2009 ANZIIF Annual Review of Life Insurance Case Law by TurksLegal

2009 ANZIIF Annual Review of Life Insurance Case Law Case notes presented by TurksLegal

2009 ANZIIF Annual Review of Life Insurance Case Law Case Notes presented by TurksLegal TABLE OF CONTENTS

Powers of the FOS Wealthcare Financial Planning Pty Ltd v Financial Industry Complaints Service Ltd & Ors

Page 2

Delay and Interest Nino v MLC Ltd Newey v First Superannuation Pty Ltd

Page 8 Page 10

Non- Disclosure and Misrepresentation Phillips v ING Life (2009) FCA 283 Virag v United Super Fund Pty Ltd and Hannover Life re

Page 14 Page 18

Litigation and Obtaining Information Halpin v Lumley General Insurance Ltd (2009) NSWSC 644 Psalidis & Anor v Norwich Union Life Australia Limited

Page 22 Page 24

Remittance to Trustees Tuftevski v Total Risks Management Pty Ltd

Page 27

Fresh Evidence John Gilberg v Stevedoring Employees Retirement Fund Kowalski v MMAL Staff Superannuation Fund Pty Ltd

Page 35 Page 38

Part-time/Full-time Susan Carolyn Purcell v APS Chemicals Superannuation Pty Ltd Telstra Super Pty Ltd v Finch

Page 43 Page 45

The Authors

Page 52

Powers of the FOS Wealthcare Financial Planning Pty Ltd v Financial Industry Complaints Service Ltd & Ors By John Myatt, Partner

What is this Case about? A financial adviser sought judicial review of a decision of the FICS (now the Financial Ombudsman Service ‘FOS’) in the Supreme Court of Victoria, arguing it was bound to give effect to proportionate liability legislation in its determination. According to the adviser’s argument, the FOS was legally obliged to take into account the liability of other parties who, if sued, might also be responsible for the client’s loss when an investment the adviser recommended was lost, as a result of a corporate collapse. The Court determined the FOS was not absolutely required to apply legal principles of proportionate liability to the complaint and importantly explained that its legal structure required the FOS to give effect to broader obligations of fairness and that it need not strictly apply legal principle.

Background In 2004, Wealthcare Financial Planning Pty Ltd (‘the adviser’) recommended that a retired couple, Mr. & Mrs. Norris roll over a $65,000 loan they had made to a finance company which was part of the Westpoint property development group. The finance company went into administration in December 2005 and the investment was ultimately lost as a consequence of the collapse of the group. Mr. & Mrs. Norris made a complaint to the Financial Industry Complaints Service. The Panel upheld the complaint. The Panel determined that the adviser had failed to make ‘reasonable inquiries’ within the meaning of Section 945A of the Corporations Act 2001 (Cth) (‘the Corporations Act’) in relation to the client’s personal circumstances and had failed to adequately investigate or give such consideration to investigations of the subject matter of the advice, as was reasonable in the circumstances. It also found the advice was not ‘appropriate’ to the client, having regard to that consideration and investigation within the meaning of Section 945A. Section 953B of the Corporations Act confers a right to bring a civil action for damages for breach of Section 945A. The Panel determined that the adviser should pay Mr. & Mrs. Norris the whole amount they had lost, plus interest, on certain conditions. The adviser commenced an action in the Supreme Court of Victoria seeking a judicial review of the Panel’s decision. The grounds of review were in substance that there were a number of other parties that might have been found liable for the same loss if they had been sued by Mr. & Mrs. Norris in a court

of law. They included the finance company itself, its directors, the Westpoint group generally, its auditors and the research house on whose reports the adviser had allegedly relied. The adviser consequently claimed that the Panel’s determination was contrary to the Rules of the FICS in that it failed to apply principles of proportionate liability in determining Mr. & Mrs. Norris’ complaint.

The Decision The Role and Function of the Dispute Resolution Scheme Justice Cavanough examined the legal basis of the Court’s power to review decisions of the FICS, noting the history and nature of the dispute resolution scheme and that its power to determine a dispute involving members of the scheme was based upon the FICS rules that established a private contract and not upon any statutory power.1 His Honour further noted that: ‘The role of a FICS Panel is not equivalent to that of a court. It is not established to hear and determine legal proceedings. For constitutional reasons it could not be so established. As a result, the scheme ‘was less concerned with the assessment of the parties’ legal rights than with the fair and practical resolution of the dispute between them.’ Consequently, His Honour observed that its decisions ‘created new rights and obligations rather than declared existing ones’. His Honour also undertook a detailed review of the Rules as they applied to the complaint, noting that the FICS was obliged to deal with the complaint on its merits and do what, in its opinion, was fair in all the circumstances. It was required to have regard to but was not necessarily bound to apply any applicable legal rule or judicial authority (including one concerning the legal effect of an express or implied term of the contract or other document). However, the FICS was also to have regard to applicable principles of good industry practice as well as the objective of resolving complaints in an accessible, efficient and timely way. His Honour cited with approval the following passage from the judgment of Justice Ousely in R v Financial Ombudsman Service Limited; ex parte Norwich and Peterborough Building Society2 which dealt with a disputed ruling in relation to a building society account by the Banking Ombudsman under the English Banking Code, in which the trial judge said: ‘The very concept of ‘unfairness’ is very wide, and permits reasonable people to disagree. But its very width serves as a caution against over-active judicial intervention in the approach adopted by the Ombudsman, in the criteria which he develops or in the application of those criteria or of the concept of unfairness to the circumstances of the case.’

Justice Cavanough concluded that the central task of the Ombudsman in that case involved the exercise of a ‘broad discretion’ and took the view that the same considerations applied to the FICS panel. Consequently, if there was an obligation to apply a legal principle of proportionate liability it was, at most, one of a number of matters that the FICS would have to keep in mind in reaching a resolution of the dispute that was fair in all the circumstances. Proportionate Liability The adviser relied on statutory provisions imposing proportionate liability which were introduced in similar terms around Australia, as a result of the reform of public liability and tort laws which took place in the wake of the collapse of HIH and the so-called ‘insurance crisis’. The adviser relied mainly on Part IVAA of the Victorian Wrongs Act 1958, (the ‘Wrongs Act’) which came into operation on 1 January 2004. The mechanics of this legislation are discussed in great detail in the judgment. In summary, like similar provisions in other Australian jurisdictions, it provides for the apportionment of damages awarded by a court in an action for economic loss or damage to property arising from either negligence or breach of contract, where more than one party was responsible for the loss in question. Such a person is described as a ‘concurrent wrongdoer’ and, in relation to a claim, is: ‘a person who is one of 2 or more persons whose acts or omissions caused, independently of each other or jointly, the loss or damage that is the subject of the claim.’ 3 In a legal proceeding involving an apportionable claim, the Wrongs Act has the effect of limiting the liability of a concurrent wrongdoer to an amount reflecting the proportion of the loss that the court considers just, having regard to the extent of the defendant’s responsibility for the loss or damage in question. The adviser’s argument was that in Victoria (and by implication, other states where similar legislation had been enacted) proportionate liability was now a fundamental ‘legal norm’ and therefore had to be applied by the FICS. However, as Justice Cavanough pointed out, Part IVAA of the Wrongs Act is not universal in its application and only applied in a legal proceeding involving a court or statutory tribunal. It may not, for example, apply to arbitration. He consequently concluded that the principle can only ‘happily operate’ in a forum which potentially had jurisdiction over all the parties who were liable to pay damages. The FICS (and its successor, the FOS) only have jurisdiction over the respondent to a complaint where the respondent is a member of the FICS. As such, the Wrongs Act did not appear to be applicable in the context of a determination by the FICS. His Honour noted that the Panel had determined that the adviser was in breach of Section 945A of the Corporations Act and that in the course of its determination had also quoted Section 953B inferring that the Panel found a contravention of both provisions, as well as on

Section 851(2) of the Corporations Act, (the predecessor of Section 945A) in respect of the initial recommendation it had made to invest money with the finance company in the first place. Justice Cavanough then applied the reasoning of the Federal Court in Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd4 to the effect that had Mr. & Mrs. Norris brought a claim against the adviser in the Federal Court under those provisions, their claim could not have been defeated by Part IVAA of the Wrongs Act. In Dartberg, Justice Middleton found that the ‘express purpose’5 of the relevant portion of the Corporations Act was to make each alleged transgressor, if found liable, legally responsible for the whole of the loss. Justice Middleton had also noted6 that the Federal Parliament had introduced proportionate liability provisions into the Corporations Act in 2004, but they only applied to conduct which contravened Section 1041H (which prohibits misleading and deceptive conduct in relation to a financial product or a financial service). They were not made applicable to Section 945A or the other provisions relied on by the Panel. The adviser claimed that the FICS had wrongly determined that that the Dartberg decision meant the adviser’s liability could not be reduced on the basis of proportionate liability. On the contrary, Justice Cavanough concluded firmly that: ‘In my view there is no substance in this ground. The decision of Middleton J did show, in my opinion, that had the Norris’ claim been brought in the Federal Court in reliance on Section 851(2) or s 945A and s 953B of the Corporations Act 2001, their damages could not have been reduced by reference to the principles of proportionate liability’. 7

Implications The Court found against the adviser on all points: •

The FICS Panel was not absolutely required to apply any legal principles of proportionate liability to the complaint as it had broader obligations of fairness;

•

The Wrongs Act was not applicable to proceedings commenced other than before a court or tribunal; and

•

In any event, the law of proportionate liability was not applicable to claims brought under Sections 945A and 953B of the Corporations Act.

Justice Cavanough consequently did not consider that the Panel’s decision was made in breach of the Constitution and Rules of the FICS and the adviser’s application for judicial review was therefore dismissed. The FICS Panel and its successor, the FOS, are required to ‘have regard’ to all of the law that is relevant or capable of being applied and the judgment suggests (without deciding) that they

may also be required to ‘properly interpret and understand that law ... as a fundamental element in making the decision.’ However, there is no requirement to resolve complaints by making determinations strictly by application of principles of law to the facts as found and the FOS is free to resolve disputes in another way which does not involve the strict application of legal principle if, in all the circumstances, this produces a fair result. Proportionate liability laws are not ‘capable of being applied’ in this situation, firstly because they are only suitable for courts and tribunals that have potential jurisdiction over all the parties that are liable to pay damages and, secondly, because they do not operate in relation to claims under Sections 945A and 953B of the Corporations Act. The adviser’s submissions were not couched in terms that its liability should have been reduced by an amount reflecting the responsibility of other wrongdoers but in absolute terms that it should not have been held liable at all. The judgment leaves it open for the Panel to have taken into account some analogy with proportionate liability resulting in a reduction in the amount of compensation awarded if it considered this produced a fair outcome. However, the decision in Dartberg (which the Court expressly approved) suggests that this would mean the complainant in this case would be awarded less than the law would otherwise provide. It remains to be seen whether the Panel of the FOS will be willing to exercise its discretion in that manner. The law already provides remedies for joint tortfeasors to obtain contribution from one another through the courts. Justice Cavanough observed that: ‘(the adviser) ... was guilty of common law negligence (in other words that it failed to take reasonable care. Had the case been before a court of competent jurisdiction (whether State or Federal) and had a negligence finding, alone, been made, then there might have been room for the application of Part IVAA of the Wrongs Act’.8 Rights of contribution can still be pursued, but not necessarily through the FOS. Citation Wealthcare Financial Planning Pty Ltd v Financial Industry Complaints Service Ltd & Ors (2009) VSC 7. Endnotes (1) See generally Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd (2006) FCA 1805 (2) (2002) EWHC 2379 Queen’s Bench Division (Admin) (3) Section 24AH of the Wrongs Act 1958 (Vic) (4) (2007) FCA 1216 (Middleton J) (5) At paragraphs 10 to 12 and 33 (6) At paragraph 18 (7) At paragraph 45 (8) At paragraph 44

Delay and Interest Nino v MLC Ltd By Lisa Norris, Partner and Michael Iacuzzi, Senior Associate

What is this Case About? Section 57 of the Insurance Contracts Act 1984 provides that an insurer becomes liable to pay interest from the date from which it was ‘unreasonable’ not to have paid a claim. Here the insurer originally adopted an interpretation of the policy which in the opinion of the Court ‘might reasonably have been taken’1 and which had led it to decline the claim on several occasions. However, the insurer subsequently revised the way it had previously interpreted the crucial portion of the policy and eventually accepted the claim. Though the previous interpretation of the policy was clearly not unreasonable, the Court held that the insurer became liable for interest from the date all the relevant facts could have been assembled and not from the date when it adopted a different interpretation of the policy.

