was ‘inconceivable’ that he answered ‘No’ to the above two questions in the application for insurance, and was therefore fraudulent. His Honour also considered that the life insured’s partial disclosure of his health check (albeit for a false reason) and his sister’s MS were ‘if anything…consistent with…a person engaging in fraudulent conduct’.

Implications

This case is a reminder that for a multitude of behavioural reasons, at times, people are deliberately untruthful when they apply for life cover and that accordingly, sometimes it is necessary to invoke the avoidance provisions of the ICA.

Of course determining when non-disclosure and misrepresentation is fraudulent within the meaning of the ICA can be a difficult question that troubles many life insurers, although in the instance of this case, with the stark history of drug use, it may be that the decision to avoid was fairly straightforward. Still, one must also not feel that findings of fraud are only reserved for such extreme cases with salacious facts. The fact of the matter is that the temptation to hide pertinent matters from life insurers so as to avoid embarrassment or obtain cover at a standard price (or at all) is as old as life insurance itself. Fraud comes in many shapes, sizes and intensity and brave life insurers will be prepared to make the call in this regard.

Further, what this case does highlight is that in the eyes of the law (as opposed to say social media), illicit drug use is not yet on par with more accepted vices such as recreational alcohol use. In other words, dismissing drug use as being within accepted social norms and therefore irrelevant to an insurer’s decision to provide cover, will not be a valid reason for not disclosing such matters in an application for insurance (assuming the relevant question is asked). Having regard to the firm findings on fraud, this case also suggests that even if the life insured’s use of illicit drugs was recreational, it would not be difficult to prove fraud (which of course depends on the evidence).

Life insurers can therefore take comfort in the fact that the courts – notwithstanding the modern, cosmopolitan age – remain willing to enforce underwriting standards about illegal conduct, which are backed up by medical evidence.