Are your Claims Procedures Adequate to Protect your Trustee? by TurksLegal

Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management By Helen Wang & Paul Cleary | February 2011 Area of Expertise | Superannuation, Life Insurance

Summary On 17 December 2010, the Supreme Court of NSW (Gzell J) handed down its decision in Apostolovski v Total Risk Management [2010] NSWSC 1451. This case gives superannuation fund trustees and their advisers guidance in relation to the trustee’s fiduciary duties in the processing of claims for superannuation benefits, including the timely processing of claims and related matters. In Apostolovski, the Court considered two main issues: • from what date interest was payable on a total and permanent disablement benefit; and • whether the trustee was liable to pay equitable compensation for breach of trust by the trustee on the basis that the trustee’s ‘gross lack of diligence’ (at para 52) in failing to make the payment of the benefit in a timely manner had caused the member loss. The judgment provided a useful commentary on the nature of the fiduciary duty which a trustee of a superannuation fund owes to a member making a claim for a TPD benefit; and the recent High Court decision in Finch v Telstra Super Pty Ltd [2010] HCA 36.

Who Does This Impact? Superannuation trustees, group life insurers and their advisers.

What Action Should Be Taken? See the last section of this TurkAlert for our summary of the practical outworkings of this case.

Facts On 29 November 2005, Total Risk Management Pty Ltd, the trustee of the Bluescope Steel Superannuation Fund (‘the Trustee’) was informed that a member of the Fund, Mr Milan Apostolovski, wished to make a claim for a TPD benefit. On 3 February 2006, the Trustee sought documents from the member, which were supplied on 9 March 2006. In March 2006, the Trustee wrote to the member’s solicitors advising that the member’s TPD claim would be assessed at the same time as the member’s claim to withdraw the preserved component of his superannuation benefit. On 29 March 2006, the Trustee’s administrator wrote to the member’s solicitors advising that information had been requested from the employer and that the information would be provided to the fund’s group life insurer and then to the Trustee. That letter also noted that the member was under financial pressure. Relevantly, the member had accepted voluntary redundancy in July 2005, had separated from his wife and had received notification that the mortgagee was about to foreclose on the member’s house.

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Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management by Helen Wang & Paul Cleary

In a letter to the Trustee dated 7 August 2006 seeking a prompt resolution of his claim, the member’s solicitors once again pointed out that the member was under considerable financial pressure. This information was repeated numerous times in later communications. On 10 August 2006, the Trustee referred the matter to the group life insurer, whose policy had been current at the time the member ceased work. On 23 October 2006, the insurer responded to the Trustee, advising that the member was not covered under its policy because the member’s injuries pre-dated the commencement of cover under that policy on 1 July 2005. The Trustee advised the member of the insurer’s position in a letter dated 7 November 2006. On 13 November 2006, the Trustee referred the member’s claim to the previous insurer, but on 16 March 2007, that insurer also advised the Trustee that it was not on risk in relation to the member’s TPD claim saying that the member was at work at the time its policy terminated and the member had consequently been covered under the incoming insurer’s policy. On 3 May 2007, the Trustee remitted the matter back to the insurer with whom it had first lodged the claim and on 15 June 2007, it agreed that it was the insurer on risk. It then proceeded to assess the claim and declined it on 25 March 2008. The judgment mentions that the Trustee did not decline the TPD claim until 10 July 2009 but it is unclear what occurred between the date of the insurer’s denial and the Trustee’s decision to decline some 15 months later. The member commenced proceedings against the Trustee on 10 March 2010. On 12 November 2010, the Trustee determined to accept the member’s TPD claim. The Court noted that the decision was made just days before the trial commenced. The questions for the Court were therefore: (a) whether and if so on what basis the member was entitled to equitable compensation for breach of trust or loss or damage for breach of statutory duty; and (b) from what date was interest payable on the TPD benefit.