Background The plaintiff was a school teacher working in excess of 30 hours a week. She ceased her employment in September 2001 as a result of an injury to her back which had occurred some years earlier. She initially stated that the injury left her with a capacity to work just two hours a day, four days a week. In May 2003, she informed the insurer that she was working in a casual job six hours per week, teaching Spanish to adults at evening college. She said that the maximum number of hours she might be able to work would be eight hours per week. The insurer took this as evidence confirming her capacity for suitable work. The policy, which had commenced several years before, was silent on whether a benefit was payable for total and permanent disablement (‘TPD’) where the insured had a partial capacity for their former work and it was possible to construe it in a number of ways. The insurer rejected the plaintiff’s claim in May 2003 and on three subsequent occasions on the basis she had a capacity to work in an occupation for which she was fitted by knowledge training or experience. A further review occurred in January 2008 and on this occasion the insurer (presumably in the light of further developments in case law) adopted a different legal construction of the policy and accepted liability.

The Decision Applying Sayseng v Kellogg Superannuation Pty Ltd,2 and Bankstown Football Club Limited v CIC Insurance Ltd,3 Justice White concluded that once liability is accepted the question of reasonableness under Section 57 of the Insurance Contracts Act 1984 must be judged from the standpoint of â&#x20AC;&#x2DC;the true position in respect of the claimâ&#x20AC;&#x2122;. That is, on the understanding that the claim was properly payable by the insurer from the start. The court will make an allowance from the time the claim was received for the insurer to investigate and to consider its position. This determination is to be made having regard to the particular facts of the case, including the issues which the insurer would be required to look into and determine in order to satisfy itself it was liable under the policy in the circumstances. It was consequently not relevant that the insurer acted bona fide in originally denying the claim, or that it had a reasonable argument if it had chosen to maintain that denial. Rather, a court will award interest on the basis of what the court finds is a reasonable time for completion of the relevant enquiries. In this case, Justice White took the view those enquiries were relatively simple and could have been concluded within three months.

Implications Older policy wordings frequently fail to expressly consider problem situations which have been the subject of disputes and highlighted in case law, while more current wordings will generally be drafted with these problems in mind. In these situations, insurers are exposed to the risk that changes in judicial interpretation may alter and change the approach they must take to the assessment of a claim that is the subject of repeated reviews. This case confirms that an insurer gets no relief from a liability to pay interest where it rejects a claim based on a reasonable construction of the policy which it later departs from.

Citation Nino v MLC Ltd (2009) NSWSC 400 Endnotes (1) At paragraph 26 (2) (2007) NSWSC 857 (3) (Supreme Court of New South Wales, Cole J, 17 December 1993, unreported)

Newey v First Superannuation Pty Ltd By Lisa Norris, Partner and Michael Iacuzzi, Senior Associate

What is this Case About? A decision maker may be within its legal rights to defer a decision about whether or not a person suffers total and permanent disablement (‘TPD’) where there is evidence that the claimant’s medical condition has not stabilised and in particular if a claimant will undergo treatment or surgery which has a reasonable prospect of resulting in them being able to return to work within their education, training or experience. The Court found the insurer’s and trustee’s decisions to defer a TPD claim in the light of evidence of this kind was reasonable. It therefore declined to award interest in the claimant’s favour. The Court also found that the proceedings were commenced prematurely because it was reasonable to defer the decision and ordered the claimant to pay the other parties’ costs.

Background Mr Newey was employed as a welder with Emerdyn Pty Ltd (the Employer) and was a member of the Furniture Industry Retirement Superannuation Trust (the Fund), of which First Superannuation Pty Ltd was the Trustee. The Trustee had a group life policy with Hannover covering its members for certain benefits, including total and permanent disablement (‘TPD’) benefits. In March 2008, Mr Newey suffered a back injury, and subsequently lodged a claim under the policy for the TPD benefit. By May 2008, the insurer received the Employer’s workers compensation file, which included evidence that Mr Newey was considering undergoing back surgery that had been recommended by his doctors. At the request of the insurer, the Trustee enquired whether Mr Newey would in fact undergo the recommended procedure. Mr Newey’s solicitor advised the Trustee on 30 May 2008 that he would undergo surgery for a disc replacement, but would first undergo hip surgery. In June 2008, the insurer received a report from Mr Newey’s treating specialist which stated that, depending on the outcome of the back surgery, it was hoped that Mr Newey would return to work within 3-6 months. The insurer decided to defer assessment of Mr Newey’s claim for 6 months until after the surgery had taken place, to ascertain if the anticipated return to work was in fact possible. In August 2008, the Trustee wrote to Mr Newey’s solicitor and advised that the claim would be deferred until after Mr Newey’s surgery. In response, Mr Newey’s solicitor stated (contrary to their letter dated 30 May 2008) that Mr Newey now would not undergo a disc replacement, as the expense had not been approved by the workers compensation insurer. He did however undergo hip surgery in September 2008. On 6 November 2008, while a decision on the claim was still pending, Mr Newey commenced proceedings in the Supreme Court of NSW alleging that it was unreasonable to have withheld payment of the TPD benefit.

Mr Newey ultimately had emergency back surgery in February 2009 and the TPD claim was assessed and admitted by the insurer and Trustee in August 2009, after further medical evidence was obtained which reported on his condition and employment prospects following the surgery. The Supreme Court proceedings nevertheless continued but only for the payment of interest and the plaintiff’s legal costs.

The Decision The parties accepted as a general proposition that a decision maker could take into account the prospect of surgery which may result in a disability no longer being permanent.1 However, Mr Newey’s counsel argued that it was unreasonable for a decision to be deferred, pending future treatment which may never occur. He asserted that, as at 8 May 2008, (upon receipt of the workers compensation file) the insurer should have reached a decision on the basis that the spinal surgery was not likely to proceed. Justice Rein found that to succeed in this allegation, Mr Newey was required to provide clear evidence that the spinal surgery (as distinct from the hip surgery) would not take place or was unlikely to occur and he did not do so. His Honour found that the evidence indicated that at all times it had been reasonable to believe that Mr Newey might well undergo spinal surgery, particularly in light of the correspondence from Mr Newey’s solicitor to this effect. Justice Rein noted that the documents provided to the insurer and the Trustee included material that supported a finding that Mr Newey satisfied the definition of TPD but equally also contained material which did not support the claim for TPD. The medical evidence therefore painted a confusing picture. In order to obtain interest under section 57 of the Insurance Contracts Act, Mr Newey had to show the insurer and trustee ought to have paid the TPD benefit prior to admission of the claim in August 2009, and therefore it was incumbent on him to demonstrate that they reasonably ought to have held the opinion that he satisfied the definition of TPD prior to the commencement of proceedings. His Honour summarised four main aspects of the medical evidence which led the decision makers to be uncertain prior to commencement of the proceedings that the plaintiff satisfied the definition of TPD, namely: •

The plaintiff had suffered an injury in 2004 and returned to work after conservative treatment;

•

The evidence indicated that surgery of the lower discs could potentially remedy Mr Newey’s incapacity;

•

The evidence indicated that Mr Newey had education, training and experience in work other than as a welder which he might reasonably be fit for; and

•

Mr Newey had undergone hip surgery in September 2008 and might undergo the spinal surgery.

His Honour’s approach to this issue is in stark contrast to that taken in cases such as Bankstown Football Club Ltd v CIC Insurance Ltd2 and those following it including Nino v MLC Ltd (supra), where liability to pay the claim from the outset was assumed once liability was admitted. Justice Rein’s reasoning appears to be a more appropriate way to determine liability for interest in cases where liability for the insured benefit is determined by reference to the reasonable formation (or otherwise) of an opinion forming part of the definition of TPD by the insurer and trustee based on the evidence that has been furnished to them. By concluding that once it is reasonable for the decision maker not to have formed the required opinion, it must also be reasonable for it not to have paid the claim (and therefore that it is not liable for interest under Section 57). Justice Rein’s approach avoids the contradiction evident in Nino’s Case that a decision that is reasonable for some purposes may not be for others. Justice Rein concluded the proceedings had for the reasons already outlined, been commenced prematurely against the insurer and the Trustee and Mr Newey was consequently ordered to pay their costs to a maximum amount of $5,000. In capping Mr Newey’s liability to pay costs, his Honour took into account: •

The fact that Mr Newey’s claim had been admitted and he had been paid a (relatively small) benefit;

•

His opinion that a proportion of the costs were incurred in the course of assessing the claim (and were not costs of the proceedings);

•

That the evidence did not provide a clear picture of Mr Newey’s treatment;

•

That the amount of interest claimed by Mr Newey was approximately $4,500;

•

That there was a need for proportionality between costs and the amount in dispute; and

•

Except for the claim for interest, the appropriate order would have been for each party to bear their own costs.

Implications The central issue arising from this judgment is that in appropriate circumstances, a decision with respect to a claim may sustainably be deferred. However, insurers and trustees need to carefully consider whether a decision to defer assessment of a claim is justified by the evidence. If a claimant in fact intends to undergo surgery or other treatment, and there is a possibility that the claimant will return to their previous occupation or other work within their education, training or experience, a decision to defer is likely to be found reasonable. A decision to defer may not be reasonable if it is based on evidence which contains a mere suggestion that a claimant may benefit from surgery or other treatment, where there is no

evidence that the claimant will actually undergo that surgery or other treatment (i.e. there is a mere possibility of surgery but no real prospect of it). Further, a decision to defer would not be reasonable if the evidence shows that the claimant will not be able to return to work post-surgery in any event, or that he or she could only return to work post-surgery in a field outside their pre-disability education, training or experience (eg after retraining). Justice Rein chose to adopt a different approach to that taken in cases such as Bankstown Football Club Ltd v CIC Insurance Ltd2 and those following it including Nino v MLC Ltd (supra), where liability for interest was assumed automatically once the claim was admitted. Justice Reinâ&#x20AC;&#x2122;s approach to the awarding of interest under Section 57 of the Insurance Contracts Act 1984 appears to be a more appropriate way to determine liability for interest in cases where liability for the insured benefit is determined by reference to the formation of an opinion by the insurer or trustee based on the evidence that has been furnished to them and is to be preferred to the contradictory reasoning shown in other recent cases.

Citation Newey v First Superannuation Pty Ltd (2009) NSWSC 1100 Endnotes (1) See Tower Australia Ltd v Farkas (2005) 64 NSWLR 253 (2) Supreme Court of New South Wales, Cole J, 17 December 1993, unreported

Non-Disclosure and Misrepresentation Phillips v ING Life Limited By Alph Edwards, Partner

What is this Case About? This is the first decision by a court of record in which an insurer has successfully invoked the remedy in Section 29(4) of the Insurance Contracts Act 1984 (‘the ICA’). Importantly, the judgment clarifies that the required notice under this Section can be given to the legal personal representative of a deceased insured. Absent the ability to give notice in this manner, the remedy available under s29 (4) would be not be available in death claims where the life insured is also the policy owner. The judgment also contains useful commentary on aspects of the duty of disclosure in connection with an application for life insurance and in particular why certain matters regarding the insured’s state of health would fall within the duty of disclosure under Section 21 of the ICA.

