A Case of Interest? TPD Claims and s57 of the Insurance Contracts Act

A Case of Interest? TPD Claims and s57 of the Insurance Contracts Act

by Helen Barnett and Peter Riddell | August 2007 Area of Expertise | Life Insurance

In Diosdado Sayseng v Kellogg Superannuation Pty Ltd & Anor1 Nicholas J of the Supreme Court of New South Wales held that the plaintiff was entitled to interest on his total and permanent disablement benefit (TPD), from a date prior to the insurer’s initial decision to decline the claim.

The decision underlines the importance for insurers to take a proactive and considered approach in their management of TPD claims so as to avoid potentially large awards of interest. This is of particular significance given the proposed amendments to the Insurance Contracts Act 1984 (Cth) (the Act) and Regulations, which will see an increase in the prescribed interest rate.

The Facts The plaintiff issued proceedings against the trustee of his superannuation fund and its group life insurer, claiming an entitlement to a total and permanent disability (TPD) benefit pursuant to the group life insurance policy.

On 8 June 2007, Nicholas J of the NSW Supreme Court held that the plaintiff fulfilled the definition of TPD within the meaning of the policy, and the insurer was therefore liable to pay the trustee the agreed benefits plus interest.2 The benefit was subsequently paid to the trustee on 29 June 2007.

On 8 August 2007 the parties returned before His Honour for determination of the amount of interest payable pursuant to s57 of the Insurance Contracts Act 1984 (Cth) (‘the Act’).

Section 57 of the Act provides that an insurer who is liable to pay an amount under a contract of insurance will also be liable to pay interest on that amount. Pursuant to 57(2), the period for which interest is payable is: “the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount” and ending on the day on which payment is made.

The dispute between the parties focused on the date on which the period of interest commenced. The judgment indicates the following chronology in respect of the Plaintiff’s claim:

21 September 1998

Plaintiff ceases active service with Employee

4 November 1998

Trustee advises Insurer of the claim

6 November 1998 21 March 1999

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Insurer advises Trustee of its requirements for investigation and assessment of the claim Plaintiff absent from work for six months

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17 June 1999 9 September 1999 1 October 1999

Late 1999

Insurer receives Member’s Statement and treating doctor’s report from Trustee Insurer receives Employer’s Statement from Trustee Insurer receives Plaintiff’s proof of age and identity documentation Arrangements are made for the Plaintiff to be examined by two independent medical examiners

12 January 2000

Medical report of first independent examiner

14 March 2000

Medical report of second independent examiner

27 April 2000

Insurer declines Plaintiff’s claim

30 November 2006

Evidence concludes in proceedings before Nicholas J

8 June 2007

Nicholas J determines that Plaintiff was TPD

29 June 2007

Benefit paid from the insurer to the trustee.

The Parties’ Positions The insurer argued that interest was payable from 30 November 2006, being the date on which evidence was completed before Nicholas J in the proceedings. This was because much of the evidence adduced at the hearing was not available to it when it made its initial decision. As such, the insurer submitted that it was not unreasonable for it to have declined the claim on 27 April 2000 and to have maintained that denial.

In the alternative, the insurer argued that interest was payable from a date no earlier than 27 April 2000, noting in particular that the Plaintiff had not provided his proof of age and identity until 1 October 1999, and thus it was only after this time that appropriate arrangements could be made for the Plaintiff to be reviewed by independent medical examiners.

The trustee submitted that the period of interest should commence on 27 April 2000, as the true position of the Plaintiff’s claim was reasonably discoverable by that date. The trustee referred to the findings of the trial judge at first instance, who held that the insurer was obliged to provide the Plaintiff with the opportunity to respond to the adverse medical reports from the independent examiners obtained in January and March 2000. The trustee argued that if the insurer had complied with the procedural fairness requirements, the Plaintiff would have provided submissions in response to the adverse reports, and this would have enabled the insurer to resolve the conflict and pay the claim.

The plaintiff argued that the insurer should have completed its investigation within three months of the initial notification of the claim, and in the circumstances interest should be payable from the date on which the plaintiff was considered by the Court to satisfy the definition of TPD, being 21 March 1999. In the alternative, the plaintiff submitted that interest was payable from 3 months after receipt of the Member’s Statement and supporting documents, being 17 September 1999.

