Remedies for Non-Disclosure under Group Cover By Lisa Norris | June 2009 Area of Expertise | Insurance & Financial Services
Summary The Insurance Contracts Act 1984 (Cth) (‘the ICA’) makes it clear that where there have been nondisclosures by a proposed member upon joining a scheme, the insurer can utilise the remedies in s29 as though there was an individual contract of insurance with the trustee regarding that member. The insurer can in that way avoid the contract to pay the underwritten cover to the member. What happens, however, where a member takes out additional units of cover after they joined the fund?
Who Does This Impact? Group life insurers. It also indirectly impacts the owners of blanket superannuation contracts and their administrators.
What Action Should Be Taken? When assessing a claim pursuant to a group life insurance policy which has automatic and underwritten components, this case illustrates that if there is evidence suggesting breach of the duty of disclosure, it is appropriate to continue assessment of the claim on its merits to the extent that there is automatic cover even if the additional cover is to be avoided.
Background The Victorian County Court decision of Robert Virag v United Super Fund Pty Ltd and Hannover Life re of Australasia Ltd [2009] VCC deals with a group life insurer’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. It was found in Virag that by virtue of s32, the provisions of the ICA apply to a non-disclosure by a member of a fund when that member increases the level of cover above the automatic acceptance limit, even if that increase occurs after the member became a member of the fund.
Facts The plaintiff injured his lumbar spine on 4 April 2006 during the course of his employment and became totally and permanently disabled for work as a result. He applied for a TPD benefit which comprised ten units being: •
Three units of automatic cover which he had obtained upon joining his industry superannuation fund in 1999; and
•
Seven 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.
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Hannover (‘the Insurer’) formed the view that there had been a failure by the plaintiff to comply with the duty of disclosure, and rejected the claim in respect of the additional seven units of cover on the ground of non-disclosure. The case was concerned with whether the plaintiff was entitled to the seven extra units of cover.
The plaintiff’s insurance arrangements On 15 February 1999, the plaintiff joined the Construction and Building Union Superannuation Fund (‘CBUS’). When he joined the fund, he became entitled to three ‘units’ of death and total and permanent disablement insurance cover, being the cover automatically provided to members of the fund upon joining. That cover was not subject to underwriting. These three units of cover were provided pursuant to a Group Life Policy entered into by United Super Pty Ltd, as trustee of the CBUS Fund (‘the Trustee’). On 1 April 2002, the Insurer took over all existing units of cover then held by members of CBUS from the previous underwriter. On 1 April 2005, a new policy of insurance (‘the Policy’) was entered into between the Insurer and the Trustee. In June 2005, a site meeting was called at the factory where the plaintiff was working. A representative from CBUS spoke at this meeting, and encouraged CBUS members on the site to consider whether they had sufficient insurance cover, and if they did not, to take out more cover. On that day, 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 three units of cover he had automatically become entitled to upon joining the fund. The plaintiff’s application for seven units of additional death and TPD cover was accepted by CBUS on about 28 June 2005. CBUS was acting on the Insurer’s behalf in accordance with an administration kit which set out the guidelines CBUS was to apply in relation to applications for insurance by its members. Any application that could not be automatically accepted by CBUS under the terms of the administration kit was to be referred to the Insurer for assessment by its underwriters. After the plaintiff became disabled, he applied for the TPD benefit. The Insurer rejected his claim in respect of the additional seven units on the grounds of non disclosure. Shortly stated, the non-disclosure alleged related to attendances by the plaintiff upon his doctors in late 2004 and February 2005, and the reason for them.