Background In November 2002, Mr. Phillips entered into a term life insurance policy with the insurer, with a sum insured of $700,000 payable in the event of his death. At the time he was 50 years old, did weight training, swam two kilometres and cycled 300 kilometres each week and his doctor described him as being as ‘fit as an elite athlete’. On 6 September 2003, whilst the policy was in force, Mr. Phillips died of oesophageal cancer. On 3 December 2003, having investigated the claim and having obtained further medical information in relation to Mr. Philips which the insurer said he should have disclosed to it, the insurer paid his widow the sum of $466,667, having reduced the amount payable under the policy to reflect the premium it would have charged had it known the true position in accordance with the formula under s 29(4) of the Insurance Contracts Act 1984 Mrs. Phillips commenced proceedings in the Federal Court for the balance of the sum insured and interest pursuant to Section 57 of the Act. The bulk of the deceased’s medical history at the time of his application to the insurer was provided in a health evaluation form. This form was completed by a nurse, who attended Mr. Phillips and asked him a series of questions that appeared on the form. The form contained the prescribed notice regarding the duty of disclosure under the Act and it was accepted that the nurse read this aloud to the deceased. The deceased also signed the form beneath the duty of disclosure notice. The health evaluation form asked the following:

Have you ever experienced, required or received medical advice, investigation or treatment for any of the following and, if so what the condition is, when it first occurred, what were the symptoms, did you take any time off work and are you fully recovered.

The form then listed a series of conditions including at question D (4): Indigestion, ulcer, hiatus hernia, bowel disorder, Colitis, haemorrhoids or passing blood from the bowel?

Mr. Phillips responded: Swallowed a fish bone, punctured oesophagus & caused a gastric ulcer 6 yrs ago. Zoton T daily. Nil Sx past 6 yrs – Dr Spurge.

At question D (19) the Mr. Phillips was asked: Do you (sic) contemplate (sic) seeking medical advice, undergoing any investigation or treatment or having any operation in the near future?

Mr. Phillips responded ‘No’. The insurer argued that the deceased had failed in his duty of disclosure under Section 21 of the Act, by failing to disclose in the health evaluation form that he had been diagnosed with a condition know as ‘Barrett’s oesophagus’, that he had undergone, and was required to undergo medical treatment and surveillance of this condition and that he had received medical advice to the effect that ‘Barrett’s oesophagus’ increased the risk of developing oesophageal cancer. Mrs. Phillips disputed that her husband knew that he had ‘Barrett’s oesophagus’ and asserted that the insurer had waived compliance with the duty of disclosure in any event because it did not ask questions expressly in relation to Barrett’s oesophagus. She also disputed that the notice given by the insurer in Section 29 of the Act was validly served upon her as legal personal representative of the insured.

The Decision Justice Siopis in the Federal Court in Perth reviewed Mr. Phillips’ complete medical history and concluded that the deceased had been told by both his specialist and his general practitioner that he had ‘Barrett’s oesophagus’. At the time of the application to the insurer he continued to be treated for this condition and was regularly taking Zoton. He had also undergone further gastroscopies at regular intervals since the diagnosis was conveyed to him. His Honour consequently found that the:

‘overwhelming inference is that the deceased was aware, and had not forgotten, that he had been diagnosed with Barrett’s oesophagus at the time of applying for life insurance in October 2002. 1

Additionally, the Court found that even if it had been persuaded that the deceased did not know the precise name of his condition at the time he applied for the policy, he was still aware that he had a condition that increased his risk of contracting cancer of the oesophagus. Justice Siopis also found that the deceased knew that his condition was relevant to the risk proposed, by him for the purposes of his duty of disclosure under Section 21 of the Act, given that he knew he had to take prophylactic medical steps with respect to cancer, such as taking the Zoton and undergoing regular gastroscopies and that even if the deceased did not know this, a reasonable person in his circumstances would know it. Consistent with these findings, the Court also concluded that the deceased had made a number of misrepresentations by giving an incomplete answer to question D of the health evaluation form detailed above. The Court rejected the argument that there was a waiver by the insurer of compliance with the duty of disclosure and found that it had been made sufficiently clear to Mr. Phillips that the insurer was interested in his whole medical history. The fact that specific certain questions were asked in the health evaluation form did not mean the insurer only wanted to know about those specific subject matters. Rather it was clear that the insurer was seeking information relating to any matter which might affect the life expectancy of the applicant for insurance. The insurer’s underwriter gave evidence that had the insurer known the true nature of Mr. Phillips medical history at the time the policy was entered into, it would have applied a 50% premium loading to the term life cover and declined the application for total and permanent disability cover. The Court accepted this evidence and concluded that the insurer was entitled to proportionally reduce the amount of Mr. Phillips life cover in accordance with the formula set out in Section 29(4). Section 29(4) provides that notice of a variation of the insured sum is to be by ‘notice in writing given to the insured’. Mrs. Phillips argued that the insurer had never given this notice to the insured (and it could not now do so as he was dead) but rather had given it to her as his legal personal representative. The Court dismissed this argument on the basis that Section 29(4) of the ICA refers to the notice as a notice to vary the contract. It consequently followed that the relevant party to the contract on the death of the insured would be the insured’s legal personal representative. Consequently, the notice had been validly given to her in that capacity.

Implications That fact that this is the first time that Section 29(4) has been examined by a superior Court since the inception of the ICA, suggests that unlike the other limbs of Section 29, subsection 4 is either fairly uncontroversial or perhaps overlooked by insurers. Certainly this judgment indicates that it can be an effective remedy for insurers in cases of non-disclosure and misrepresentation, certainly one which should be actively considered where avoidance of the whole policy may seem to be an excessive and disproportionately harsh response. The judgment also usefully clarifies that a notice under Section 29 (4) can be provided to a deceased insured’s legal personal representative. This has often been thought to be the better legal view but this judgment is the first judicial confirmation that this is the correct construction of this aspect of the Section. Several useful points of guidance emerge from the judgment for life insurers in dealing with potential issues of non-disclosure and misrepresentation, such as: •

The fact that an insured is not aware of the precise name of the condition he or she may be suffering from does not mean they are excused from telling the insurer about it when applying for cover;

•

An answer to a question can still amount to a misrepresentation if the answer is incomplete, even if the partial response given is true as far as it goes;

•

It will be difficult for an insured if to argue that he or she had simply forgotten about the condition and consequently ceased to have a duty to disclose it if they are having ongoing treatment and investigations;

•

To construe the phrase ‘illness or injury’ in an application form in such a way as to exclude ‘conditions’ or ‘disorders’ is too restrictive and not a fair reading which could be adopted by a reasonable insured; and

•

When it is made clear that an insurer is interested in all aspects of an insured’s medical history, be it through the nature of the cover offered or the questions asked in an application, the duty of disclosure will not be restricted to just matters which are the subject of specific questions asked in an application document.

Citation Phillips v ING Life (2009) FCA 283 Endnotes (1) At paragraph 73

Robert Virag v United Super Fund Pty Ltd and Hannover Life re of Australasia Ltd By Lisa Norris, Partner

What is this Case About? This case deals with a group life insurerâ&#x20AC;&#x2122;s remedies if a member fails to comply with the duty of disclosure when applying for additional (underwritten) cover at a point in time after the claimant became a member of a superannuation fund. It confirms that Section 32 of the ICA treats this cover as if was provided by an individual contract in respect of that member and as though the individual contract had been entered into at the time the proposed member became a member of the scheme. The case also confirms that all the usual requirements of Section 29 of the ICA must be met if the insurer elects to avoid this cover including the requirement that it would not have offered a policy of life insurance on any terms if it had been aware of the true position.

Background The plaintiff had 10 units of TPD cover issued by the insurer of his superannuation fund, namely: â&#x20AC;˘

3 units of automatic cover which he had obtained upon joining the fund in 1999; and

â&#x20AC;˘

7 units of additional (underwritten) cover which he obtained through his industry superannuation fund in 2005, several years after he became a member of the fund.

The additional cover came into force in June 2005, after a site meeting was called at the factory where the plaintiff was working. A representative of the fund spoke at this meeting, and encouraged members on the site to consider whether they had sufficient insurance cover and if they did not, to take out more cover. Following the meeting, the plaintiff completed an application form (including a personal health statement) for seven extra units of death and TPD cover. This cover was in addition to the 3 units of cover he had automatically become entitled to upon joining the fund. The plaintiff failed to disclose attendances upon his doctors in late 2004 and February 2005 and the reason for them in this application. On 4 April 2006, during the course of his employment, the plaintiff injured his lumbar spine and became totally and permanently disabled for work as a result. He applied for a TPD benefit which comprised 10 units however the insurer refused to pay the underwritten portion of the benefit which it argued was void as a consequence of non-disclosure and misrepresentation.

The Decision Section 32 of the Insurance Contracts Act provides:

32. Non-disclosure or misrepresentation by member of scheme This Division extends to the case where there was a failure to comply with the duty of disclosure, or a misrepresentation was made, to the insurer under a blanket superannuation contract in respect of a proposed member of the relevant superannuation or retirement scheme as though: a)

The insurance cover provided by that contract in respect of that member were provided by an individual superannuation contract between the insurer as insurer and the trustee for the purposes of the scheme as the insured; and

That contract had been entered into at the time when the proposed member became a member of the scheme.’ (Emphasis added).

The Insurer identified a problem with the application of Section 32 of the ICA in the circumstances, in that on its face, it applies only to applicants for insurance cover when they join a superannuation scheme for the first time. The insurer contended that as the relevant portion of the plaintiff’s cover came into force some time after he joined the fund, the circumstances were not covered by Section 32 and therefore its rights to avoid the policy were not covered by the ICA and instead arose under the common law which continued to apply to contracts not covered by the Act. This meant that it did not have to comply with the requirements of Section 29 of the ICA and in particular the requirement that it would not have offered a policy of life insurance on any terms if it had been aware of the true position, which on the evidence of its underwriter, it was unable to do. Judge Wischusen, before whom the matter came for trial in the County Court of Victoria, did not accept that the ICA did not apply and was strongly influenced by the fact that the ICA was enacted as remedial consumer protection legislation which was intended to govern all insurance cover provided to scheme members. He observed that the operation of Section 29 is extended by Section 32 where there was a failure to disclose (or misrepresentation made) to the insurer under a blanket superannuation contract in respect of ‘a proposed member’ by the use of two ‘fictions’: 1. As though the insurance cover provided by the blanket policy in respect of that member was provided by an individual contract in respect of that member between the insurer and the trustee; and 2. As though the individual contract had been entered into at the time the proposed member became a member of the scheme. His Honour explained that the Section isolates ‘the cover’ in respect of which the nondisclosure was made by treating it as if provided by an individual superannuation contract. Next, it places the making of that fictional contract at the only place in time where the failure to disclose can be of relevance for the purpose of remedy – when the member’s proposal for

the particular insurance cover is being made and he becomes a member of the scheme for ‘that cover’. (Emphasis added) In this way, the section puts the insurer and the member in the same positions regarding nondisclosure and misrepresentation in respect of that cover as they would occupy under the ICA, had the non-disclosure or misrepresentation been made in respect of an individual contract of life insurance which provided that cover. His Honour therefore found that the remedies available to the Insurer were those found in the ICA, not at common law. Section 29(3) of the ICA provides that, in the event of a breach of the duty of disclosure: ‘If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract’ (emphasis added). The plaintiff submitted that based on the underwriting evidence, if full disclosure had been made, he would have been offered at least death cover and therefore the insurer would have been prepared to enter into a contract of life insurance on some terms. He argued that as the insurer would have been prepared to provide cover under the policy for death alone, Section 29(3) would not permit avoidance. The insurer on the other hand submitted that for the purposes of Section 29(3), the cover offered should be divided up into two separate policies: one for TPD cover and a separate policy for death cover, and so ‘on any terms’ should be read as whether the insurer would have been prepared to enter into a TPD policy on any terms. His Honour concluded that had there been a breach by the plaintiff of the duty of disclosure, because the insurer would have offered death only cover - i.e. it would have been prepared to enter into a contract of life insurance on some terms – it would not have been entitled to avoid the policy under s29(3). We have previously discussed these difficulties in application of s29(3) and bundled contracts of life insurance in our articles ‘Court of Appeal Restricts Insurers' Avoidance Options Under Section 29(3)’, ‘Section 29(3) Under the Spotlight Again’, and in our TurkAlert ‘Tying Up Loose Ends From Schaffer’ (please refer to www.turkslegal.com.au for a copy of each article).

Implications There has long been uncertainty about exactly how a group life insurer should approach a situation where a member meets the criteria in the policy for payment of a benefit, but some of the cover was underwritten and there appears to have been a breach of the duty of disclosure affecting the entitlement to that cover. Virag provides some long overdue guidance regarding this issue.