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The Judgment Nicholas J commenced his judgment by reviewing previous case law regarding the application of s57 of the Act. It is of note that all cases cited were concerned with the application of s57 in the context of general insurance, rather than life insurance.

The primary case cited was that of Bankstown Football Club v CIC Insurance Limited.3 In that case Cole J of the NSW Supreme Court held that the calculation of interest pursuant to s57 was not to be determined by reference to whether or not there was a bona fide dispute, but whether or not the insurer was liable to the claimant for payment of the insurance benefit. Thus Cole J stated that: “If there was liability found and the insurer to pay, then the presumption must be that the insurer ought be deemed to know of that obligation as ultimately determined, even though it may bona fide have held a different view at all times prior to determination, at least at the first instance level, in relation to the question of liability.”

However, he also noted that the insurer must be given a reasonable period in which to investigate and determine its position.

Nicholas J considered that it was appropriate to adopt the Bankstown approach in this instance. He noted that an insurer would not be automatically liable to pay interest from the date on which it became liable to pay the claimant an amount under the contract of insurance. In this instance he considered that liability for payment of the claim arose on 21 March 1999, being 6 months after the plaintiff ceased work. However, interest did not run from that date.

Adopting the Bankstown approach, His Honour stated that, in assessing when the insurer’s rejection of the claim will be “unreasonable”, the Court will have regard to the following two factors: (a) Whether the insurer had a reasonable period of time to conduct its investigations into the claim; (b) When the “true position” was, or should have been, discoverable by the insurer – that is, at what point the evidence before the insurer should have led it to form the opinion that the Plaintiff was TPD. In the circumstances of this case, a “reasonable period of time” for investigation of the claim was found to be approximately 10 months, commencing on the date on which the insurer was notified of the claim by the trustee, and concluding shortly after it had received the Employer’s Statement. His Honour noted that it would be reasonable to expect that if a particular item of evidence was of significance to the insurer, it would have called for it earlier. However, considering the matter overall, he felt it was not unreasonable for the insurer to have waited for Employer’s Statement before paying the claim.

His Honour then considered whether, together with the materials previously supplied by the plaintiff, the Employer’s Statement revealed the “true position” in respect of the claim. He concluded that, once the Employer’s Statement had been received by the insurer, it was difficult to see how it was reasonable for the insurer to continue withholding payment for more than a short time. He noted that it was open to the insurer to initiate its own enquiries after notification of the claim, and by the time the Employer’s Statement had been received, the insurer had had ample time to thoroughly investigate and assess the claim.

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His Honour also noted as an aside that the plaintiff’s date of birth was available to the insurer from the Member’s Statement and initial medical report. The implication is that the insurer was not required to wait for the plaintiff’s proof of identity before arranging appointments for the plaintiff with the independent medical examiners.

Thus His Honour concluded that it was unreasonable for the insurer to withhold payment of the claim from 17 September 1999. This was 10 months after initial notice of the claim, three months after receipt of the Member’s Statement and the initial medical report, and one week after receipt of Employer’s Statement.

His Honour further stated that to accept the positions put forward by the insurer and the trustee, a period of just under 18 months from initial receipt of the claim, would have allowed the insurer a period of time which was “unreasonably lengthy”.

Implications It is relatively common practice in the industry to assess interest under s57 from the date of the initial or subsequent decline of a claim. If the decline is without merit, it is argued that at that point, it is unreasonable to withhold payment of the claim.

Further, prior to the date of an insurer’s decision, the insurer cannot be said to have formed an opinion in relation to the claim, and thus the claimant’s cause of action has not yet arisen. It follows that interest cannot be payable from a date before the cause of action has arisen.

This reasoning is in keeping with the decision in Geoffrey Wagstaff v PFS Nominees Pty Ltd & Anor.4 In that instance the claimant lodged a TPD claim in March 2004. The insurer requested information from the claimant, including copies of the WorkCover file and medical reports. The claimant demanded that a decision be made within 14 days in July 2004, and when this was not forthcoming, proceedings were commenced in August 2004. The TPD benefit was paid in October 2004, but the claimant pursued an order for costs and interest.