The applicable law Assuming that the Insurer demonstrated that the plaintiff had failed to comply with the duty of disclosure1, the Court was required to decide whether the Insurer’s remedy was to be found in the Insurance Contracts Act Act, or at common law. For the reasons set out below, his Honour concluded that the provisions of the ICA were applicable. It was common ground that the Policy was a ‘life policy’ within the meaning of the Life Insurance Act 1995 and that it was a ‘blanket superannuation contract’ within the meaning of s11(4) of the Insurance Contracts Act. Section 32 of the Insurance Contracts Act provides:
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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 was provided by an individual superannuation contract between the insurer as insurer and the trustee for the purposes of the scheme as the insured; and (b) that contract had been entered into at the time when the proposed member became a member of the scheme.’ (Emphasis added). His Honour observed that the operation of s29 is extended by s32 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 felt that s32 was designed to serve two purposes: 1. by creating a fictional single contract in respect of the ‘non-disclosing’ or ‘misrepresenting’ life insured, it makes remedies available to the insurer in respect of that cover; and 2. by giving the individual contract so created a fictional commencement time, it places the non-disclosure before, rather than after, the contract of insurance was entered into. This overcomes the problem that the non-disclosure or misrepresentation to which s32 applies will usually occur after the blanket policy (group life insurance contract) is in place. The Insurer identified a problem with the application of s32 in the circumstances, in that on its face, it applies only to applicants for insurance cover when they ‘become a member’, that is, when they join a superannuation scheme for the first time. Applied literally, s32 was inapplicable to the facts of this matter, so the Insurer submitted that the members’ duty of disclosure must have been found under the common law. Under the common law, two steps arose for consideration. Firstly, whether a prudent insurer would have considered the non-disclosed matter material to the acceptance of the risk, and if so, whether the actual insurer was induced by the non-disclosure to accept the risk. If yes to both, the contract could be avoided. It was apparently for this reason that the Insurer’s representatives led evidence from a prudent underwriter as well as underwriting evidence from employees of CBUS and the Insurer itself. The plaintiff submitted that ‘proposed member’ did not confine the operation of s32 to the moment when a person first joined the superannuation scheme. The plaintiff argued that he was a ‘proposed member’ in respect of the seven units at the time of his application for them, and that he did not become a member ‘in respect of’ the seven units until his application was accepted on 28 June 2005. His Honour was strongly influenced by the fact that the ICA is remedial consumer protection legislation and that therefore
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a purposive approach to the question of construction raised here is required. It is legitimate to have regard to the consequences of an interpretation in the evaluation of alternative statutory constructions. His Honour observed that if s32 was limited in its application to members who obtain additional (underwritten) units of cover upon becoming members of a fund, members of such funds who later take out or extend the insurance cover under the scheme would not be subject to the intended protection of the ICA, but would have their disclosure obligations governed by the common law. This would create a disparity, as those who take out all of their cover upon joining a fund would fall within the provisions of the ICA. His Honour concluded that it was intended that the ICA would govern all insurance cover provided to scheme members. He listed the following factors which he felt were demonstrative of this legislative intention: 1. The inclusion of variations in the definition of contract of insurance in the ICA. 2. The inclusion of a definition of blanket superannuation policies in the ICA. 3. The specific references to members of retirement and superannuation schemes. 4. The creation of a fictional individual contract in respect of each scheme member’s cover between trustee and insurer. 5. The attribution of representations made by the member to the trustee. 6. The nomination of a contract date bearing no relation to the actual date of the policy between the trustee and the insurer. 7. In some cases, creating a contract date that pre-dates the actual blanket superannuation contract. To his Honour, all those matters pointed to an intention to include within s32 a variation or extension to cover by an existing member of a retirement or superannuation scheme. It was held that the ‘proposed member’ of which s32 speaks should be read ‘as meaning a member proposing himself for insurance cover under the scheme’. His Honour found that s32 operates in this way: it operates when there was a relevant failure to disclose (or misrepresentation, within the meaning of the ICA) in respect of a scheme member’s insurance cover. It uses fictions to expose that member’s individual insurance cover to the remedies found in Division 3. It does so by isolating ‘the cover’ in respect of which the non-disclosure was made by treating ‘the cover’ as if provided by an individual superannuation contract between insurer and trustee. 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’. In this way, the section puts the insurer and the member in the same positions (regarding non-disclosure 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.
