Offset clauses – The essential elements
- Newsletter Article
- Published 15.12.2020
Offsets clauses are one of the most disputed elements of income protection insurance (IP). In a nutshell, these clauses enable the life insurer to reduce the benefits otherwise payable to a claimant under the policy on account of ‘other’ concurrent income replacement style benefits received from statutory lines of cover or other life policies and the like. The overarching aim of such clauses is undoubtedly to ensure the totality of money received by a sick or injured claimant during a claim, from all sources (excluding investment income), does not exceed pre-disability income.
The success of offset clauses is wholly dependent on the wording used. Whilst common in IP policies, the wording used in such clauses can vary significantly. There is not one correct way to write an offset clause of course but too often, life insurers can find their offset clauses do not do what they intended them to do. Below, we explore some of the frequent issues that arise from the wording of offset clauses.
The Words are Everything
The words of an offset clause will be treated like the rest of the policy, that is, they will be given a businesslike interpretation with attention to the language used by the parties and the commercial circumstances the policy is intended to secure.
There have been some cases that demonstrate the approach taken by the courts in interpreting offset clauses.
In Carolyn Philips (nee Durrand) v Tower Australia Ltd (NSWSC 2008), the insurer sought to offset social security payments received on the basis that they were captured by the offset clause with respect to benefits under ‘Workers Compensation, Workcare, Accident Compensation or any other similar State or Federal Legislation…’. The question was whether the social security payments fell within ‘other similar … Federal Legislation’. Justice Einstein found:
‘To my mind in the instant context the social security payments do not qualify as relevantly ‘similar’ within the subject definition. In order to so qualify any relevant benefits would have to arise by reason of accident compensation schemes or statutory accident compensation schemes or the like.’
In considering a Personal Accident Policy, the NSWCA1 considered a general insurer’s offset clause that specified that benefits were payable pursuant to a compensation table and ‘…will be reduced by weekly benefits paid or payable from any... statutory workers compensation scheme.’
At trial, the judge found an amount of $26,000 could be offset representing an estimate of the proportion of the lump sum settlement that related to weekly compensation benefits. On appeal, the claimant argued the trial judge’s approach was wrong as the policy did not operate to allow the apportionment of a lump sum payment. The NSWCA agreed with the claimant’s argument and found the policy permitted the offset of weekly benefits, not a lump sum damages payment.
In Buswell v TAL Life Limited (NSWSC 2018), the insurer sought to offset ‘income’ received by the claimant under a damages claim settled against her employer. Relevantly, ‘Other Disability Income’ meant ‘income’ a person may derive during a month for which a benefit is payable and included ‘any benefit under workers compensation, statutory compensation… or other similar State, Federal or Territory Legislation…’ . The applicable offset clause also permitted a lump sum payment to be apportioned over a 60 month period.
Justice White found the meaning of ‘income’ was to be given its ordinary meaning and the receipt of damages for personal injury or a settlement sum as a compromise was capital, not income. While the Court accepted that a damages payment could be ‘Other Disability Income’ if it fell within one of the specified circumstances set out in the offset clause, it was found the entitlement to damages was modified by NSW workers compensation legislation but ultimately arose under common law, not legislation.
In each of these cases, the working approach to the offset clauses adopted by the insurer was found to be unsupported by the words used in their clause. Obviously, the words used are important in any contract but given the crucial work offset clauses are expected to perform and given the intersecting areas of law, statutory schemes and compensation models which such clauses traverse, it is even more so the case with offset clauses that precision is used in the wording and careful thought is given to the types of payments (and how they are paid) that the clause wishes to capture.
Workers Compensation/Motor Vehicle weekly payments received as Lump Sums
Often times, weekly payments of workers compensation (which would be offsetable under most IP policies when received) are initially disputed and then paid later as a lump sum. Additionally, they may be paid within a bundle of workers compensation rights which are settled for a lump sum pursuant to a settlement agreement which does not break down how the lump sum is apportioned between potentially offsetable amounts and other benefits.
It is crucially important in such circumstances for the offset clause to work as intended, that the clause:
- permits the insurer to deem which part of an undifferentiated combined lump sum is to be considered weekly payments and hence offsetable (noting settlement agreements will never do this);
- allows the breakup of the lump sum to monthly apportionments which can also be attributed to the relevant months in which payments are due under the policy; and
- adopts general language which captures a benefit and does not subsequently lose it because, for example, the mode of the underlying settlement changes the fundamental nature of the payment from income to capital.
A well drafted offset clause should do all these things but many particularly older style clauses, will not always be that robust.
Competing Offsets – Centrelink
In some instances, both Centrelink and an insurer may seek to offset benefits an insured receives from the other (where the IP offset clause does not specifically exclude Centrelink or social security payments).
In these circumstances, insurers should be aware that it is widely considered that Centrelink’s right to offset takes precedence over that of the insurer by virtue of Part 3.14 of the Social Security Act 1991 (Cth) which allows Centrelink to recover certain benefits where a person receives ‘compensation’ from another source for the same period. The AAT has held that payments under a group IP policy are ‘compensation’ under the Social Security Act2.
Offsetting JobKeeper Payments
In the context of the COVID pandemic, life insurers have found themselves grappling with the issue of whether JobKeeper (JK) payments fall within the ambit of offset clauses which were not drafted with such unique payments in mind.
Assuming an insured otherwise qualifies for receipt of IP benefits, given that JK payments are essentially a government funded wage subsidy and do not compensate for a work incapacity due to illness or injury, they will generally not be captured by clauses which restrict offsets to payments of the latter nature. Similarly, they will generally not be captured by clauses requiring income to be derived from personal exertion as JK payments are received by persons who are not working.
However, some clauses may potentially allow for the offset of JK payments, if for example, they do not require that the other income be received on account of illness or injury and are broad enough to capture payments received under such a statutory scheme. Again, it will all depend on the wording.
The non–indemnity nature of life insurance is such that a life insurer’s right to offset other income received by an insured as a result of the illness or injury also giving rise to the claim, will arise solely from the wording it chooses to insert in its policy wording.
Offset clauses therefore need to be well thought out and sufficiently broad enough to capture all payments which are intended to be offset. Consistent with recent NSWCA authority on the construction of exclusion clauses3, there is no room for error here and the words will be construed in their narrowest possible sense without an expansive lens.