Compensation There is an extended line of authority which has viewed trustees’ decisions in respect of claims for total and permanent disablement as involving the exercise of a discretion and hence only open to be reviewed by the courts in a limited range of circumstances. Those circumstances were defined in Rapa v Patience, NSWSC, unreported, 4 April 1985, adopting the reasoning of McGarvie J in Karger v Paul [1984] VR 161, the latter of which concerned the exercise of an absolute and unfettered discretion by trustees of a deceased estate.

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Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management by Helen Wang & Paul Cleary

Following Rapa v Patience, a court could only intervene if the discretion: 1. was not exercised by a trustee in good faith; 2. was not exercised upon real and genuine consideration, including genuine consideration of the right question; 3. was not exercised in accordance with the purpose for which it was conferred; and 4. in the limited cases where reasons were disclosed by the trustee in exercising a discretion, those reasons were unsound. However, the High Court recently concluded in Finch v Telstra Super Pty Ltd [2010] HCA 36 (see our recent TurkAlert on this case) that the decision-making process involved in deciding whether a member was entitled to a TPD benefit did not really involve the exercise of a discretion. Apostolovski is the first case to be decided since the High Court’s decision in Finch and applies the revised view that the trustee’s assessment of a TPD claim is a performance of a trust duty. In Apostolovski, the Court said: ‘Here the fault was not to fail to take relevant information into account: it was to fail to act with reasonable dispatch. But, in my view, that also is a breach of fiduciary duty by [the Trustee]… But a trustee must bring to his or her office the same degree of care, skill and diligence as an ordinary prudent person would exercise in performing the duties of a trustee and to fail or exercise that degree of care, skill and diligence constitutes a breach of fiduciary duty’ (at paras 28-29). In assessing whether the Trustee had discharged this duty, Gzell J pointed to the fact that the Trustee was well aware of the destitute state of the member’s financial affairs evidenced by seven letters received by or on behalf of the member. Despite knowing the member’s poor financial position, the trustee did not place any pressure on its insurers to reach a decision. The Court also held that the Trustee was ‘obligated to examine the insurer’s claim that it was not on risk for the claim with reasonable dispatch rather than accepting it at face value…’ (at para 19). Gzell J concluded that the time it took for the Trustee to reach a decision on the claim was ‘grossly in excess of the period any ordinary prudent man of business would take to come to the decision that [the member] was entitled to a [TPD benefit]’ (at para 35). This amounted to a breach of the trustee’s fiduciary duty towards the member. The member was therefore entitled to equitable compensation.

Breach of statutory duty Gzell J found the same facts which led to a breach of the Trustee’s equitable duty constituted a breach of the Trustee’s statutory duty under s52 of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘the SIS Act’), namely that the Trustee knew of the member’s financial circumstances and yet failed to impress upon the insurers the urgency of the member’s claim. Under s 52(2)(b) of the SIS Act, the trustee of a regulated superannuation fund must: ‘exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide.’

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Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management by Helen Wang & Paul Cleary

The Court found that the statutory standard accorded with the standard at general law and the statutory reference to being ‘morally bound’ did not add to the trustee’s obligation. Accordingly, the member could recover compensation for his loss under s 55(3) of the SIS Act which provides: ‘A person who suffers loss or damage as a result of conduct of another person that was engaged in a contravention of subsection (1) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention’ [the reference to subsection (1) here is a reference to s 55(1) SIS Act which provides that a person must not contravene a covenant contained or taken to be contained in the governing rules of a superannuation entity]. The Court also found that the defences under ss 55(5), 55(6) and 310 of the SIS Act did not apply.

Interest The Trustee accepted that interest on the TPD benefit amount was payable to the member. However, the question was the time from when interest should run.

The member’s submissions The member argued that if the Trustee had submitted the TPD claim to both insurers at the same time, the trustee could have reached a decision by 18 November 2006. Accordingly, the member contended that interest should run from that date.

The Trustee’s submissions The Trustee contended that interest should be calculated from 10 July 2009 when it reached its first decision to decline the member’s claim.

