New Supreme Court Decision on Policy Commencement, Misrepresentation and NonDisclosure By Fiona Hanlon & Ros Wicks | April 2010 Area of Expertise | Insurance & Financial Services
Summary The Supreme Court of New South Wales has recently found that a life insurer was entitled to avoid an income protection policy for ‘innocent’ non-disclosure and misrepresentation. In the course of its judgment, the Court made several findings which provide a handy guide for claims managers in relation to some commonly encountered issues in connection with non-disclosure.
Who Does This Impact? Claims and legal teams of life insurers.
What Action Should Be Taken? This case offers guidance on such matters as: •
The date of policy commencement in the context of the payment of deposit premium and an offer of revised terms.
•
How a well-worded PDS can clarify the steps in the offer and acceptance process.
•
Whether the underwriting evidence needed to ground the avoidance had to be that of the original underwriter or could be from a current employee of the insurer who was not there at the time.
•
When the failure to disclose other matters which may not impact on an underwriter’s assessment may nevertheless be crucial in substantiating an insurer’s right to avoid a policy for non-disclosure and misrepresentation.
Background Mr Frazer, a shot firer employed in the mining industry, completed an application for income protection insurance on 11 December 2007. His personal statement disclosed no history of mental health issues or any anticipated tests or medical examinations. He signed an authority to charge his Mastercard for the premium and an amount in respect of the initial premium was deducted by the insurer on 12 December 2007. Because Mr Frazer worked with explosives, the insurer was only prepared to offer cover which was subject to an explosives exclusion and it sent his adviser a copy of the exclusion it would apply. The adviser met Mr Frazer who, on 21 December 2007, signed a document headed ‘Acceptance of Revised Terms Form.’ This form set out the terms of the exclusion and already had a policy number on it. The form was signed and returned to the adviser’s office immediately before his leaving on holidays but in the event was not received by the insurer until 8 January 2008. The insurer issued the policy on 11 January 2008.
TURKSLEGAL
TUR K A L E R T
1
New Supreme Court Decision on Policy Commencement, Misrepresentation and Non-Disclosure by Fiona Hanlon & Ros Wicks
On 4 January 2008, Mr Frazer was diagnosed with major depression which caused him to be unable to work and he was given a prescription for the anti-depressant Avanza. He sought to claim under the policy. The claim was refused. The insurer sought to avoid the policy under Section 29(3) of the Insurance Contracts Act (1984) (the ‘ICA’) as a consequence of non–disclosure and misrepresentation, namely: 1. The failure to disclose consultations with medical practitioners for depression prior to completion of the application on 11 December 2007; 2. The failure to disclose the diagnosis of depression and consequential cessation of work prior to the issue of the policy on 11 January 2008; and 3. The failure to disclose a referral to a colorectal specialist prior to the application on 11 December 2007 and an incorrect answer to a question in the application which asked him whether he had a bowel disorder. The insurer also argued, in the alternative, that Mr Frazer had a pre-existing medical condition and his claim was excluded under the terms of the policy.
The Decision In seeking to have the insurer’s decision to avoid the policy overturned, Mr Frazer argued that: 1. He did not have a medical consultation for depression prior to completing the application on 11 December 2007 and had merely sought medical help in connection with occasional sadness and insomnia which he was not obliged to disclose to the insurer. 2. The 4 January 2008 diagnosis of depression post dated the formation of the contract which he said occurred either when the premiums were deducted or when he signed the ‘Acceptance of Revised Terms Form’. Hence, by 4 January 2008 the policy was, according to Mr Frazer, already in force and he therefore had no obligation to disclose his diagnosis with depression. 3. He did not understand the testing and referral to the colorectal specialist to be in respect of possible cancer and therefore did not believe the matter to be sufficiently significant to fall within his duty of disclosure under Section 21 of the ICA. Mr Frazer’s counsel also sought to argue that in the event the policy was enforceable, the diagnosis with depression did not occur until after the formation of the contract and consequently it was not a pre-existing condition within the meaning of the relevant policy exclusion. In view of the nature of the arguments raised on Mr Frazer’s behalf, the precise date of the commencement of the policy came to be of central importance to the decision and the Court was compelled to examine the precise steps taken in the formation of the contract and the terms of the pre-contractual documents, such as the Product Disclosure Statement (‘PDS’) and the ‘Acceptance of Revised Terms Form’ in detail.
