Tying Up Loose Ends From Schaffer by Alph Edwards | July 2007 Area of Expertise | Life Insurance
Introduction The NSW Court of Appeal has confirmed that a life insurer asserting what it would have done had it known the true facts when avoiding a policy under s29 (3) of the Insurance Contracts Act (“the Act”), does not have to show it would have rejected an application outright as at the date the Policy was incepted. The insurer of course still has to show that it would not have offered cover on any terms but it may show that it would have done this at some date later than policy inception1. In coming to this decision the Court of Appeal has effectively cleaned up an issue left unresolved in Schaffer v Royal & Sun Alliance Life Assurance Australia2 where two of the appeal judges appeared to differ as to when the insurer had to show that no cover would have been offered3.
The Facts The insured applied for an income protection policy with the insurer in November 2001 but did not disclose that 9 days prior to policy inception, he had been referred to a specialist by his general practitioner “for what will almost certainly turn out to be sleep apnoea”. The insured did in fact have sleep apnoea which was confirmed by tests in January 2002. In June 2003 the insured claimed under the policy and in January 2004 the insurer avoided the policy on the basis that had it known the truth about the referral to a specialist it would not have offered cover to the insured and would have waited until the results of the tests were known.
The Trial The insured launched District Court proceedings challenging the insurer’s avoidance. At trial the insured conceded that he had breached his duty of disclosure and that the insurer would not have offered him cover on the day the policy was incepted. The insurer’s evidence was that if it had known the true facts it would have deferred a decision on cover for 12 months before eventually declining the application, given the absence of successful treatment during this 12 months.
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It was argued by the insured that the insurer could not rely on s29(3) because it had to show that as at the date the policy was incepted, not 12 months later, that a policy on any terms would not have been issued. The trial judge rejected this submission and found that the insurer was entitled to avoid the policy on the basis that the “there was nothing in the end which would allow me to find that they would have done anything but decline [the policy]”. The insured appealed.
The Appeal The critical issue before the Court of Appeal was whether s29(3) imposed a time limit on the notional decision that the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms. The answer to this question essentially boiled down to whether one accepted the views of Davies JA or McPherson JA in the leading case on s29(3), being Schaffer. In this case both judges agreed that in order to rely on s29 (3), the insurer had to show more than that it would have deferred offering cover, had it known the true facts. Rather, the insurer must show that it would not have offered cover on any terms. The two judges appeared to differ however on a point that was not relevant to the outcome in Schaffer. That is, despite saying he agreed with Davies JA, McPherson JA indicated that the insurer must prove it would not have been prepared to enter into a contract of life insurance at the time that disclosure ought to have been made i.e. at policy inception. Other than the three year window prescribed by s29 (3), Davies JA did not put any time limit on when the insurer had to show it would have made the notional decision. Whilst this issue was not relevant to the outcome in Schaffer (because there was no evidence of a final decision at all) it was critical in this case bearing in mind that the insurer’s evidence was that it would have deferred making a decision for 12 months before declining to offer any cover. In a nutshell then, if the Court of Appeal accepted that McPherson JA was right, then the insured would succeed. If the views of Davies JA were preferred, then the insurer would succeed. In the end, the Court of Appeal preferred Davies JA’s interpretation of s29 (3) for the following reasons: •
The placing of a temporal limit in s29 (3) was inconsistent with the Australian Law Reform Commission report recommendations dealing with innocent non-disclosure and misrepresentations noting that s29 substantially reproduced the draft clause 30 prepared by the Commission.
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There were internal inconsistencies in the views of McPherson J on the temporal question. Indeed on one view, given he said he agreed with Davies JA and the authorities he relied upon, McPherson JA may not have been advocating that a temporal limit should be applied at all.
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s29 (4) makes it plain that for the purpose of s29 (3) an insurer is entitled to bring the results of consequent enquiries in the exercise of determining its attitude to acceptance of the risk.
The appeal was dismissed.
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Implications This judgment ties up one of the loose ends left in Schaffer. Namely, it now appears clear that an insurer which shows that it would have eventually declined to offer cover after a period of deferral, will not fall foul of 29(3) simply because it cannot prove that at the time of Policy inception that it would not have offered cover on any terms. This is a pleasing outcome for insurers, although overall, s29 (3) still remains a highly unworkable remedy for most life insurers. As reported previously however, relief should be on the way in the form of the proposed amendment to Part IV, Division 3 of the Act which should be enacted before this year is out. Details of the proposed changes can be found in John Myatt’s paper on the subject at www.turkslegal.com.au.
Endnotes 1
Davis v Westpac Life Insurance Services Ltd [2007] NSWCA 175
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[2003] QCA 182
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For a detailed discussion of Schaffer, please see my earlier TurkAlert “Court of Appeal Restricts Insurer’s Avoidance Options Under Section 29(3)” at www.turkslegal.com.au
For more information, please contact: Alph Edwards Partner T: 02 8257 5703 alph.edwards@turkslegal.com.au
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