The decision in relation to interest The Court rejected the Trustee’s submissions that it was reasonable to take from 29 November 2005 to 10 July 2009 to assess the claim and considered the following points to be significant in evidencing unreasonable delay on the part of the Trustee: • The member’s personal circumstances – the extreme financial pressure that the member was under had been communicated a number of times to the Trustee. In particular, the Trustee knew that the member was being charged penalty interest rates by his mortgagee and foreclosure on the member’s home was a real threat. A timely decision on the member’s claim would have assisted to alleviate that financial pressure; • There was a lack of active claims management by the Trustee. There was no evidence that the Trustee sought an early decision from either insurer at any stage; and

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Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management by Helen Wang & Paul Cleary

• There was a failure to act prudently in relation to the representations made by the first insurer that it was not on risk. Although the Court acknowledged that ‘It is impossible to nominate a finite date by which [the Trustee] should have finalised its investigations’ (at para 14), the Court held that the Trustee should not have accepted the initial decision of the insurer that it was not on risk. Had the Trustee analysed the facts for itself, and referred the matter to the insurer for a decision at that time, a decision on the claim would have been made in 10 months, that being the time it took the insurer to reach a decision on the claim when the claim was eventually referred back to it. In short, the Court held that it would have been reasonable for the Trustee to conclude its investigations and to make a decision on the member’s claim by 7 September 2007. Accordingly, interest would run from that date.

Implications There are several important lessons for superannuation fund trustees stemming from the Court’s decision.

Extended Liability The finding that a trustee may become liable to pay compensatory damages in excess of the insured benefit as a result of its conduct is a wake up call to all trustees that there are significant consequences if they fail to meet the required standard of diligence in managing those claims and dealing with its insurers.

Awareness of Financial Hardship Wherever a trustee is considering a claim and is made aware of the financial hardship of a member, the trustee’s procedures should ensure that the trustee and all service providers act prudently and in a timely fashion to reach a speedy determination. Although the facts of Apostolovski specifically related to a TPD claim, it seems probable that the principles espoused in that case would also apply to other applications or claims where the member or potential beneficiaries may be under financial pressure including: • applications for death benefit payments; • applications for income protection insurance benefits; and • applications for early release on the grounds of severe financial hardship. Also as a general principle, the trustee should exercise independent judgment of any representations made to it by service providers in the management of the fund, especially where those representations could have a significant effect on the benefit entitlements of members or beneficiaries.

Claims assessment procedures Based on the decision in Apostolovski, superannuation trustees should ensure that where a member or beneficiary claiming a benefit has produced evidence of financial hardship, their claims assessment procedures take special account of the following matters, as relevant:

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Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management by Helen Wang & Paul Cleary

â&#x20AC;˘ seeking an early decision from the insurer; â&#x20AC;˘ appropriately following up the status of claims with insurers and other service providers (including claims assessors) to ensure that such claims are processed and determined in a timely fashion; and â&#x20AC;˘ ensuring that its internal procedures allow the claim to be assessed on a timely basis.

Retention of evidence The trustee should ensure that it retains documents and communications evidencing that it has discharged its duty of care, skill and diligence in managing the fund. In relation to processing claims in circumstances similar to those in Apostolovski, this would include keeping copies of correspondence following up or pressuring insurers to determine claims, and of all the steps that the trustee has taken to resolve the matter.

Clarity as to which insurer is on risk To prevent similar problems arising where there has been a changeover of insurers, trustees should ensure that they have a very clear understanding of which insurer is on risk for TPD (and other insurance claims) and for which members. Where there has been a changeover of insurers and a subsequent dispute by the insurers as to which of them is on risk in relation to a given claim, the trustee is obligated to examine for itself who is on risk in a timely fashion, rather than accepting at face value an assessment by an insurer that it is not on risk.

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Are your Claims Procedures Adequate to Protect your Trustee? Apostolovski v Total Risk Management by Helen Wang & Paul Cleary

For more information, please contact: Helen Wang Lawyer T: 02 8257 5762 helen.wang@turkslegal.com.au

Paul Cleary Partner T: 02 8257 5760 paul.cleary@turkslegal.com.au

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