TURKSLEGAL
TU R K A L E R T
2
New Supreme Court Decision on Policy Commencement, Misrepresentation and Non-Disclosure by Fiona Hanlon & Ros Wicks
Relevantly, the Court found that the PDS explained that: ..in some instances it may be necessary to obtain further medical or financial information before an application is finalised and …that once the insurer has processed and accepted the application and first premium the insured will be sent a plan document setting out the terms and conditions of the plan and a plan schedule outlining the regular premiums and the cover chosen.1
In relation to the debiting of the credit card, Justice Gzell found in the context of the explanation provided by the PDS that: ..the authority to charge the account is but part of the proposal put forward by the assured and unless and until the proposal is accepted and the insurer issues a policy, there is no concluded contract.2
He considered the initial charge to Mr Frazer’s credit card was in the nature of a deposit and not the payment of a premium under an existing policy. His Honour also found that the execution of the ‘Acceptance of Revised Terms Form’ did not result in a concluded contract either, notwithstanding that the form already had a policy number on it. Once again, in the context of the PDS and the terms of the relevant form, he characterised the insurer’s willingness to enter into a policy subject to explosives exclusion not as an offer by it that was capable of acceptance by Mr. Frazer, but an invitation to Mr. Frazer to submit a further offer to it. Consequently, Justice Gzell found that: ..in forwarding the Acceptance of Revised Terms Form, NMLA was offering to consider Mr Frazer’s application on the basis that it provided for no payment for any disability contributed to or caused by participation in any activity involving the use of explosives. It was an offer to consider a revised proposal from Mr Frazer open for 30 days.3
His Honour consequently concluded that the policy was not ‘entered into’ within the meaning of the disclosure obligations under the ICA until 11 January 2008. Mr Frazer was therefore obliged to disclose to the insurer that he was diagnosed with a major depressive illness on 4 January 2008 under Section 21 of the ICA. To be entitled to avoid the policy under Section 29(3) of the ICA, the insurer had to show not only a breach of the duty of disclosure, but also that it would not have entered into the policy on any terms had that true position been known to the insurer. The insurer presented evidence from a current senior underwriter and non-disclosure consultant in its employ in relation to this issue. Justice Gzell rejected the submissions from Mr Frazer’s counsel that the only acceptable evidence was that of the original underwriter who had considered the application in the first place4 and accepted the insurer’s evidence. His Honour went on to find that if the contract had, as Mr Frazer’s counsel submitted, come into existence on 21 December 2007, at the time of the referral to the colorectal specialist, Mr Frazer was concerned that he may have been suffering bowel cancer and though he was ultimately not diagnosed to be suffering from a life threatening condition, His Honour did not accept that he considered it a trivial matter at the time.
TURKSLEGAL
TU R K A L E R T
3
New Supreme Court Decision on Policy Commencement, Misrepresentation and Non-Disclosure by Fiona Hanlon & Ros Wicks
Justice Gzell consequently found that Mr Frazer was in breach of his duty to the insurer under Section 21 of the ICA to disclose this information and his negative response to the relevant question in the application in relation to bowel disorders was a misrepresentation within the meaning of Section 29 of the ICA. The insurer’s underwriter gave evidence that had the insurer been aware of the referral it would have deferred consideration of the application until such time as the specialist had examined Mr Frazer and provided a report. This would not have occurred until after the date Mr Frazer was diagnosed with depression. As the underwriter had also given evidence that the insurer would not have been prepared to offer cover on any terms once the diagnosis of depression was made, the failure to disclose the bowel condition, though it would ultimately have not resulted in an altered underwriting outcome in itself, was a crucial occurance in the chain of events substantiating the insurer had a right to avoid the policy under Section 29(3) of the ICA. As a result of these findings His Honour did not need to consider the insurer’s alternative defence based upon reliance upon the pre-existing condition clause. Nevertheless, His Honour noted that he would have rejected the submissions put by the plaintiff that the pre-existing conditions clause under the policy did not apply, as Mr Frazer had clearly had treatment for depression prior to the date the policy was entered into.