This case indicates that, pursuant to Section 32 of the ICA, in this situation there are two contracts: the (actual) group life contract under which the automatic cover is payable and the (fictional) contract for the additional cover only created by Section 32. It is the fictional contract that the insurer is entitled to avoid by s29 of the ICA, assuming that the criteria for avoidance exist. Section 32 (and in turn Section 29) do not affect the obligation to pay the automatic cover under the group life insurance contract which is in effect severable from the underwritten cover written under the ‘fictional’ Section 32 contract. In practical terms, if the criteria for payment of a benefit have been met (i.e. the insured event, such as death or total and permanent disablement, has occurred), this case indicates that the insurer should: 1. Pay the benefit payable under the automatic cover arrangements pursuant to the group life insurance contract with the trustee; and 2. Avoid the (fictional) contract with the trustee for additional cover created by Section 32. Alternatively, if the insurer is still investigating whether there has been a breach of the duty of disclosure and/or whether it is able to avoid the fictional contract under Section 29, it should reserve its rights in this regard in the letter that admits the claim with respect to the automatically accepted cover. As the ICA applies to a non-disclosure by a member covered by a group life insurance contract, what a ‘prudent underwriter’ would have done when confronted with the true facts is not relevant. It is still unclear what law applies where there has been a non-disclosure/misrepresentation by a member covered by a group life insurance contract that is not a blanket superannuation contract relating to a superannuation or retirement scheme. Finally, the judge seems to have accepted that the member had the duty of disclosure imposed by Section 21 of the ICA, although under s21 the duty falls on ‘the insured’, that is the trustee. The member is not ‘the insured’, although he or she is clearly a ‘life insured’. Although it logically follows that the member does not have a duty of disclosure under Section 21, the Court clearly accepted that such a duty exists in circumstances where a person becomes a member of a superannuation or retirement scheme. Citation Robert Virag v United Super Fund Pty Ltd and Hannover Life re of Australasia Ltd (2009) VCC

Litigation and Obtaining Information Halpin v Lumley General Insurance Ltd By Danielle Wallis, Lawyer

What is This Case About? This is an important decision for insurers engaged in litigation involving issues of fraud, or who are in possession of evidence which may have a significant impact upon a witness’ credibility, or where an opposing witness knew of that evidence they may be tempted to change their testimony. Litigants who possess evidence of this kind generally do not wish its forensic value to be lost through being disclosed to the opposing witness before they are cross examined. In this decision in response to an interlocutory application, the NSW Court of Appeal has affirmed the existence of a continuing judicial discretion to keep this evidence confidential in appropriate cases.

Background The plaintiffs brought proceedings after the insurer had declined a claim in respect of the alleged theft of a significant amount of sporting memorabilia. The insurer in its particulars and defence did not admit the existence of the goods or that the theft occurred as alleged. It also alleged in its defence that the plaintiffs deliberately provided false information in the claims process, with the intent of inducing payment, thereby constituting fraud in the course of making the claim. The Court made orders as part of the usual pre-hearing directions for the service of the insurers witness’ evidence by way of affidavit. The insurer served a number of affidavits, but sought by way of Notice of Motion to obtain an Order from the Court dispensing with the service of other evidence. The evidence the insurer sought to keep confidential included various investigators’ reports and the results of further inquiries prompted by those reports.

The Decision Some years earlier, in Markus v Provident Insurance Co Ltd1, Justice Clarke in the New South Wales Supreme Court had ruled that he had the discretion to refuse a plaintiff access evidence which: ‘…would not enable the plaintiffs to be in a better position from the point of view of presentation of the case at trial. On the other hand it is clear that the only purpose

in my view to be served by letting the plaintiffs see this documentation would be to put them on notice of the allegedly suspicious circumstances’. At First Instance The plaintiffs made three primary submissions in support of the proposition that the ‘Markus Discretion’ did not apply in this case: (a)

The ‘Markus discretion’ no longer exists or exists in a very limited form by virtue of the introduction of the new Civil Procedure Act 2005, Uniform Civil Procedure Rules 2005 and various Practice Notes of the Court, which required a ‘cards on the table’ approach as regards exchange of evidence.

(b)

The ‘Markus discretion’ had never had any application in circumstances where the defendant was positively asserting a defence of fraud.

(c)

Even if the ‘Markus discretion’ remained, the necessary elements had not been made out by the defendant and the Court would not in its discretion make the orders sought.

The trial judge, Justice Hoeben, rejected all three arguments, noting the insurer’s evidence has been specifically prepared to challenge important parts of the plaintiffs’ case and the credit of the first and second plaintiffs and were the affidavits to be made available to them, there would be an inevitable risk of the plaintiffs being tempted to tailor their evidence to meet it. He concluded stating that there was nothing in the statutory enactments or subsequent case law which has the effect argued for by the plaintiffs and that the requirements for the discretion to be satisfied were present. On Appeal The Court of Appeal dismissed the plaintiffs’ appeal and confirmed the judge at first instance had acted appropriately by taking into consideration the overriding purpose of the Civil Procedure Act 2005 in promoting the just and efficient resolution of disputes. The Court was satisfied Justice Hoeben had weighed the prejudice that may be suffered by the plaintiffs in not being supplied with the information before trial and also the prejudice to the insurer if it were required to divulge that material prior to cross examination of the insured, in circumstances where credit was very much an issue.

Implications The decision at first instance and on appeal confirms the continued existence of an important discretion which enables litigants to preserve the forensic value of evidence which might undermine the credibility of an opposing witness or which, if the opposing witness knew of it would tempt them to alter their testimony.

As the plaintiffsâ&#x20AC;&#x2122; submissions illustrate, it had been thought in some quarters that the case management regime reflected in Civil Procedure Act 2005 and Uniform Civil Procedure Rules 2005 is inconsistent with a judicial discretion of the kind discussed in Markus and this issue has now been decisively resolved. Quite apart from the disclosure of evidence by service of affidavit, insurers may be called upon to disclose evidence which may be subject to the Markus discretion under subpoena or by way of discovery obligations. In appropriate cases, the making of an application to the Court to withhold this information could potentially mean the difference between being in a position to retain a forensic advantage and properly test the credibility of a witness, or arming the witness with the ability to tailor their evidence to their advantage. Insurers conducting litigation involving issues of fraud or witness credibility should carefully consider the effect of producing or serving such documents or witness statements before doing so. In certain cases, as this decision makes clear, a forensic advantage may be retained by seeking application of the discretion. Citation Halpin v Lumley General Insurance Ltd (2009) NSWSC 644 Endnotes (1) (1983) 25 NSW CCR 1

Psalidis & Anor v Norwich Union Life Australia Limited By John Myatt, Partner and Fiona Hanlon, Senior Associate

What is this Case About? This is a case which concerns an insurerâ&#x20AC;&#x2122;s limited ability to compel a life insured to give discovery of their medical records in legal proceedings where a policy has been avoided by the insurer as a consequence of non-disclosure and misrepresentation. It involves the interpretation of Victorian legislation which means it may not necessarily be applicable in other States and Territories.

Background In July 2007, Norwich issued a Critical Illness Policy to Mr. Psalidis and also issued a Life and Total and Permanent Disability Policy on his life to a company he controlled known as the Jam Group. In January 2008, Mr. Psalidis lodged a claim under the Critical Illness Policy seeking payment of a benefit of $1.2 million alleging that he had been diagnosed in December 2007 with a form of cancer affecting the blood known as plasmatcytoma.

Norwich refused to pay the claim and in April 2008 avoided both policies, alleging fraudulent non-disclosure and fraudulent misrepresentation on the part of Mr. Psalidis before the policies were entered into. The details of those allegations summarised in judgment are as follows: On 23 January 2007, Mr. Psalidis attended his treating doctor, Dr Chew, and the doctor requested that tissue samples taken from Mr.Psalidis be examined by Melbourne Pathology. On the following day, 24 January 2007, Melbourne Pathology reported that the specimen showed a spreading malignant melanoma. On 14 February 2007, the malignant melanoma was removed by a surgeon, Dr Houseman, at Cabrini Hospital. About four months later Mr. Psalidis applied to Norwich for the policies and was asked several highly relevant questions by Norwich. He answered those questions as follows: (i) Q

A (ii) Q A

Have you ever had or been told you had or received medical advice, investigation or treatment for ... cancer, cyst or tumour of any kind? No. When did you last attend Dr Denis Chew? 10 December 2006.

(iii) Q For what reason did you attend him and what was the result? A Blood pressure check. Good. Norwich alleged that contrary to his duty of disclosure, Mr. Psalidis did not mention that in January and February 2007 he had the skin specimens removed by Dr Chew and that he had been diagnosed with malignant melanoma or that he had undergone surgical excision of the melanoma. Mr. Psalidis and his company issued proceedings in the Supreme Court of Victoria, seeking a declaration from the Court that they were respectively entitled to the benefits payable under the policies. The plaintiffs each asserted that they did not breach any duty of disclosure to Norwich and that they had honestly disclosed all matters known to them to be relevant to the risk.

The Decision A party to legal proceedings can be compelled to discover to the other parties to the proceedings documents relevant to facts in issue between them that are in their â&#x20AC;&#x2DC;possession, custody, or powerâ&#x20AC;&#x2122;.

Prior to the enactment of the Health Records Act 2001 in Victoria there was no doubt that treatment records were not the patient’s property and a patient therefore could not be ordered by the court to discover these records to other parties, as the documents were not within their ‘possession, custody, or power’. However the Health Records Act 2001 gave patients a statutory right of access to the records which could be obtained by the patient by making an application and subject to the payment of a small fee. Justice Cavanough considered various judicial interpretations of the notion of ‘possession, custody, or power’ in Australia and overseas which turned upon whether the party in question had a ‘presently enforceable legal right’ to obtain the documents from whoever actually held them. In a much earlier decision in Palmdale Insurance (in liquidation) v L Grollo and Co Pty Ltd,1 it had been suggested that this would include documents that will come into a party’s power if they make a request for and are granted access to the documents. Justice Cavanough reviewed the Health Records Act 2001 and found some 16 limitations and restrictions upon a patient’s rights to obtain their medical records. He consequently concluded it did not create ‘an unrestricted right of access to medical records’ and therefore that the records were not discoverable by Mr. Psalidis. He also distinguished the case from Palmdale Insurance and other similar decisions which suggested that the discovery obligation extended to documents which a party might be able to obtain by making an application. Implications In 1998, in the case of Fitzgerald v Munro,2 Justice Beach ruled that medical records in Victoria may not be divulged by a medical practitioner without the patient’s consent. Had the application to obtain discovery directly from the plaintiff succeeded, it would have prevented the plaintiff taking advantage of this decision to prevent the critical records of his medical attendances being introduced into evidence. Justice Cavanough expressly left it open to the insurer to bring an application for third party discovery against the medical practitioners in which the question of whether the plaintiff had waived his right to claim privilege over the records, so there is still a prospect the insurer may obtain access to them. The decision has less relevance to jurisdictions such as New South Wales, where medical records can be accessed relatively simply by the issue of a subpoena. Citation Psalidis & Anor v Norwich Union Life Australia Limited [2009] VSC 417 Endnotes (1) [1987] VR 113 (2) [1998] VSC 30

Remittance to Trustees Tuftevski v Total Risks Management Pty Ltd as trustee of the BHP Billiton Superannuation Fund By Peter Riddell, Partner and Helen Mentiplay, Senior Associate

What is this Case About? Apart from considering when a court should execute the trust by substituting its own discretion for that of the trustee, this is a case which considers a number of other issues including the appropriate time for assessment of the claim and when a claim is statute-barred by reason of relevant limitation of actions legislation. The decision may be seen (along with other recent cases, such as Finch at first instance1 and Kowalski2) as part of a trend in which the courts have tried to expand the situations in which the exercise of discretion by a superannuation trustee can be reviewed. The judgment suggests that superannuation trustees who fail to provide claimants with an opportunity to respond to adverse materials are at risk of having their decisions open to review for want of bona fide inquiry and genuine consideration, much as life insurers have been since the decision in Beverley v Tyndall.3

Background The plaintiff was an employee of BHP Steel (BHP). He injured his back in 1985 and continued to work light duties. He was a member of the self-insured BHP Billiton Superannuation Fund (the Fund), of which the Defendant is Trustee (the Trustee). He submitted his resignation on 29 September 1998, requesting payment under a voluntary redundancy scheme being offered at that time. His resignation took effect on 30 November 1998 and he ceased to be a member of the Fund on that date. The trust deed provided that a benefit would be paid to a member who retired prior to normal retirement age due to disablement. ‘Disablement’ was defined as follows: ‘Disablement means physical or mental disablement caused through illness infirmity or accident to a degree which the Trustee in its absolute discretion, after obtaining the advice of one or more registered medical practitioners considers likely to render the Member permanently incapable of obtaining or continuing in suitable employment as determined by the Trustee having regard to the Member’s qualifications training and experience.’ The next year, on 24 March 1999, the plaintiff submitted an application for a Disablement Benefit to the Trustee citing back pain which prevented him from performing his duties as a Technical Officer.

