TPD clauses

Paul Cleary & Lisa Norris | September 2011 | Financial Services & Life Insurance

The NSW Court of Appeal recently re-examined the nature of the duties a trustee owes to its members when entering into a new policy of life insurance. The Court found that a trustee had not breached any duty owed to its members by entering into a group life insurance policy which contained different terms to an earlier policy.

The Court also revisited the relevance of capacity for part-time employment to TPD claims generally. The Court found that, generally, a claimant who can work parttime will not be TPD for the purposes of a ‘typical’ TPD definition.

Who does this impact?

Life insurers and superannuation fund trustees.

What action should be taken?

The Court has now indicated that, in the absence of clear language to the contrary, a claimant with the ability to return to work on a part-time basis (or who has in fact done so) is unlikely to meet the criteria for payment of a TPD benefit where the TPD definition is consistent with “the common form wording” considered by the Court.

In considering a TPD definition, fund trustees and life insurers should carefully consider whether the applicable policy wording in fact limits “occupation” or “employment” to full time employment, or whether it is on par with the “common form wording” set out in the judgment.

A superannuation fund trustee changing its insurance arrangements should consider adopting similar due diligence measures to those taken by this trustee, as part of its Change Management Plan.

Background We discussed this case in our TurkAlert dated May 2010, titled Trustee’s duties, TPD and part time work: are the Courts reining back? To recap, the respondent, Commonwealth Bank Officers Superannuation Corporation (“the Trustee”), was the trustee of the Officers’ Superannuation Fund (“the Fund”) which was established to provide benefits to employees of the Commonwealth Bank (“the Bank”).

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TPD clauses and super trustees’ duties

TPD clauses and super trustees’ duties

The appellant, Mr Manglicmot, commenced employment with the Bank as a bank teller on a full time basis in 1998. The appellant sustained various injuries in 2000.

He continued to work for the Bank for 15 hours a week after he was injured, and did not cease work until he accepted redundancy on 25 August 2003. The appellant had claimed a TPD benefit of $120,000 on the basis that he was unable to work for more than 15 hours a week as a bank teller or in any other occupation.

Up until 30 June 2003, the life insurer of the Fund was Hannover Life Re of Australasia Ltd (“Hannover”). From 1 July 2003, the Fund’s group life insurer was CommInsure Pty Ltd (“CommInsure”). The CommInsure Policy was in force as at the date relevant to the appellant’s claim.

The earlier group life policy between Hannover and the Trustee (“the Hannover Policy”) had defined TPD to mean: having been absent from work through injury or illness for an initial period of six (6) consecutive months and in our opinion being incapacitated to such an extent as to render the Insured Person unable ever to engage in or work for reward in any occupation or work which he or she is reasonably capable of performing by reason of education, training or experience (emphasis added).

Following a merger between the Bank and Colonial Ltd, the Trustee invited CommInsure to provide a quote for the group life cover. CommInsure was the insurer of Colonial Ltd’s superannuation fund.

The premium rates under CommInsure’s quote were lower than Hannover’s proposed premium, and CommInsure guaranteed premiums for 3 years whereas Hannover did not.

The Trustee entered into a group life policy with CommInsure which commenced on 1 July 2003 (“the CommInsure Policy”).

The agreement between the Trustee and CommInsure also contained a promise that CommInsure would “match or better the current terms and conditions in the Hannover contract”. Relevantly, the CommInsure Policy contained the following definitions:

“A member is totally and permanently disabled if, as a result of sickness or injury, he or she... (b) has been absent from all employment for 6 consecutive months from the date of disablement and we consider, on the basis of medical and other evidence satisfactory to us, the member will not ever be able to resume any occupation, whether or not for reward, where: ... >> date of disablement means the later of: --

the date on which the sickness or injury that was the principle [sic] cause of the member’s disablement commenced or occurred; and

--

the date the member ceased all work.

The date of disablement must occur while the member is covered under this policy.

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Paul Cleary & Lisa Norris | September 2011

Occupation means an occupation that the person can perform, on a full time or part time basis, based on the skills and knowledge the person has acquired through previous education, training or experience.” (emphasis added).

The Trustee retained solicitors to conduct a comparison of the CommInsure Policy and the Hannover Policy to identify any “gaps” in cover.