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‘A contract of life insurance with the insured on any terms’ 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, s29(3) would not permit avoidance. The Insurer submitted that for the purposes of s29(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 - ie. 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 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 Turk Alert ‘Tying Up Loose Ends From Schaffer’. Relief for these effects of s29(3) should be on the way in the form of the proposed amendment to Part IV, Division 3 of the ICA. The Bill proposes the introduction of a new s27A that will enable life insurance products to be ‘unbundled’ into the respective covers for the purposes of exercising remedies in relation to each type of cover, as was discussed by John Myatt in his paper on the Insurance Contracts Amendment Bill 2007.
What the insured ‘knows’. Section 21 of the ICA requires disclosure of any matter ‘the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms’, or any matter that a reasonable person in the insured’s circumstances would know to be so relevant. The defendants alleged that from November 2004 the plaintiff knew that: •
he had recurrent symptoms involving his neck and back;
•
he was highly stressed and anxious and was undergoing counselling; and
•
he had injured his neck at work on or about 19 November 2004 and his back on 10 February 2005.
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It was argued that as none of this was disclosed in the application, the answers given on the proposal form amounted to misrepresentations. The Insurer submitted that the plaintiff knew that the undisclosed matters were relevant to the Insurer’s decision to accept the risk, and that a reasonable person in the circumstances ‘could be expected to know’ that the matters were relevant to the Insurer’s decision. In considering what constitutes knowledge for the purposes of s 21 of the ICA, his Honour cited Permanent Trustees v FAI [2003] 214 CLR 514: ‘the word ‘knows’ is a strong word. It means considerably more that ‘believes’ or ‘suspects’ or even ‘strongly suspects’. We discussed the implications of the FAI case in our Turk Alert ‘High Court Raises New Questions On Duty of Disclosure’. His Honour was not satisfied from the evidence that the plaintiff knew (using ‘knows’ as a ‘strong word’) that the health issues not disclosed in the application for the seven additional units of TPD and death cover were relevant to the insurer’s decision to accept the risk of total and permanent disablement. His Honour also found that a reasonable person in the plaintiff’s circumstances would not have ‘known’ the matters to be relevant in the required sense. As a result, his Honour found that there had been no non-disclosure for the purposes of s21.
Implications There has long been uncertainty with respect to 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 clarity regarding this issue. This case indicates that, pursuant to s32 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 s32. It is the fictional contract that the insurer is entitled to avoid by s29 of the ICA, assuming that the criteria for avoidance exists. Section 32 (and in turn s29) does not affect the obligation to pay the automatic cover under the group life insurance contract. While this level of analysis was not conducted by the Court in Hudson2, the Court accepted that this was the correct approach in that case also. In practical terms, if the criteria for payment of a benefit have been met (ie. 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 s32. 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 s29, it should reserve its rights in this regard in the letter that admits the claim with respect to the automatic cover.
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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 s21 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 s21, the Court has clearly accepted that such a duty exists in circumstances where a person becomes a member of a superannuation or retirement scheme. His Honour’s views regarding the discrepancy which would arise if certain members were covered by s32 and others were not resulted in his Honour’s finding that a literal application of the wording of s32 was not appropriate. Arguably, the same reasoning must apply to the obligations of a member under s21, or a similar discrepancy would exist: people with individual contracts of life insurance would be subject to the duty of disclosure, but those who obtain insurance pursuant to a superannuation or retirement scheme would not. This could not have been intended by the parliament in enacting the ICA any more than the outcome with respect to s32 pointed out by the Insurer in this case. But that is an analysis yet to be conducted by a Court. Robert Virag v United Super Fund Pty Ltd and Hannover Life re of Australasia Ltd [2009] VCC
Endnotes 1
His Honour ultimately found that the plaintiff had not breached the duty of disclosure, as summarised below.
2
NRG Victory Australia Limited v Hudson [2003] WASCA 291
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For more information, please contact: Lisa Norris Partner T: 02 8257 5764 lisa.norris@turkslegal.com.au
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