Implications This case provides some helpful guidance on the question of when a policy of life insurance commences and illustrates how the form and contents of the PDS and other application documents, such as revised offers of cover, can be crucial in determining important issues in connection with the date of commencement of the contract of insurance and hence the date on which the insured ceases to be subject to duty of disclosure. The legal characterisation of the revised terms form, as an offer by the applicant for insurance which was subject to further consideration by the insurer, is particularly helpful in reinforcing that the duty of disclosure continues after the execution of such an offer, up to and including the eventual date of acceptance by the underwriter. The decision also adds weight to other recent authority in NSW to the effect that it is not fatal to the insurer’s case under Section 29 if it is unable to call the original underwriter to give evidence and shows that a court will be prepared to give weight to the evidence of other senior underwriters who can give evidence of the manner in which the insurer would have dealt with the application had the true position been known. The eventual importance of the insured’s failure to disclose his referral to the colorectal specialist, despite the fact he was ultimately not diagnosed to be suffering from a significant bowel condition, provides a timely reminder to claims managers of the prudence of conducting a thorough investigation of all the matters an insured may have failed to disclose when considering whether a policy should be avoided under Section 29 of the ICA. Finally, the decision illustrates that it is also worth remembering that if the standard policy terms contain a pre-existing conditions exclusion, this may represent a viable alternative defence to a claim, especially if, for example, underwriting issues might prevent the insurer successfully defending its decision to avoid a policy under Section 29 of the ICA.
TURKSLEGAL
TU R K A L E R T
4
New Supreme Court Decision on Policy Commencement, Misrepresentation and Non-Disclosure by Fiona Hanlon & Ros Wicks
Citation: Frazer v National Mutual Life Association [2010] NSW SC45
Endnotes 1
At paragraph 30
2
At paragraph 23
3
At paragraph 27
4
See also Kenan Berk v Westpac Securities Administration Ltd & Anor [2010] NSW SC
TURKSLEGAL
TU R K A L E R T
5
New Supreme Court Decision on Policy Commencement, Misrepresentation and Non-Disclosure by Fiona Hanlon & Ros Wicks
For more information, please contact: Fiona Hanlon Senior Associate T: 02 8257 5741 ďŹ ona.hanlon@turkslegal.com.au
Ros Wicks Senior Associate T: 02 8257 5741 ros.wicks@turkslegal.com.au
Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Insurance & Financial Services | Commercial Disputes | Workers Compensation | Business & Property
www.turkslegal.com.au This Tur kAler t is cur rent at i t s d ate o f p u b l i c at i o n . Wh i l e eve r y c a re h a s b e e n t a k e n i n t h e p re p a rat i o n o f t h i s Tu r k Aler t it do es not constitute legal advice a n d s h o u l d n o t b e re l i e d u p o n fo r t h i s p u r p o s e. Sp e c i f i c l e g a l a dv i ce s h o u l d b e s o u g ht o n p ar ticular matters. Tur ksLegal do es not ac ce p t re s p o n s i b i l i t y fo r a ny e r ro r s i n o r o m i s s i o n s f ro m t h i s Tu r k Al e r t . Th i s Tu r k Al e r t i s co py r i ght and no par t may b e repro duced in a ny fo r m w i t h o u t t h e p e r m i s s i o n o f Tu r k s Le g a l . Fo r a ny e n q u i r i e s, p l e a s e co nt a c t t h e a u t h o r o f this Tur kAler t. Š Tu r k s Le g a l 2 01 0