The Trustee considered the application on 15 November 1999 and rejected it on the basis that the plaintiff’s retirement was due to his decision to resign to get a redundancy package and not as a consequence of his disablement. The Trustee had obtained a medical report which was adverse to the plaintiff and a statement from BHP (the Employer’s Statement) which suggested that the plaintiff had been capable of working his normal duties before he ceased work and had voluntarily resigned in order to obtain the redundancy package. These two documents were not provided to the plaintiff prior to the Trustee’s determination. On 9 December 1999, the plaintiff requested copies of the documents which the Trustee had used to assess his claim. The Trustee chose not to provide the plaintiff with the adverse medical report because it suggested that surveillance be undertaken. It did not disclose the Employer’s Statement either. In March 2000, the plaintiff’s solicitors provided the Trustee with further medical reports from his treating doctors which supported the view that the plaintiff was disabled. On 14 March 2000, the Trustee affirmed its determination that the plaintiff’s termination was not due to his disablement. On 26 April 2000, the plaintiff lodged a claim with the Superannuation Complaints Tribunal (SCT). Around the same time the Trustee obtained surveillance material which showed the plaintiff performing various physical activities and it sought a supplementary medical report commenting on this surveillance. On 20 February 2001, the Trustee reviewed the claim as additional information had been provided by the plaintiff during the course of the SCT proceedings. It determined to reject the claim on the basis that the plaintiff was capable of continuing in suitable employment and did not satisfy the definition of Disablement. It did not provide the surveillance material, the supplementary medical reports or the Employer’s Statement to the plaintiff prior to its determination. On 5 March 2001, the plaintiff obtained copies of the surveillance materials from the SCT, which the Trustee had provided to the SCT at its request. The plaintiff made submissions to the SCT attacking the surveillance material. However, on 30 September 2002, the SCT affirmed the Trustee’s decision to reject the plaintiff’s claim. On 22 February 2006, the plaintiff lodged a further complaint with the Trustee, attaching a new medical report from a Dr Gotis-Graham. He submitted that the Trustee had acted unreasonably in rejecting his application for a Disablement Benefit. On 24 February 2006, the Trustee wrote to the plaintiff advising that it was not in a position to consider the complaint again, as the plaintiff had lodged a complaint with the SCT regarding the rejection of his Disablement Benefit.

The Decision His Honour, Acting Justice Smart, in the Supreme Court of New South Wales considered several issues presented by these facts: (a)

Did the Trustee have an obligation to provide the plaintiff with an opportunity to respond to adverse materials before it made its decisions in 1999, 2000 and 2001?

(b)

Was the Trustee bound to reconsider its decision following the submission of a new medical report by the plaintiff in February 2006?

(c)

What was the appropriate time for assessment of the claim?

(d)

Was the claim statute-barred by reason of any relevant Limitation of Actions legislation?

(e)

Should the Court execute the Trust by substituting its own discretion for that of the Trustee?

The Opportunity to Respond to Adverse Materials Acting Justice Smart found that although there were materials before the Trustee from which it could have reached the conclusion that the plaintiff did not satisfy the definition of Disablement, it had failed to provide the plaintiff with an opportunity to respond to adverse materials. Specifically, in respect of its decisions of 15 November 1999 and 14 March 2000 the Trustee had failed to seek the plaintiff’s response to ‘the thrust of’ the adverse medical report and the Employer’s Statement (without necessarily disclosing those documents); and in its decision of 20 February 2001, the Trustee had failed to seek any information or response from the plaintiff regarding the adverse medical report or the surveillance material, or provide the surveillance videos to the plaintiff. As a result, the Court found that there had been no bona fide inquiry or genuine decision making by the Trustee and the decisions from 1999, 2000 and 2001 were liable to be set aside. The Court also found that the defects in these decisions were not rectified by the fact that the plaintiff had been provided with an opportunity to respond to the adverse materials in its submissions to the SCT and the SCT had nonetheless upheld the Trustee’s decision. In respect of the February 2006 decision, His Honour held that apart from the defects in the earlier decisions, the Trustee would not have been required to reconsider this decision because the additional medical report was not relevant to the decision to be made by the Trustee, as it did not relate to the period relevant to the assessment of the claim.

In coming to this conclusion the Court found that the correct date for assessment of the claim was the date of the plaintiff’s retirement ‘or within a reasonable time thereafter,’ not the later period to which the supplementary medical reports related. Senior Counsel for the plaintiff submitted that the Trustee was bound by the rules of natural justice. He argued that the Trustee had failed to provide the plaintiff with copies of the adverse material on which it relied and had therefore not afforded him with procedural fairness and its decisions could be reviewed on this basis. The Court confirmed that there was a considerable body of authority against the plaintiff’s proposition and the law as it presently stands, does not require the trustee to adhere to rules of natural justice. Nonetheless, the Court concluded that the earlier decisions of the Trustee were flawed due to the Trustee’s failure to provide the plaintiff with an opportunity to respond to adverse materials, thereby producing the same practical results as if the Trustee had been obliged to follow the requirements of natural justice. The Court’s position was strongly influenced by the judgments in both the Victorian Supreme Court and the Court of Appeal in Flegeltaub.4 In that case, at first instance, Byrne J stated that, although a trustee is not bound by the rules of natural justice, the circumstances may require it to seek the claimant’s position so that a proper decision can be made – for example if there is an adverse matter of fact which the claimant is in a position to explain. In the Court of Appeal, Justice Callaway had stated in Flegeltaub4 that the obligation of the trustee to make inquiries in certain circumstances is not a matter of natural justice, but was a matter of bona fide inquiry and genuine decision making and this approach evidently found favour with Acting Justice Smart. As the trustee was not bound by the rules of natural justice, the Court found it unnecessary to deal with the Trustee’s submissions that any defects in its earlier determinations were cured as a result of the proceedings before the SCT. His Honour also examined the obligations imposed by s52(1) and 52(2)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and found that these provisions also imposed an obligation on trustees to disclose adverse facts to the claimant, on the basis that the ordinary prudent person in the circumstances envisaged by the legislation would take this action as part of their duty to exercise the requisite degree of care, skill and diligence. The Obligation to Reconsider Claims The plaintiff relied on Tonkin5 to argue that the Trustee was bound to reconsider its decision after he had provided the new medical report from Dr Gotis-Graham in February 2006. The Court found that a trustee was only required to consider new evidence if it was relevant to the decision to be made. He considered that the report from Dr Gotis-Graham was not relevant to the decision to be made by the Trustee because it did not discuss the plaintiff’s condition in November 1998, being the date he ceased employment.

The Court therefore concluded that the report of Dr Gotis-Graham did not provide a sufficient basis to warrant the Trustee reconsidering the matter and would not have ordered the Trustee to reconsider its decision of February 2006, if not for the defects in its earlier decisions. However, the Court did note that this position was likely to change if the plaintiff submitted a further report from Dr Gotis-Graham that did comment on his capacity for employment as at the date of his retirement and suggested that such a report would be helpful. Correct Time for Assessment The Court found that the provisions in the trust deed envisaged that at ‘about the time of retirement' the physical or mental condition of the member is likely to prevent him or her from obtaining or continuing in employment. The Court noted that there was ‘an element of futurity involved' and on this basis his Honour considered it was therefore appropriate to insert the words ‘within a reasonable time’ into the definition of Disablement as follows: …likely to render the Member permanently incapable of obtaining or continuing in suitable employment (within a reasonable time) as determined by the Trustee having regard to the Member’s qualifications training and experience.’ The Court therefore considered that the question being posed by the trust deed in this instance was whether the plaintiff satisfied the definition of Disablement ‘in or about November 1998, or within a reasonable time thereafter’. In recent times, differences of opinion have arisen as to when is the appropriate time to assess a claimant as being totally and permanently disabled/incapacitated under similar insurance or trust deed arrangements. On the one hand, decisions such as Auspine6 and Oberlechner7 indicate that the appropriate time is the date the claim is being assessed. On the other hand, decisions such as Halloran8 and Mabbett9 suggest that the appropriate time is at the expiry of the six month waiting period which is generally provided in the relevant insurance policies. This case falls into the Halloran category. However, as the trust deed in this case did not provide for a six month waiting period, it appears that the Court has imported into the trust deed the requirement that the plaintiff is unable to obtain alternative employment within a ‘reasonable time’. The Court did not suggest how long a reasonable period may be, although it found that the provisions have a more immediate operation than that of the position eight to ten years after the member has retired. However, the Court did note that evidence obtained after November 1998 (the date the plaintiff ceased work) may still be relevant. For example, the Court considered that surveillance materials obtained some 16 months after the plaintiff ceased work were relevant. However, the medical report only commented on the plaintiff’s condition in May 2005. It would

appear clear that in these circumstances, six and a half years after retirement is not ‘within a reasonable time’. Limitation of Actions The Trustee argued that the plaintiff’s action was statute-barred, but this was rejected. The Court found that the plaintiff’s cause of action was a claim based on a ‘specialty’, being the trust deed which established the Fund. He ultimately concluded that the trust deed was governed by the laws of Victoria, and the action therefore had a limitation period of 15 years pursuant to s5(3) of the Limitation of Actions Act 1958 (Vic). The Court also found that a claimant’s cause of action does not accrue until a decision is made, or alternatively the trustee advises the claimant of its decision. The Trustee had made its decisions in 1999, 2000 and 2001 and advised the plaintiff of them shortly thereafter. The plaintiff’s claim had therefore been brought well within the 15 year limitation period. Court Exercises Trustee’s Discretion The Court cited with approval the principles espoused by Justice McDougall in Baker10 – that in normal circumstances a court will remit the matter back to the trustee to determine the matter according to law, but it can substitute its own discretion if in the court’s opinion, a trustee is unlikely to fulfill its duty in a proper manner. The plaintiff referred to the fact that the Trustee had held back materials from the plaintiff and submitted that the behaviour of the Trustee had been adversarial in character. On this basis, the plaintiff submitted that the Trustee was unlikely to fulfill its duty in a proper manner and therefore the Court should execute the trust after hearing all the evidence. It appears that Acting Justice Smart agreed with the plaintiff’s position, as he found it was appropriate for the Court to execute the trust in this instance, having regard to the Trustee’s earlier behavior. Other than the conduct referred to by the plaintiff, he noted that the Trustee had conducted ‘a vigorous and determined case against the applicant' before him in Court. Further, an operative who had been retained by the Trustee to film surveillance (who had made derogatory comments about the plaintiff which were audible on the video recording) had also adopted the approach of a vigorous adversary. His Honour’s comments regarding the Trustee’s defence of the claim are surprising and perhaps do not give recognition to the fact that the Trustee owes a duty to all other members of the Fund to vigorously defend any claim for benefits to which the Trustee considers the applicant is not entitled. Furthermore, the operative who conducted the surveillance was engaged by the Trustee but was not its employee or representative and the Trustee expressly stated that it did not support or condone his comments once it became aware of them. The fact that the operative took on an adversary role in respect of the plaintiff could not be seen as a true reflection of the Trustee’s position.