The Trustee and CommInsure continued to negotiate some amendments to the terms of the CommInsure Policy between July and December 2003, but no amendment was sought or made to the TPD definition. Therefore the CommInsure Policy TPD definition above governed the appellant’s claim.

TPD clauses and super trustees’ duties Paul Cleary & Lisa Norris | September 2011

At first instance, in Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd [2010] NSWSC 363, Rein J of the NSW Supreme Court rejected the appellant’s arguments that: 1. the Hannover policy provided TPD benefits where the member was unfit for full time work but fit for part time work; 2. the Trustee had breached duties owed to him as a member of the Fund by entering into the CommInsure Policy; 3. the CommInsure Policy contained terms which reduced the scope of cover to members, and included onerous definitions; 4. the TPD definition in the CommInsure Policy was more restrictive than the Hannover Policy definition as it contained the words “on a part-time basis”; 5. based upon Chammas v Harwood Nominees Pty Ltd [No1] (1993) ANZ Insurance Cases 61-175, there was a significant distinction between the CommInsure and Hannover Policies; and 6. he had suffered loss and damage by reason of the Trustee’s decision to enter into the CommInsure Policy, as he would have been entitled to a TPD benefit if the TPD definition in the Hannover Policy applied.

Rein J doubted that the Hannover policy provided TPD benefits where the Fund member was able to engage in part time work, but did not decide that matter. Instead, he regarded the negotiation of and entry into the CommInsure policy as a discretionary matter for the Trustee, open to challenge on grounds such as good faith and genuine consideration but not on grounds of fairness or reasonableness per se.

Rein J considered that the provisions of the SIS Act did not impose on a superannuation fund trustee higher duties than the general law or greater liability in relation to the exercise of its discretions. He was not satisfied that the terms of the Hannover policy were commonly found in the industry and then available. He considered that error in the exercise of the respondent’s discretion, and breach by the respondent of its general law or statutory obligations had not been shown.

The trial judge also found against the appellant on causation, finding that he ceased employment due to redundancy instead of sickness, illness or injury.

Judgment on Appeal

Client Update

First instance judgment

The judgment of the NSW Court of Appeal in Manglicmot is instructive for superannuation trustees and life insurers on several legal and practical levels. It gives guidance on several important issues including: >> the interpretation of a form of wording that commonly appears in TPD definitions, and specifically, whether a capacity for part time work disentitles a claimant to a TPD benefit where such a definition applies; >> the matters that a court will take into account in deciding whether a trustee has discharged its fiduciary and statutory obligations when changing its insurance arrangements; >> the scope of the covenants under sections 52(2)(b) and 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 and whether they extend the general law fiduciary obligations of the trustee; and >> the importance of proving causation, ie that to qualify for TPD, the cessation of employment needs to be due to sickness, illness or injury and not because of the acceptance of redundancy.

We examine these aspects of the judgment in turn.

TPD clauses and super trustees’ duties Paul Cleary & Lisa Norris | September 2011

A central question for determination by the Court of Appeal was whether the Hannover TPD clause provided TPD benefits where the member was unfit for full time work but fit for part time work.

If it did not, then on its proper construction the Hannover TPD definition had the same meaning in that respect as the CommInsure TPD clause, and the foundation for his action would fail.

The Court analysed comments made in earlier, firstinstance judgments with respect to whether certain TPD definitions (in both life insurance policies and trust deeds) disqualified a claimant who could work part-time from entitlement to a benefit.

The Court considered the frequently cited decision of Chammas v Harwood Nominees Pty Ltd (1993) ANZ Ins Cas 61-175, as well as Riley v The National Mutual Life Association of Australasia Ltd (1986) 4 ANZ Ins Cas 60-684, Wyllie v National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324, Beverley v Tyndall Life Insurance Co Ltd [1999] WASCA 198; (1999) WAR 327, Szuster v Hest Aust Ltd [2000] SADC 2, Alcoa of Australia Retirement Plan Pty Ltd v Thompson [2002] FCA 256; (2002) 116 FCR 139, Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945, Hay v Total Risk Management Pty Ltd [2004] NSWSC 94, Nile v Club Plus Superannuation Pty Ltd [2005] NSWSC 55, Camilleri v Australian Casualty & Life [2006] NSWDC 77, Baker v Local Government Superannuation Scheme Pty Ltd [2007] NSWSC 1173, and Halloran v Harwood Nominees Pty Ltd [2007] NSWSC 913.

