Non-Disclosure: Court Allows Life Insurer to Vary Insured Amount Under Section 29 (4) By Alph Edwards | April 2009 Area of Expertise | Life Insurance
Summary In Phillips v ING Life Limited 1 the Federal Court has rejected a challenge to a life insurer’s decision to vary an insured amount on the basis of non-disclosure and misrepresentation under s29 (4) of the Insurance Contracts Act (the Act).
Who Does This Impact? Claims and legal teams of life insurers.
What Action Should Be Taken? Ensure that s29 (4) is considered as a remedy for non-disclosure or misrepresentation if the relevant criteria are met.
Introduction Whilst not breaking any new ground with respect to many of the issues swirling around s29, the decision is significant in that it is the first time since the Act’s inception in 1986 that s29 (4) has been central to a dispute in a judgment of a superior court. Further, the judgment does clarify one controversial point with respect to s29 (4), namely, that the required notice under this section can be given to a legal personal representative of the insured. This is a critical finding because absent being able to give this notice to a legal personal representative of the insured, the remedy under s29 (4) would be not be available in death claims where the deceased is the insured or policy owner.
The Facts The applicant claimed a term life benefit of $700,000 on a life policy held with ING by her late husband (the deceased). The deceased entered into the policy on 19 November 2002 and subsequently died of oesophageal cancer on 6 September 2003. ING reduced the sum insured under the policy to $466,667 pursuant to s29 (4) of the Act on account of the deceased’s failure to disclose his condition of Barrett’s oesophagus prior to the policy being entered into. Section 29 (4) permits an insurer, in circumstances where an insured has failed in the duty of disclosure under s21 of the Act or made misrepresentations, to vary the sum insured in accordance with a prescribed formula. In a nutshell, the formula results in a reduced sum insured when a higher premium would have been charged for the same cover, had the true facts been known. The applicant brought the proceedings to seek the full amount of the term life benefit as written under the policy.
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Non-Disclosure: Court Allows Life Insurer to Vary Insured Amount Under Section 29 (4) by Alph Edwards
Non-Disclosure and Misrepresentation The threshold issue was whether the deceased had failed in his duty of disclosure or made misrepresentations in his application for the policy. The bulk of the deceased’s medical history was to be provided in a health evaluation form. The health evaluation form was completed by a nurse, who attended the deceased and asked him a series of questions that appeared on the form. The form contained the prescribed notice regarding the duty of disclosure 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?
The deceased 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 deceased was asked: Do you [sic] contemplate [sic] seeking medical advice, undergoing any investigation or treatment or having any operation in the near future?
The deceased responded ‘No’. ING argued that the deceased had failed in his duty of disclosure under s21 of the Act by failing to disclose in the health evaluation
form that he had been diagnosed with 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. The applicant argued that ING had failed to prove that at the time he applied for the policy the deceased knew that he had Barrett’s oesophagus and additionally, that ING had waived compliance with the duty of disclosure in any event. The Court rejected the applicant’s argument and 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.
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Non-Disclosure: Court Allows Life Insurer to Vary Insured Amount Under Section 29 (4) by Alph Edwards
The fact that the deceased had been told by both his specialist and his general practitioner that he had Barrett’s oesophagus, that he remained taking Zoton and that he underwent further gastroscopies at regular intervals, were the decisive factors in the Court coming to this finding. 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. The Court also found that the deceased knew that his condition was relevant to the risk proposed, given that he knew he had to take prophylactic medical steps with respect to cancer i.e. 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. Having made the above findings, the Court found that the deceased had failed to comply with his duty of disclosure under s21 of the Act. It also found that the deceased had made a misrepresentation by giving an incomplete answer to question D (4) of the health evaluation form detailed above. The answer was incomplete because the deceased had failed to disclose he was undergoing regular gastroscopies because he had Barrett’s oesophagus. The answer to question D (19) (4) of the health evaluation form detailed above was also found to be a misrepresentation on the basis that the deceased would have known that his condition was an ‘illness or injury’. In this regard the Court rejected an argument by the applicant that Barrett’s oesophagus was not an ‘injury’ or ‘illness’ on the basis that the deceased, or a reasonable person in his circumstances, would not be as ‘restrictive’ in determining the meaning of the question. Finally, in terms of the alleged waiver by ING of compliance with the duty of disclosure, the applicant’s argument was that ING by use of the health evaluation form had conveyed the clear message that the proposed life assured was not required to give a detailed statement of his or her health history or to answer the specific questions asked, but only needed to do what was required for completion of the health evaluation form. Once again, the Court rejected this argument. It found that it was made clear to the deceased that ING was interested in his whole medical history and the fact that certain questions were asked in the health evaluation form did not mean ING only wanted to know about certain subject matters. Rather, it was clear that ING was ‘seeking information relating to any matter which might affect the life expectancy of the applicant for insurance’.