Implications This decision reflects an increasing willingness of the part of Judges to closely supervise and intervene in the exercise of trustees’ discretions. As in Baker10, the Court’s approach seems to stem from the same underlying concern that superannuation benefits are of special importance because of the employment context in which they are paid. That is, members superannuation schemes pay a part of their wages by way of contributions and in such circumstances ought to have the opportunity to be heard before a trustee exercises its discretionary powers against them. It seems increasingly likely that the decisions of superannuation fund trustees will be open to review by the courts where the trustee fails to provide a claimant with the opportunity to respond to any adverse facts or documents prior to the exercise of the trustee’s discretion. While the courts justify the review on a different basis, the practical result is that trustees may be required to adhere to principles similar to those required by the rules of natural justice. A failure to do so may well leave decisions of trustees open to review for lack of bona fide inquiry and genuine decision making. In the case of funds which have group insurance arrangements, trustees ought to take into account in their determinations whether the insurer has complied with its procedural fairness obligations. If the insurer has failed in this regard and it is apparent that the claimant has not had the opportunity to respond to adverse materials, the trustee may need to take steps to ensure that the claimant is provided with this opportunity so that its own decision is not open to review. In this case, the Court did not address the issue of whether the Trustee ought to have provided reasons for its determination; however the decision confirms that superannuation trustees are under an increasing degree of scrutiny from the courts. As such, trustees would be well-advised to keep good records of their claims process, including reports, recommendations, minutes and file notes; so that they can show that each claim has been given real and genuine consideration. Trustees should note that according to the Court in this case, the correct time for assessing the likelihood of a return to suitable work is within a ‘reasonable time’ after cessation of work, though in the long run this is a matter for the proper construction of the trust deed (or insurance policy). Finally, the case also has implications for trustees in Victoria, as it suggests that the limitation period under the Limitation of Actions Act is 15 years from the date the decision is made, or alternatively the date the decision is conveyed to the claimant.

Citation Tuftevski v Total Risks Management Pty Ltd as trustee of the BHP Billiton Superannuation Fund 2009) NSWSC 315. Endnotes (1) Finch v Telstra Super Pty Ltd (2008) VSC 481 (2) Kowalski v MMAL Staff Superannuation Fund Pty Ltd (ACN 064 829 616) (No 3) (2009) FCA 53 (3) [1999] WASCA 198 (4) Telstra v Flegeltaub (2000) VSC 107 (Justice Byrne) (2000) VSCA 180 (Court of Appeal). (5) Tonkin & Ors v Western Mining Corporation Ltd & Anor (1998) WASCA 101. (6) Auspine Staff Superannuation v Henderson (2006) FCA 1281. (7) Oberlechner v Watson Wyatt Superannuation (2007) NSWSC 906. (8) Halloran v Harwood Nominees (2007) NSWSC 913. (9) Mabbett v Watson Wyatt Superannuation & Anor (2008) NSWSC 365 (10) Baker v Local Government Superannuation Scheme Pty Ltd (2007) NSWSC 1173

Fresh Evidence Gilberg v Maritime Super Pty Ltd By John Myatt, Partner

What is this Case About? This is an important decision at an appellate level setting out the test to be adopted by trustees in deciding when they must reconsider a previously declined claim for TPD. The decision is of particular interest as it applies to a process set out in the fund’s rule about how TPD is certified and not just to the formation of a particular opinion by the trustee.

Background Mr Gilberg was a waterside worker. On 12 May 2001, he severely injured his back and was unable to continue in his employment. On 4 April 2003, he made a claim for a TPD benefit supported by two medical reports as the fund’s rules required. The fund was also required to obtain independent reports and in the event that not all doctors agreed that the member was disabled in the manner required by the relevant definition, the fund was to arrange for a further ‘tiebreaker’ medical opinion to be obtained. In this case the rules provided the trustee was to base its determination ‘solely’ upon the medical opinion of the ‘tiebreaker’ doctor. The Fund obtained the additional medical opinions required by the rules but while all doctors agreed that Mr Gilberg was permanently incapable of performing his duties they did not agree that he was unable ever to work again in a job for which he was qualified by education training or experience. Consequently, the trustee had to refer Mr Gilberg to the ‘tiebreaker’ doctor, Dr Oates. Dr Oates agreed that Mr Gilberg would never do his own job again but did not consider that he was unable ever to work again in any job for which he was qualified by education, training or experience. The fund consequently rejected his claim. On 28 January 2005, he made a complaint to the Superannuation Complaints Tribunal (‘SCT’) which upheld the complaint and directed that the TPD benefit be paid. The Trustee appealed to the Federal Court where Justice Buchanan found that the SCT had made an error of law in that the trustee, pursuant to the Rules was obliged to follow the ‘tie breakers’ opinion. He consequently found the SCT could not reject the medical opinion of Dr Oates and find of entitlement to TPD benefits the basis of the other medical opinions. He restored the original determination of the trustee and decided that there was no point in remitting the matter to the SCT for further adjudication as once the errors of law were resolved, there were no grounds upon which it could do anything other than refuse the claim.

After the conclusion of the Federal Court proceedings, Mr Gilberg asked the trustee to reconsider his claim and provided the trustee with a statement and a report of Dr Rodreigues. This report was dated 4 October 2002, though the request for reconsideration occurred in 2007. The Trustee refused to reconsider the claim stating that it had no power to do so because of the decision in the Federal Court and the wording of the Rules. Mr Gilberg subsequently provided the trustee with a further report of Dr Griffiths dated 13 December 2007 and Dr Harris dated 20 February 2008 and once again sought reconsideration of the claim by the Trustee. The Trustee responded by letter dated 4 April 2008, repeating that it had no power to reconsider the claim as the procedure under the rules had been exhausted and even if it did, the doctor’s reports provided did not trigger the assessment process a second time. Proceedings were commenced in the Supreme Court of New South Wales July 2008.

The Decision At first instance, Justice McDougal found that Mr Gilberg was not entitled to relief in relation to the trustee’s refusal to reconsider his claim and entered judgment in favour of the trustee. Mr Gilberg appealed to the Court of Appeal where the leading judgment was given by Justice Hodgson. He observed that there were four issues to be resolved of which only the last had been considered by the judge at first instance. (1) Is there power to reopen an application under the relevant rule? (2) What is the duty of the trustee when an application is made to reopen? (3) Was the duty fulfilled in this case? (4) What, if any, relief should be afforded? While noting that the relevant rule required a procedure to be adopted to determine if a member was TPD, rather than requiring an opinion to be formed by the trustee, the Court concluded that it nevertheless remained equally open to a member to seek to restart that process in appropriate cases even though it had already worked through once to its conclusion and the claim declined. This was because the rule: ‘…provides an entitlement to Members, without suggesting that the entitlement is lost irrevocably if the Member once applies and fails.’ 1 The trustee would be duty bound to restart the process required by the rules and obtain further medical reports, including if necessary a further ‘tiebreaker’ report, if the material provided in support of the new application indicated:

‘a reasonable possibility of a different result by reason of circumstances occurring since the previous application or by reason of evidence not reasonably available at the time of the previous application.’ 2 Justice Hodgson provided a useful practical example of how this might occur, noting that where the original medical evidence had been based on the conclusion that the member’s medical condition was likely to improve over time, further medical evidence indicating that it had not improved as expected would be grounds to reopen consideration of the claim. His Honour noted for instance that Dr Oates was of the view that the appellant’s failure to return to work was not entirely due to his back injury but also as a result of demotivation and to psycho-social factors. If that, according Justice Hodgson was the case, the entrenchment of such demotivation and psycho-social factors might reasonably be considered itself an aspect of Mr Gilberg’s physical and mental condition, which could properly be the subject of a further medical opinion.3 The trustee had maintained it had no power to reconsider the claim and had hence failed to address the correct question, which was whether the reports themselves were sufficient to suggest the possibility of a different result. The decision of the trustee had consequently miscarried and was set aside. The member submitted that the Court should therefore now decide the matter, in place of the trustee, however the Court declined to do so and instead directed the trustee to restart the procedure under the rules and cautioned it to exercise consideration about the fairness to the member of qualifying the same medical practitioners again, particularly Dr Oates.

Implications The decision indicates a trustee when asked to review a previously declined claim must actively consider whether there is a ‘reasonable possibility’ of a different result by reason of either: •

Circumstances occurring since the previous denial; or

•

Evidence not reasonably available at the time of the previous denial.

The relevant ‘circumstances’ may include the failure of the member’s medical condition to improve in the way the original examiners expected, or ‘the entrenchment’ of physiological problems associated with prolonged unemployment. This suggests that there may frequently be grounds to reopen old claims where the member continues to be disabled and has not returned to work. It is useful to compare the approach taken in this case by the New South Wales Court of Appeal with that taken in the Federal Court by Justice Finn the following case, Kowalski v MMAL Staff Superannuation Fund Pty Ltd, which was decided earlier in 2009 and which offers a considerably more conservative view of the obligation to reconsider.

It is unclear if Kowalski was cited to the Court of Appeal but the case is not considered at any point in the judgment.

Citation John Gilberg v Maritime Super Pty Ltd (2009) NSWCA 325 (Court of Appeal). See (2008) NSWSC 1318 for the first instance decision and (2009) NSWCA 394 in relation to the Court of Appeal’s decision on costs.

Endnotes (1) At paragraph 22. (2) At paragraph 26 (3) At paragraph 37

Kowalski v MMAL Staff Superannuation Fund Pty Ltd By Darryl Pereira, Senior Associate

What is this Case About? This is a case about the right of a member to seek reconsideration of a decision to deny a claim for total and permanent disablement (‘TPD’). It highlights that the trustee is not merely the ‘pawn’ of the member as there are limitations to a trustee’s duty to reconsider a TPD claim based on further evidence. Both this and the previous case, Gilberg v Maritime Super Pty Ltd are decisions which emphasise that a trustee is not bound to reconsider without good reason, but in Kowalski the Court suggests the obligation to review a decision is triggered where there was merely a ‘reasonable possibility’ of a different result if a review was undertaken.

Background The plaintiff issued proceedings against the trustee of his superannuation fund claiming an entitlement to a TPD benefit pursuant to the terms of the trust deed governing the superannuation fund. The fund was self-insured during the relevant period for which the plaintiff was claiming the benefit. The trustee sought summary dismissal of the plaintiff’s proceedings pursuant to s31A of the Federal Court of Australia Act 1976 (Cth).This section provides that a Court can give judgment for one party against another, if the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting its case. This procedure is slightly unusual but came against a background of numerous earlier proceedings between the plaintiff and his former employer over the course of several years including proceedings in the Supreme Court of South Australia in 2005 in which the employer was successful in having him declared a vexatious litigant.

In this case, the plaintiff alleged that in August 1991, he suffered a psychological injury/mental breakdown whilst employed by Mitsubishi Motors Australia Ltd (MMAL) and in respect of which he lodged a TPD claim in February 1992. The plaintiff’s TPD claim was rejected by the trustee. This decision was not challenged in the proceedings. The plaintiff’s employment was subsequently terminated by MMAL on 16 March 1994. The trustee was advised at the end of March 1994 by MMAL that the plaintiff had ‘resigned’ from his employment. There was no contemporaneous evidence of how the trustee was notified of the plaintiff’s termination. There was also no evidence to suggest that a formal application for a TPD benefit was made by the plaintiff at the time of his termination. In late August 1994, the trustee determined to pay the plaintiff a ‘resignation benefit’ under the Trust Deed. The plaintiff claimed that the trustee should have considered, in late August 1994, his entitlement to a TPD benefit rather than a resignation benefit. He was then paid an ‘ill health benefit’ in November 1998, as a significant part of an overall settlement in relation to: ‘Any matters related to the termination of his employment with MMAL.’ ‘Any superannuation payable by the MMAL Staff Superannuation Fund.’ In July 2001, the plaintiff provided the trustee with further medical evidence which he asked to be considered in connection with a TPD entitlement. The plaintiff’s TPD claim was reconsidered and rejected by the trustee in August 2001. The relevant test under the Trust Deed for TPD was: ... in relation to a Member disablement due to illness, accident or injury as a result of which – He has been continuously absent from employment with the Employer for a period of at least six months (or such lesser period as the Trustee may determine in any particular case); and He is, in the opinion of the Trustee and after consideration of medical evidence satisfactory to them, incapacitated to such an extent as to render him unlikely ever to engage or work for reward in any occupation for which he is reasonably suited by education, training or experience. On 3 November 2005, the plaintiff applied to have the decision made by the trustee in August 2001 to decline his TPD claim reconsidered based on additional material. The trustee refused to reconsider the plaintiff’s claim again. The trustee’s solicitors informed the plaintiff that: ‘… The trustee is of the opinion that your letter of 3 November 2005 and its annexures raise no new issues. We have again been instructed by the Trustee that we will not be responding to any matters that you have previously raised and which have been dealt with.’

