D20-21\016 (SCTA 2020)

Key Takeaways

A later in time insurer which assumes risk under a group policy pursuant to a Life Insurance Act Part 9 transfer, becomes ‘the insurer’ of the policy for s29 ICA purposes. This contrasts with the situation where the later in time insurer assumes the earlier in time insurer’s risk pursuant to usual group takeover terms. In these cases, there is AFCA authority which suggests that only the earlier in time insurer is ‘the insurer’ for s29 purposes and only it can exercise the remedies that flow from that.

Brief Facts

The life insured completed an application for insurance cover in superannuation in July 2014 and was issued life and IP cover via policies owned by the trustee of the superannuation fund.

The insurer that provided this cover subsequently transferred its liabilities and assets (including the policies) to another insurer (the New Insurer) on 1 October 2016 pursuant to Part 9 of the Life Insurance Act.

In May 2017, the life insured lodged an IP claim in respect of his torn Achilles tendon.

The New Insurer shortly thereafter avoided the insurance cover pursuant to s29(3) of the ICA.

The life insured complained to the SCT.

Determination

The New Insurer primarily relied on misrepresentations instead of non-disclosures as the source of the entitlement to exercise s29 remedies, in light of Sharma v LGSS Pty Ltd (FCA 2018) and the SCT agreed with the New Insurer’s approach.

Critically, the SCT found that because of the Part 9 transfer of the policies from the earlier insurer to the New Insurer, any misrepresentation that the life insured made to the earlier insurer was made to the New Insurer for the purpose of s25 and s29 of the ICA.

The SCT acknowledged that the financial advisory firm that submitted the insurance application on the life insured’s behalf was previously found to have breached their best interests obligations under the Corporations Act, and that a FCA judgment describes, among other things, complaints that the firm failed to disclose medical conditions of its clients in insurance applications. As a result of that judgment, the financial advisory firm who submitted the application on behalf of the life insured had been banned from providing financial advice for five years. However, the SCT held that the FCA judgment regarding the financial advisory firm did not negate the New Insurer’s and the trustee’s entitlements to rely on the life insured’s application as submitted to them.

The SCT assessed the insurer’s retrospective underwriting evidence based on the underwriting guidelines in force at the time of the application. Ultimately, the SCT found that the life insured made several misrepresentations, and that if they were not made, relevant cover would not have been entered into. The avoidance was upheld.

Implications

The ability of a later in time group insurer which acquires a risk by way of standard takeover terms to exercise the outgoing insurer’s s29 remedies, remains highly questionable given AFCA decisions 613562 and 619820.

These issues remain to be dealt with another day, however, this decision does confirm one aspect which was left unclear by these AFCA decisions, namely, what happens when the transfer of risk from one insurer to another is by way of a Part 9 transfer rather than standard takeover terms.

Thankfully, this SCT decision confirms what most observers assumed would be the case, that is, given standard transfer of title principles, under a Part 9 transfer, the new insurer becomes ‘the insurer’ for all purposes under s29. It should be noted that whilst this interpretation seems a given, there is/was a counter view that ‘the insurer’ under s29 could only ever be ‘the insurer’ which initially wrote the risk.

Additionally, the determination indicates that for insurers looking to exercise s29 remedies in relation to group life cover entered into or varied prior to 28 December 2015, it is best practice to emphasise misrepresentations to EDR decision makers, rather than relying on non-disclosures. The SCT is evidently willing to uphold an avoidance based on a misrepresentation where there was no duty of disclosure owed, so emphasising misrepresentations will enhance the prospects of success before the SCT (and should also do so at AFCA).