The NSW Supreme Court held that liability could only arise when the insurer formed its opinion, unless there is an unreasonable delay. The Court considered that the insurer was entitled to request the WorkCover file and other materials to determine liability, and that it had acted promptly in obtaining the necessary information. The Court therefore held that there had not been an unreasonable delay by the insurer in forming the opinion, and thus interest was not payable.

In Diosdado Sayseng Nicholas J noted that the plaintiff’s entitlement to insurance was dependant, in part, on the insurer forming an opinion. He stated further that the insurer was under an obligation to act reasonably in forming its opinion. Although it is not expressly stated, the implication from these comments is that the insurer might be unreasonable in forming its opinion, and that such unreasonable conduct may occur prior to the opinion being formed, resulting in interest being payable prior to the formation of the opinion.

As the policy in this case contained an opinion based clause, in the writers’ submission, the court, for the purposes of assessing interest, ought to have first enquired as to the reasonableness of the decision. If the decision was found to be unreasonable the court could have stated this and awarded interest from the time it considered the insurer ought to have formed its opinion. However, other than the comments referred to above, His Honour appears to have overlooked the fact that the policy contained an opinion-based clause. His assessment of the period of interest is based on what he considered was a reasonable period of time for the insurer to investigate the claim.

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His Honour’s findings in this regard are problematic. Firstly, His Honour gives the insurer a period of 10 months from commencement of the date on which the insurer receives initial advice of the claim from the trustee. No mention is made of the fact that the plaintiff took seven months to provide his claim form and supporting medical documentation, after they were requested by the insurer. Thus, in real terms, the insurer had only three months to consider those materials and conduct its own investigations and obtain its own materials.

His Honour’s expectation appears to be that, even if the claimant has not provided the basic documents in support of their claim, the insurer should commence its investigation process. The difficulty in TPD cases, however, is that there are often significant delays by claimants in submission of their supporting documentation to the insurer. To require that investigations be commenced on claims that may never even be pursued places an onerous burden on insurers.

Further, if His Honour’s judgment is taken to its logical conclusion, a claimant who persistently delays in provision of their documents may well be in a better position to argue that the insurer took an unreasonably lengthy time to form its opinion, even if the claimant’s own conduct contributed to the insurer’s delay.

His Honour’s consideration of the “true position” in respect of the claim is also problematic. As at 17 September 1999 the only documents before the insurer were the member’s statement, one treating doctor report, and the employer’s statement. His Honour’s comments that the insurer had the previous 10 months to investigate the claim suggest that his finding is based on the fact that the insurer should have (but did not) conducted its investigations earlier.

Thus the reasoning behind His Honour’s decision appears to be that an insurer should be provided with a “reasonable” period of time in which to investigate. If, in that time, the insurer has before it materials which suggest that the claimant is TPD, and it fails to conduct its own investigations and obtain its own evidence in contradiction within that reasonable period of time, then it is unreasonable for the insurer to refuse payment of the claim.

The lesson to be learned from this decision is that insurers should attempt to remain pro-active in their management of TPD and other life insurance claims, including: •

Following up with the trustee and/or the claimant after receiving the initial advice that the claimant intends to lodge a claim;

•

Arranging to conduct investigations early on in the claim, rather than responding to materials which have been provided by the trustee or the claimant.

•

Chasing up materials which the insurer believes are significant to the assessment of the claim, such as employer’s reports, WorkCover files or proof of identity documents.

The decision can also be seen as dealing a blow to the effectiveness of opinion based clauses in TPD policies, as the court has confirmed that when assessing a claim for interest it will not undertake an enquiry as to the reasonableness of the position adopted by the insurer. Rather, the award of interest will be calculated on the basis of what the court finds is a reasonable time for completion of the insurer’s investigation of the claim.

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Endnotes 1

[2007] NSWSC 857 (‘Bankstown’).

2

[2007] NSWSC 583; See, ‘TPD Claims: Work Capacity or Work Reality?’ TurkAlert, July 2007.

3

(Unreported, Supreme Court of New South Wales, Cole J, 17 December 1993).

4

(Unreported, Supreme Court of New South Wales, Macready AJ, 22 June 2005); See, “A Timely Decision

– Court Awards Costs in Insurer’s Favour’, TurkAlert, October 2005.

For more information, please contact:

Helen Barnett Lawyer T: 03 8600 5004 helen.barnett@turkslegal.com.au

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

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