Justice Finn summarised the plaintiff’s allegations against the trustee as relevantly including whether: The trustee should have considered, but failed properly to do so, the plaintiff’s entitlement to a TPD Benefit at the time he was paid a resignation benefit in August 1994; and The trustee should have but failed to properly consider his claim for a TPD Benefit in November 2005. His Honour noted that the plaintiff was also effectively complaining that he should not have been paid an ‘ill health benefit’ in 1998, but this had not been pleaded in the case, in which the plaintiff, as usual, was self-represented.

The Decision His Honour accepted that the grounds upon which a Court will review an exercise of a superannuation trustee’s exercise of discretion are essentially those stated in the well known decision in Karger v Paul1, namely where: •

That discretion was not exercised in good faith;

•

There was not a real and genuine consideration of the correct question;

•

The discretion was not exercised in accordance with the purposes for which the discretion was conferred; and

•

If the trustee has given reasons for its exercise of discretion, those reasons were not sound.

Justice Finn further noted that whilst both under the general law and the terms of this particular trust deed, the trustee had no duty to give reasons for a determination adverse to the plaintiff. A failure to give reasons in circumstances where an explanation might be called for is another matter. In this respect, His Honour quoted with approval the observations made by Justice Young in Maciejewski v Telstra Super Pty Ltd who in dealing with the suggestion that a trustee is not bound to give any reasons and therefore the matter is completely unreviewable stated: ‘Nothing could be further from the truth…in a case where a plaintiff puts forward a prima facie case that the trustee’s discretion was miscarried, the absence of reasons and the absence of any evidence before the Court as to what happened, will tend to make that prima facie case a virtual certainty’.2 However, it is evident that His Honour had a poor impression of the plaintiff both as a litigant and as a witness: ‘While Mr Kowalski vigorously disputes the accuracy and often the veracity of much of the documentary evidence before me, his concerns have only slight bearing on

the issues I need addressed. I have little regard for his regular assertions of bad faith, as freely made as they are unsubstantiated. And I treat with considerable reserve his interpretation of the motives of others, his own evidence from the bar table and his general narrative of the events. Moreover, his application and pleading, as will be seen, are as notable for what they leave unchallenged as for what they challenge.’ 3 His Honour noted that no formal application for a TPD benefit was made at the time the plaintiff’s employment was terminated and the trustee was unaware that it should consider the plaintiff’s termination entitlements with such a benefit in mind in 1994. It followed that the trustee was entitled, at that time, not to inquire into whether there was medical evidence capable of supporting a TPD entitlement stating that it ‘had no need, or obligation, to in the circumstances.’ Turning to the plaintiff’s allegation that the trustee should have reconsidered the plaintiff’s claim to a TPD benefit in November 2005, His Honour noted that: ‘Whilst it is a trustee’s duty to act in the best interests of its beneficiary, absent an express power of dictation, a trustee is not the pawn of a beneficiary.4 His Honour held that a beneficiary is entitled to seek the reconsideration of a decision affecting his or her interests unless this is precluded by the nature of the decision itself or by the terms of the trust instrument. His Honour went on to state: ‘Where the decision, as here requires the Trustee to form a particular opinion and that opinion has previously been formed adversely to the beneficiary, the Trustee is not obliged to reconsider that opinion absent some reason for so doing. Where, as here, what is raised by the beneficiary is (a) matter which the Trustee has previously had raised before it and dealt with, the Trustee is entitled to decline to re-entertain that matter in the future unless, because of a change of circumstances or otherwise, that decision was not one that a reasonable person could then make’. 5

His Honour therefore dismissed the plaintiff’s claims against the trustee.

Implications It is well established that a trustee may be bound to reconsider a previously declined claim for TPD, when fresh medical or other evidence is provided.6 In recent times, solicitors acting on behalf of members have increasingly relied upon this principle to seek to have a trustee or group life insurer repeatedly review a member’s claim to a TPD benefit. The decision in Kowalski highlights that the trustee is not merely the ‘pawn’ of the beneficiary in these situations and there are limitations to a trustee’s duty to reconsider a TPD claim based on further evidence. There is some tension between Justice Finn’s formulation that a trustee is not obliged to reconsider unless the change in circumstances renders the former decision one that a

reasonable person could no longer make and the later decision of the New South Wales Court of Appeal in Gilberg v Maritime Super Pty Ltd. Both decisions emphasise that a trustee is not bound to reconsider without good reason, but in Gilberg, Justice Hodgson seemed more willing for trustees to act where there was merely a ‘reasonable possibility’ of a different result. Perhaps this is a difference in emphasis rather than one of substance, but it is interesting to speculate whether the contrasting language of the two cases will be explored further in subsequent litigation. Finally, Justice Finn’s comments that a trustee should be mindful of giving reasons in the context of TPD claims when an explanation might be called for, adds to a growing body of case law which suggests that the failure to give reasons could, in certain circumstances, adversely impact on a trustee’s ability to defend its discretionary determination in declining a claim for TPD.

Citation Kowalski v MMAL Staff Superannuation Fund Pty Ltd (ACN 064 829 616) (No 3) (2009) FCA 53 Endnotes (1) (1984) VR 161 (2) (1998) 44 NSWLR 601 (3) At paragraph 67 (4) At paragraph 83 (5) See Tonkin v Western Mining Corporation Ltd (1998) 10 ANZ Insurance Cases 61-397.

Part-time/Full-time Susan Carolyn Purcell v APS Chemicals Superannuation Pty Ltd By Peter Riddell, Partner and Helen Mentiplay, Senior Associate

What is this Case About? This case involves a relatively narrow issue arising from an appeal to the Federal Court from determination of the Superannuation Complaints Tribunal. The Court found that there was no evidence before the Tribunal going to the Appellant’s capacity to perform full time work, though both the trustee and insurer and ultimately the Tribunal considered that they had evidence before them when they respectively declined and affirmed the decision to decline the Appellant’s TPD claim. If nothing else, the decision shows the concept of what amounts to ‘evidence’ may be less clear cut than it appears to be and that ‘evidence’ in the mind of one tribunal may not be ‘evidence’ according to another. The Court’s approach indicates that insurers and trustees should ensure that, where a claimant was working full time prior to disablement, and this is a factor in the relevant definition of TPD, that their letters of instruction to medical practitioners expressly request an opinion making specific reference to the capacity to perform ‘full time’ work. A trustee who receives medical evidence that does not address this issue should remit the matter back to the insurer with a request that the insurer obtain a supplementary or additional medical opinion, which specifically addresses the capacity to return to ‘full time’ work.

Background The appellant was a Sales/Marketing Manager for a chemical company and was a member of her employer’s superannuation fund (‘the fund’). The first respondent was the trustee of the fund (‘the trustee’). The fund had, at the relevant time, a policy of group life insurance issued by the second respondent (‘the Insurer’). In April 2001, the appellant sustained an injury to her back and last performed work on 26 April 2002. On the day she resigned from her employment she was working reduced hours, but her position remained a full-time one. She claimed an entitlement to a TPD benefit, pursuant to the terms of the group life policy. The policy relevantly required her to: Have been unable to work in her usual occupation continuously for six months; and Be ‘unable ever again to work in any business, occupation or regular duties for which...she is reasonably qualified by education, training or experience.’ 1

The policy relevantly defined ‘usual business, occupation or regular duties’ to mean full-time, casual or part-time duties where the person insured is defined as a full-time, casual or parttime employee (as applicable) under the policy and it is immaterial whether a business, occupation or regular duty is paid or unpaid. The trustee and the insurer both decided to decline the appellant’s claim on the basis that she did not satisfy the second limb of the TPD definition. The Appellant sought to have these decisions reviewed by the Superannuation Complaints Tribunal. On 10 October 2008, the Tribunal affirmed the decisions of the insurer and the trustee.2 The Appellant subsequently appealed that decision on a question of law to the Federal Court under Section 46 of the Superannuation (Resolution of Complaints) Act 1993.

The Decision Time For Assessment Justice Marshall observed that the relevant date for consideration of the operation of the TPD definition – i.e. the relevant date for assessment – was the date of the trustee’s decision, citing as authority for this proposition other Federal Court decisions in Samaras v Australian Retirement Fund Pty Ltd 3 and Davis v Rio Tinto Staff Superannuation Fund Pty Ltd. 4 This suggests that the Federal Court will continue to support the view initially expressed by Justice Jessup in Auspine Staff Superannuation Pty Ltd v Henderson5, that the date of the trustee’s decision is the date as at which TPD is to be determined. This position is inconsistent with the decisions of a number of the superior courts in the States handed down since Auspine, which support the view that the relevant date for assessing the future likelihood of a return to work, is at the expiry of the six month absence from employment, due to injury or illness.6 Medical Evidence His Honour, when reviewing the medical evidence, placed particular emphasis on two reports obtained by the insurer during its assessment of the Appellant’s claim. In one report, Dr ‘CB’ concluded that the appellant was capable of undertaking suitable employment and went on to suggest a number of administrative tasks which she could perform, with suitable medical restrictions. His Honour noted that when the Tribunal cited Dr CB’s report in its reasons, it omitted the following ‘key words’: ‘I would consider in the first place that she should work reduced hours’. His Honour noted that Dr ‘MW’, providing a report for the WorkCover insurer, also referred to reduced hours and considered that Mr. ‘BD’s’ report was ‘to similar effect’. His Honour concluded that:

‘There was no evidence which dealt with whether (the appellant) was capable of returning to full-time work.’ In reaching this conclusion, His Honour does not give the Tribunal credit for the fact that a doctor who considers that the appellant can return to work at reduced hours ‘in the first place’, must necessarily be anticipating that the number of hours she is able to work will subsequently increase. In the context of Dr CB’s earlier comments, it was arguably not unreasonable for the Tribunal to have interpreted the report as suggesting the appellant would ultimately be capable of full time work. However, the Court seems to have taken the absence of express words to this effect as fatal.

Implications Firstly, as noted above, the decision adds to the ongoing debate regarding the appropriate time for assessment of a TPD claim and further supports the view consistently held by members of the Federal Court that the appropriate time is the date of the decision. Secondly, His Honour was not satisfied that reference in a medical report to ‘some lighter sedentary work’ was evidence of fitness for full time work. Insurers and trustees should therefore be cautious in ensuring that, where a claimant was working full time prior to disablement, their letters of instruction to medical practitioners expressly request an opinion on this issue and that the reports provide such an opinion using the specific words ‘full time’.

Citation Purcell v APS Chemicals Superannuation Pty Ltd (2009) FCA 981 Endnotes (1) At paragraph 8 (2) Determination Number D08-09\034, Superannuation Complaints Tribunal (3) (2007) FCA1323 at par 18 per Gordon J (4) (2002) 118 FCR 170 at par15 per Heerey J (5) (2006) FCA 1281 (6) See Mabbett v Watson Wyatt Superannuation and Anor (2008) NSWSC 365 and Halloran v Harwood Nominees (2007) NSWSC 913.

Telstra Super Pty Ltd v Finch By John Myatt Partner

What is this Case About? The questions of construction raised in this case confine the main legal issue decided to the terms of the particular deed in question and makes it of narrow relevance, though it provides a tortuous illustration of how difficult it can be to establish what the threshold issues that qualify a member to be considered for a benefit can sometimes be in the context of superannuation funds.

The decision however, also includes a useful discussion of the circumstances in which a court may intervene with the discretionary decision of a trustee because relevant discretion was not exercised in good faith, upon real and genuine consideration. Importantly, the Victorian Court of Appeal has clarified that not all departures from ‘procedural fairness’ will vitiate a decision on the later ground. Harassed trustees can take comfort from the Court’s observation that the fact that a trustee makes an incidental factual error or does not undertake every possible inquiry is not sufficient reason for a court to set aside a decision that was made in good faith, on real and genuine consideration and for a proper purpose.