The Court described the following wording as “the common form wording” of TPD definitions in its analysis of the body of case law with respect to the issue that has developed since 1986, for ease of reference: “incapacitated to such an extent as to render the member unlikely ever to engage in or work for reward in any occupation or work for which [he] is reasonably qualified by education, training or experience”.

The Court concluded, following its analysis of the above case law, that it was not “sound uncritically to translate what Hodgson J said [in Chammas] about limitation to full time employment to the

common form wording in different contexts, or to the Hannover TPD clause. Nor has there been a consistent course of construction or application of the common form wording or variants of it”.

The Court of Appeal concluded that:

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TPD definitions and their application

“The Hannover TPD clause defines total and permanent disablement. It is quite emphatic: the member must be unable ever to engage in or work for reward in any occupation or work. As further context, the member must have been absent from work for six months. Introduction of full time employment or part time employment into the wording, notions which themselves carry uncertainty (what is the standard for full time employment?) is in my view not warranted. The clause requires unfitness to work, without distinction between full time work and part time work other than by regard to the work which the member is reasonably capable of performing by reason of education, training or experience” (original emphasis).

The Court found that there was nothing inherently unfair or unreasonable in interpreting the Hannover TPD clause as it had. The Court pointed out that:

“A member who cannot work even part time has a need; a member who can work part time has a different need, and one which will vary according to the work the member can perform. The premium will be struck according to the need to be met, and that is found in the terms of the policy of insurance”.

TPD clauses and super trustees’ duties

The Trustee’s Review Process

>> that a CommInsure officer had made a comparison of the CommInsure policy with the Hannover policy and had noted a number of differences; they did not include a difference as to TPD benefits (at [55] – [56]);

The Court of Appeal examined the steps that the trustee took as part of its due diligence in assessing the changeover of the insurance policy from Hannover to CommInsure. The Court of Appeal concluded:

>> a three year premium guarantee period, a foreshadowed reassessment of risk in 12 months by CommInsure and a series of further conditions stipulated by the trustee and accepted by CommInsure by way of undertaking (at [55]; [57]; [59]);

‘It is clear that the [trustee] intended that the CommInsure policy should provide no less benefits than the Hannover policy. It gave considerable attention to equivalence, and thought it had obtained it. As to TPD benefits, it had the support of Freehills’ review’ (at [90]).

>> the review of the draft policy by the trustee to reconcile its terms ‘with the undertakings that were represented during negotiations’ (at [62]); and

‘Considerable attention to equivalence’ The matters that the trustee considered in giving ‘considerable attention to equivalence’ between the Hannover and CommInsure policies may be categorised as follows: 1. Negotiation and internal review of the terms of the CommInsure policy (paras [49] – [63]); 2. Reference to internal legal counsel for review (paras [56], [62]); and 3. Reference to external lawyers for gap analysis and opinion (para [64]).

We examine the steps that the trustee took under these categories in more detail as follows.

1.

Negotiation and internal review

The Court of Appeal noted the circumstances of the negotiation and entry into the CommInsure policy, in particular: >> the significantly lower premiums that would apply under the CommInsure policy vis-à-vis a proposal to increase premiums in the existing Hannover Re policy (at [50] – [52]; [57]); >> the trustee’s consideration and rejection of a recommendation to defer changing the insurer on the basis that the trustee ‘could not responsibly adopt the Hannover proposal in the knowledge that there were lower rates available’ (at [53] - [54]);

>> the fact that CommInsure officers had communicated more than once with CommInsure asking for changes to the draft policy document in order to fulfil the undertaking which CommInsure accepted (at [63]).

2.

Reference to internal legal counsel

The Court of Appeal found, relevantly, that the draft document had been forwarded for review by CBA’s legal team to ensure that the provisions in the CommInsure policy were at least equivalent to those in the Hannover policy, and that the lawyer within CBA Legal was satisfied as to equivalence (at [56], [62]).