The Underwriting Hurdle The underwriting evidence given by ING was that had it known the truth 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 (presumably it was a bundled policy). The Court accepted this evidence.
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Non-Disclosure: Court Allows Life Insurer to Vary Insured Amount Under Section 29 (4) by Alph Edwards
Notice under s29 (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’. The applicant argued that ING had never given this notice to the insured (it could not do so as he was dead) but rather had given it to the applicant. The Court dismissed this argument on the basis that ING was advised that the applicant was the insured’s legal personal representative and on finding that the section: should be read as permitting a written notice to be given by an insurer in the case of the death of the insured, to the insured’s personal representative. This is because s 29 (4) of the Act refers to the notice as a notice to vary the contract. It follows that the relevant party to the contract in the circumstances is the insured’s personal representative.
Applying the Formula It would appear from the judgment that other than the threshold issue of non-disclosure and misrepresentation, no issue was raised about ING’s entitlement to apply the s29 (4) formula. Accordingly, having found that the deceased had failed in his duty of disclosure under s21 and made misrepresentations in the application for the policy and that ING would have had charged a higher premium had it known the truth, the Court dismissed the application.
Implications The fact that this is the first time that s29 (4) has been examined by a superior court since the inception of the Act in 1986 would suggest that unlike the other limbs of s29, sub section 4 is either fairly uncontroversial or perhaps overlooked by insurers. Certainly this judgment indicates that it can be an effective remedy in cases of non-disclosure and misrepresentation. The primary point to emerge from this judgment is that notice under s29 (4) can be provided to a deceased insured’s legal personal representative. Many have always felt this must be the case, however this judgment is the first judicial confirmation that this is the correct construction of the section. Additionally, several useful points of guidance emerge from this judgment for life insurers dealing with potential non-disclosure and misrepresentation. They are: •
It will be difficult for an insured who is aware of any medical condition of some substance to argue that he or she was not aware of its relevance to a life insurer and further still, that a reasonable person would not recognise the relevance.
•
The fact that an insured is not aware of the precise name of the condition he or she may be suffering does not excuse the insured from telling the insurer about the condition.
•
An answer to a question, which is technically correct, can still amount to a misrepresentation if the answer is incomplete.
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Non-Disclosure: Court Allows Life Insurer to Vary Insured Amount Under Section 29 (4) by Alph Edwards
•
A construction of the phrase ‘illness or injury’ which excludes ‘conditions’ or ‘disorders’ is too ‘restrictive’ and not one which would be adopted by a reasonable insured.
•
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 matters pertaining to specific questions asked in an application document.
Lastly, life insurers will take encouragement from the fact that a key witness in ING’s case, the nurse who completed the health evaluation form, had no independent recollection of the events in question, yet her evidence of her usual practice was readily accepted by the Court. Often it is the case in matters such as these that key insurer witnesses to the completion of a proposal form will have no independent recollection of such events. This is often seen as a strategic weakness when pitted against an insured that purports to have a clear recollection of the events in question (for example, see Bottrell v National Mutual Life 2). This judgment demonstrates that absent a specific recollection of events, good ‘usual practice’ evidence can still be persuasive.
Endnotes 1
[2009] FCA 283
2
[2007] NSWSC 458 1 June 2007
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Non-Disclosure: Court Allows Life Insurer to Vary Insured Amount Under Section 29 (4) by Alph Edwards
For more information, please contact:
Alph Edwards Partner T: 02 8257 5703 alph.edwards@turkslegal.com.au
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