Background The plaintiff, Mr Finch, was employed by Telstra from 1 October 1992 until 23 January 1998. Although born as Alan Finch, in 1988 he underwent gender reassignment surgery so commenced his employment with Telstra as a woman, Helen Finch. In October 1996, the plaintiff was experiencing dissatisfaction with his female sexuality and resumed a male personality, name and dress. He developed severe depression during this time and commenced sick leave from Telstra. Mr Finch underwent a rehabilitation program in February 1997, working from home, initially for 2 hours a day, with a view to returning to work which he did on 24 March 1997. He underwent a double mastectomy and had surgery to masculinise his nose. In August 1997, as his position of Team Leader had been made redundant, he was offered the option of voluntary redundancy or redeployment within Telstra. He successfully applied for another position within Telstra, to commence on 1 December 1997. Further gender reassignment surgery planned for November 1997 was deferred due to a lack of funds and an apprehension by Mr Finch that he was going to be retrenched. It was found as a fact that Mr Finch was very depressed from March 1997 to the end of 1997, being very conscious of his genital mutilation and sensitive of his appearance in the eyes of others. There were reports of discriminatory conduct by Telstra employees towards Mr Finch, which he claimed was damaging to his self-esteem. This was the subject of a complaint to the Equal Opportunity Commission which settled on confidential terms. On 23 January 1998, Mr Finch ceased employment with Telstra by accepting an offer of redundancy. His supervisor indicated that he was not unfit for his duties with Telstra at that time. Mr Finch commenced work (as a male) with Foxtel on 22 February 1999 as a team leader in its call centre, on a full time basis. He resigned on 26 March 1999 for ‘personal reasons’. On 23 November 1999, Mr Finch applied for his preserved benefit under the Telstra Superannuation Scheme on the basis of permanent incapacity. This benefit was paid by the trustee on 5 January 2000.

On 29 November 1999, Mr Finch had commenced work (once again as a male) with Qantas as a domestic sales consultant, 20 hours a week which increased to 24 hours a week from 16 February 2000. He took one day’s sick leave on 27 March 2000, 4 days sick leave beginning 8 April 2000 and 5 days sick leave in May 2000, as well as one day’s unexplained absence. His employment with Qantas was terminated on 16 May 2000 ‘for personal health reasons’. Mr Finch had come into contact with a male at Qantas who he previously had an intimate relationship with while living as a female. He had received death threats and both employees were reported to be ‘psychologically devastated’ following the encounter. On 19 May 2000, a claim for Total and Permanent Invalidity (‘TPI’) was lodged. The trustee declined the TPI claim by way of a letter dated 28 March 2002 on the basis that (essentially) Mr Finch had: Completed a rehabilitation program and was capable of performing his duties without restriction; and Had successfully applied for the job at Telstra Mobilenet but accepted the offer of redundancy instead, which showed that he had capacity for gainful work at the date he ceased employment at Telstra; and Had worked since the cessation of his employment with Telstra, which showed that he was qualified for and had the capacity to engage in gainful employment when he ceased work for Telstra, and thereafter. On 10 September 2002, Mr Finch made a second claim for the TPI benefit. On 20 March 2003, the trustee rejected the second claim for the TPI benefit. The trustee had not obtained a report from an independent doctor prior to making either of its decisions. It had before it evidence of three of Mr Finch’s treating doctors, Dr Doswell, Dr Syrota and Dr Rigby. This medical evidence was in the initial trial judge’s view ‘unanimously to the effect that he was suffering from a severe psychological condition and that this had the consequence that he would, from a medical point of view at least, be unlikely ever to work again’. The trustee was also in possession of a report from Telstra Management outlining Mr Finch’s duties and stating that at the time of his redundancy, he was fit for duty and ‘not a TPI candidate’. This report made no reference at all to the medical conditions that Mr Finch’s doctors emphasised were affecting him at the time he accepted redundancy. A statement from Centrelink showing that Mr Finch was in receipt of a Disability Support Pension had also been provided, as well as a statement from Qantas that Mr Finch had performed his duties adequately and had the skills and expertise necessary for the role. Finally, a statement and a statutory declaration by Mr Finch himself were provided, which contained a number of inaccuracies.

Prior to making the second decision to decline the claim, the trustee received an additional report from Dr Rigby emphasising that the returns to work were a failed rehabilitation attempt. Mr McCredden, a director of the trustee, also participated in a phone call instigated by Mr Finch, in which Mr Finch ‘volunteered the statement that his employment with Qantas had been a real job’. Proceedings were commenced against the trustee by Mr Finch in the Supreme Court of Victoria and on 28 November 2008 he gave judgment in favour of Mr Finch.1 Telstra appealed to the Court of Appeal.

The Decision In finding in favour of the plaintiff, the judge at first instance, Justice Byrne, rejected Telstra’s construction of the relevant provisions of the trust deed, ruling that the period of at least six months during which the plaintiff must be absent from all work to be eligible for the benefit did not have to occur while he was still employed by Telstra. This was described in the judgment as ‘the construction point’. He also concluded that the trustee’s decision to decline his claim had miscarried because it had not exercised its discretion in good faith, and upon real and genuine consideration because of errors in the process which the trustee had used to investigate it. In particular, the trustee had been found wanting in having placed emphasis on the comment that the employment with Qantas had been ‘a real job’ during the conversation with Mr McCredden. Mr Finch had not had the opportunity to explain or contextualise this remark. Justice Byrne was also critical of the trustee’s failure to ask questions about the circumstances of the plaintiff’s last months of employment with Telstra. The Construction Point The Trust Deed relevantly provided in Clause 2.3.3 that: ... if a Member ceases to be an Employee... because of Total and Permanent Invalidity, there is payable to the Member from the Fund a lump sum benefit ... (details of the benefit are specified). The expression Total and Permanent Invalidity was defined in Clause 2.1.2 as follows: ‘Total and Permanent Invalidity’ means, in relation to a Member, disablement as a result of which – (a) ….unless otherwise agreed between the Trustee and the Principal Employer from time to time either generally or in any particular case, the Member has been continuously absent from all active Work for a period of at least six months and has been required by the Employer to participate in a Rehabilitation Program; and (b) ….. in the opinion of the Trustee after consideration of any information, evidence and advice provided to the Trustee by the Employer and any other information,

evidence and advice the Trustee may consider relevant, the Member has ceased to be an Employee and is unlikely ever to engage in any gainful Work for which the Member is for the time being reasonably qualified by education, training or experience.’ Justice Byrne had found that under Clause 2.3.3 of the trust deed, the relevant incapacity must already exist as at the date of cessation of employment, but that six month period required in paragraph (a) of the definition of Total and Permanent Invalidity could occur after the cessation of employment with Telstra. In the Court of Appeal, Acting Justice Hansen, who wrote the leading judgment, reasoned that the second of these conclusions could not be supported despite the fact the deed’s definition of ‘Work’ was not confined to work with Telstra. He noted that paragraph (a) of the definition of Total and Permanent Invalidity had two cumulative requirements, that the member be absent from work for six months and they had undergone a Rehabilitation Program. He inferred such a program must be to rehabilitate the employee for work with Telstra and therefore both requirements were premised on the basis that the member remained in Telstra’s employment. This conclusion was sufficient to disentitle the plaintiff to the benefit claimed, as the relevant absence from work had occurred in his case after he had accepted the redundancy package. Justice Hansen nevertheless made some further observations about the findings that had been made at first instance about the trustee’s failure to exercise its discretion in good faith, and upon real and genuine consideration. Good Faith, and Real and Genuine Consideration The Court of Appeal confirmed that as set out in Karger v Paul2 it has power to set aside the discretionary decision of a trustee if the relevant discretion was not exercised by the trustee in good faith, upon real and genuine consideration, and in accordance with the purposes for which the discretion was conferred. However, the mere fact that a trustee makes an error as to a fact or some other matter or does not make all inquiries that may have been open to be made, is not sufficient reason for a court to set aside a determination that was made in good faith, upon real and genuine consideration and for a proper purpose. As Acting Justice Hansen observed, in Karger v Paul, Justice McGarvie accepted that the defendant trustee was wrong in some of his beliefs, nevertheless the Court did not conclude that these erroneous beliefs played any significant part in leading the trustee to exercise his discretion as he did. Consequently it let the decision stand. His Honour cited the following passage from the judgment of Justice McGarvie with approval: ‘If the gaps and errors in (the trustee’s) information and belief upon matters relevant to the exercise of discretion were sufficiently extensive, it could found an inference that he had not been in a position to give real and genuine consideration to his exercise of the discretion. I do not draw that inference from the evidence before me as to (the trustee’s) information and belief.3

It had been made clear by Justice Byrne that there was no intention to find actual mala fides on the part of the trustee4 and consequently the trustee’s failure was entirely confined to the trial judge’s ‘breach of process’’ findings. These failures as examined by the Court of Appeal were: (1) The failure to further investigate the ‘real job’ statement, made during the conversation with Mr McCredden or inviting the plaintiff to comment on the matter; and (2) The failure to make inquiry as to the circumstances of the plaintiff’s last months of employment at Telstra, and the reasons he decided not to continue working within the Telstra organisation. The second set of issues arose from what Justice Byrne described as ‘the bald statement of the relevant Telstra managers’ to the effect that the plaintiff was fit for duty and ‘not a TPI candidate’ as at March 1997. He also criticised the trustee for failing to enquire about the plaintiff’s actual experience at Telstra in the last months of his employment, including the reason why he did not take up an alternative position. Acting Justice Hansen dealt with these matters in turn and was unconvinced in each case that they made any material difference to way the trustee exercised its discretion. On that basis, the Court of Appeal concluded that there had been no failure to exercise real and genuine consideration, however this result was purely dictated by the facts as according to Acting Justice Hansen: ‘It is both impossible and undesirable to lay down prescriptive rules as to what constitutes a lack of real and genuine consideration by a trustee’.5

Implications The outcome of this case at first instance caused considerable disquiet as it suggested that the exercise of discretion by a trustee could be overturned as a result of question marks over the process the trustee adopted for investigating the claim which had a dubious connection with the core issues the trustee was required to consider. The Court of Appeal decision therefore appears to be a strong and timely voice in favour of commonsense. Trustees can take comfort from the Court’s observation that the fact that a trustee makes an incidental factual error or does not undertake every possible inquiry is not sufficient reason for a court to set aside a decision that was made in good faith, on real and genuine consideration and for a proper purpose. The High Court has agreed to consider an Appeal in relation to this matter. At the time of writing, the date of the Appeal and Application for Special Leave to Appeal has not been fixed.

Citation Telstra Super Pty Ltd v Finch (2009) VSCA 318 Endnotes (1) Finch v Telstra Super Pty Ltd (2008) VSC 481 (2) (1984) VR 161 (3) supra at p 175 (4) Finch v Telstra Super Pty Ltd (No 2) (2008) VSC 527 at par 9 (5) At paragraph 66

The Authors â&#x20AC;&#x201C; will be listed alphabetically John Myatt Partner T: 02 8257 5740 john.myatt@turkslegal.com.au

Darryl Pereira Senior Associate T: 02 8257 5718 darryl.pereira@turkslegal.com.au

Peter Riddell Partner T: 03 8600 5005 peter.riddell@turkslegal.com.au

Michael Iacuzzi Senior Associate T: 02 8257 5769 michael.iacuzzi@turkslegal.com.au

Lisa Norris Partner T: 02 8257 5764 lisa.norris@turkslegal.com.au

Helen Mentiplay Senior Associate T: 03 8600 5004 helen.mentiplay@turkslegal.com.au

Alph Edwards Partner T: 02 8257 5703 alph.edwards@turkslegal.com.au

Danielle Wallis Lawyer T: 02 8257 5729 danielle.wallis@turkslegal.com.au

Fiona Hanlon Senior Associate T: 02 8257 5741 fiona.hanlon@turkslegal.com.au

This information is current at its date of publication. While every care has been taken in the preparation of this publication it does not constitute legal advice and should not be relied upon for this purpose. Specific legal advice should be sought on particular matters. TurksLegal does not accept responsibility for any errors in or omissions from this publication. This publication is copyright and no part may be reproduced in any form without the permission of TurksLegal. For any enquiries, please contact the authors. ÂŠ TurksLegal 2010