3. Reference to external lawyers for review by gap analysis Instructions The Court of Appeal found that external solicitors were instructed ‘to carry out a gap analysis of standard terms of [the CommInsure policy] and [the Hannover policy] in order to identify material coverage gaps between [the respective covers]’ (at 64]).

Gap analysis The Court of Appeal found that the external lawyers’ detailed gap analysis identified that ‘the definition of “total and permanent disablement” is similar in both policies although note, in the Comminsure [sic] policy, the retrospective date of disablement where a person has unsuccessfully engaged in a rehabilitation programme’ (at [64]).

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Paul Cleary & Lisa Norris | September 2011

TPD clauses and super trustees’ duties

Findings

Scope of the SIS Covenants

The above steps enabled the Court of Appeal to conclude that:

The question remains that if the trustee had obtained cover for less TPD benefits under the CommInsure policy, would it still have avoided being in breach of its general law fiduciary obligations or the SIS covenants?

‘It is clear that the respondent intended that the CommInsure policy should provide no less benefits than the Hannover policy. It gave considerable attention to equivalence, and thought it had obtained it. As to TPD benefits, it had the support of [external legal] review’ (at [90]).

In addressing whether the trustee was in breach of its general law duties or statutory obligations, the approach that the Court of Appeal adopted was to ask whether the trustee obtained equivalent TPD cover under the CommInsure policy (as opposed to asking whether the trustee may not have done so but nonetheless was not in breach) (at [91]).

The Court of Appeal found, following its consideration of the Hannover TPD clause: ‘that there was no material difference, in relation to fitness for work, between that clause and the CommInsure TPD clause’ (at [92]).

The Court of Appeal therefore found that there was no breach as alleged by the appellant (at [92]) and on that basis disposed of the appeal in relation to breach of fiduciary duty or the SIS covenants (at [93]).

Conclusion about the trustee’s review process The trustee’s review process underlying its decision to change insurers was found by the court to demonstrate that the trustee intended that the CommInsure policy should provide no less benefits than the Hannover policy and that it had given considerable attention to equivalence.

Trustees considering changing insurers should consider integrating the steps taken by this trustee as part of their Change Management Plans (see our previous Client Update, Change Management Plans, 8 March 2011).

The Court of Appeal considered this question in obiter comments about the position were the Hannover TPD clause to be found to materially differ from the CommInsure TPD clause in relation to fitness for time work (at [93] – [122]).

General law obligations The Court of Appeal considered that it was not appropriate to express a view on the general law obligations that would apply in these circumstances. It found that it would not be appropriate: ‘to express any view on the trial judge’s reasons and conclusions as to breach of fiduciary duty. That is because the appellant’s submissions scarcely addressed the principles on which the trial judge acted, or his findings on their application’ (at [100]).

‘In the absence of meaningful challenge by the appellant, the Court should not enter upon whether or not there was error in the trial judge’s approach to breach of the general law obligations or in his conclusions. This does not suggest either that there was or that there was not’ (at [102]).

In any event, the Court of Appeal found that the appellant’s submissions were directed to ss 52(2) (b) and 52(2)(c) of the SIS Act, and particularly the covenant in s 52(2)(c) that the trustee ‘ensure’ that the trustee’s duties and powers were performed and exercised in the best interests of the beneficiaries, which we now consider.

The SIS Act covenants The Court of Appeal then made several obiter comments about the scope of the covenants set out in sections 52(2)(b) and 52(2)(c) of SIS. These comments go to the question of whether those covenants impose a higher standard on a trustee than the general law.

Client Update

Paul Cleary & Lisa Norris | September 2011

TPD clauses and super trustees’ duties Paul Cleary & Lisa Norris | September 2011

“To ensure that”

Section 52(2)(b) of SIS provides that the trustee covenants

The appellant submitted, in relation to s 52(2)(c) of SIS: ‘that “ensure” meant make certain, and that the covenant was “a covenant of strict liability” looking to the result of the trustee’s activity or, if to the process, not to the trustee’s “motives” or the things it did or did not take into account’ (at [100]).

‘to 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’.

In considering the scope of this provision vis-à-vis the trustee’s general law fiduciary obligations, the Court of Appeal considered a number of matters including the judgment of Byrne J in Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd [2006] 15 VR 87 at [102]-[107], s 323 of SIS ( which provides defences of mistake or other matters to proceedings brought under s 55(3) of SIS for breach of a SIS covenant), the objects of SIS, the origins of s 52 of SIS, prior legislation and relevant commentaries and concluded that: ‘Section 52(2)(b) does not in my opinion materially add to breach by the [trustee] of its general law duty to exercise reasonable care… The exercise of a discretionary power is approached through the s 52(2) (b) covenant in no different way from its exercise in accordance with the [trustee’s] general law obligation. Regard to s 323 [of SIS] does not alter that position’ (at [120]).

Section 52(2)(c) SIS Section 52(2)(c) of SIS provides that the trustee covenants ‘to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries’.

The Court of Appeal held in relation to section 52(2) (b) SIS: ‘Nor in my opinion does s 52(2)(c) materially add to breach by the [trustee] of its general law duty to act in the best interests of members of the Fund. The [trustee’s] general law obligation could be expressed, in the language of s 52(2)(c), as an obligation to perform and exercise its duties and powers in the best interests of the beneficiaries’ (at [121]).

On this point, the court held that:

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Section 52(2)(b) SIS

‘the words “to ensure” add nothing; an obligation is an obligation. Again, the [trustee] was exercising a discretionary power, and “to ensure” does not turn the question of exercise of a discretionary power into one of strict liability. There is liability if the discretionary power is exercised improperly, but otherwise there is not’ (at [121]).

Conclusion in relation to SIS covenants

Therefore, on the overall question whether the SIS covenants extend the trustee’s general law obligations, the court concluded that ‘the appellant’s position is not advanced by reliance on the covenants rather than the general law obligations’ (at [122]).

TPD clauses and super trustees’ duties

Causation The Court of Appeal also found that the claim would have failed on the basis of causation, even if the appellant had convinced the Court that the Hannover Policy should have been interpreted as he asserted.

The Court indicated that the appellant’s six months absence from all employment did not need to occur prior to the appellant ceasing to be an employee of the Bank (although it was not argued on appeal that this was a prerequisite to payment, in any event: [135]). However, it was a precondition to payment of the TPD benefit in both the Hannover and CommInsure policies that the appellant had been absent from employment for a minimum 6 month period by reason of sickness, illness or injury. The Court of Appeal held that “the conclusion on the evidence is that the cessation of employment with the Bank by the offer and acceptance of redundancy was not because of sickness, illness or injury”. Because the appellant had in reality been absent from employment due to redundancy rather than sickness, illness or injury, no TPD benefit would have been payable with respect to him regardless of which TPD definition applied.

The appellant therefore failed on causation, independently of failure on breach.

The Appeal was dismissed, with costs.

Implications Superannuation The approach taken by the trustee in Manglicmot gives a superannuation trustee important guidance about the due diligence procedures that it should follow in determining whether to change its insurance arrangements.

While the matter is not yet settled, Manglicmot is authority for the proposition that the covenants under sections 52(2)(b) and 52(2)(c) of SIS do not extend the equivalent general law fiduciary obligations of the trustee.

Application of TPD definitions The judgment makes it clear that a claimant with capacity for part-time employment is most unlikely to meet the criteria for payment of a TPD benefit where the applicable definition cannot be distinguished from the “common form wording”.

The Court’s comment that “the premium will be struck according to the need to be met” may in future bring into issue whether the contracting parties factored disablement for full-time or parttime work into the premium as priced, depending on how closely the wording in issue resembles the “common form wording” set out by the Court. Actuarial evidence with respect to how the premium was struck in respect of certain products may in certain circumstances become relevant.

Most if not all TPD policies are likely to have been priced on the basis set out in the judgment: that total and permanent disablement means the claimant must be unable (or unlikely) ever to engage in or work for reward in any occupation or work, whether full-time, part-time or otherwise.

Client Update

Paul Cleary & Lisa Norris | September 2011

TPD clauses and super trustees’ duties

For more information, please contact: Paul Cleary Partner T: 02 8257 5760 M: 0407 052 170 paul.cleary@turkslegal.com.au

Lisa Norris Partner T: 02 8257 5764 M: 0410 582 309 lisa.norris@turkslegal.com.au

Client Update

Paul Cleary & Lisa Norris | September 2011

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