Fairness first

Fairness first

For the Australian Financial Complaints Authority, a fair go is most important. So what happened to the laws insurers are also guided by?

By Bernice Han

Focus on fair, not blackletter law,” the Australian Financial Complaints Authority (AFCA) said in its July newsletter last year, outlining how it would make determinations.

“We decide each case as we see it and make determinations without favour,” the financial services sector’s new complaints umpire referee said. “The test we apply is, ‘what is fair in all circumstances of the case?’

“With that in mind, blackletter law arguments that are legally sound and well-articulated will not succeed if they deliver fundamentally unfair outcomes for consumers.”

The external dispute-resolution body, which replaced the industry-founded Financial Ombudsman Service in November 2018, was about nine months into its operations when the newsletter was published. It came more than a year after the Hayne royal commission into financial services sector misconduct had wrapped up and Canberra had committed to act on all 76 proposed measures.

In the post-Hayne world, consumer protection has taken on increased importance. The royal commission exposed a range of practices and behaviour where financial products were designed to extract maximum benefit to the seller rather than value to the consumer.

Insurers and other financial services providers once operated within a system where caveat emptor ruled, with product design, sales and service relying on the exact legal meaning of controlling legislation and the contract between the parties.

The insurance industry has been grappling since the 1980s with the transition from its previous focus on contract law to a consumer-conscious culture, where there is pretty much universal acceptance in politics and business that “doing the right thing” is the emerging key to success.

That transition is at the heart of AFCA’s approach to insurance disputes. The principle of “fairness” that guides its thinking is skewed heavily in favour of the consumer.

It holds that a financial services provider can act strictly within the law when responding to a consumer and still be in the wrong. Where a consumer has made what AFCA judges to be an innocent mistake, the financial services provider involved will end up on the losing side.

But John Price, the Lead Ombudsman for Insurance at AFCA, insists it’s more balanced than that.

“Fairness aims to achieve a fair outcome to all parties,” he tells Insurance News. “Certainly, reliance on blackletter law does not necessarily lead to fairer outcomes.”

As Mr Price also points out, these days “it is rare to see a court simply rely on blackletter law. Courts apply community standards and fairness in many ways.

“Fairness over-rides everything that AFCA does. It is our over-arching principle to do what is fair in all the circumstances. You cannot just extract fairness itself and ignore everything else.

“Fairness is looking at all the circumstances. It’s looking at the arrangement between the parties, it’s looking at whether the parties have obeyed the law.”

He says the policy to place fairness at the heart of its decision-making process is not at all new.

“AFCA and its predecessor scheme, the Financial Ombudsman Service (FOS), never held themselves out to be blackletter law organisations,” Mr Price said. “AFCA is required as part of its decision-making process to do what is fair in all the circumstances, as was FOS.

“We are required to have regard to the relevant legal principles, to have regard to good industry practice including codes of practice and prior determinations of AFCA and its predecessor schemes. But our over-arching requirement is to achieve an outcome that is fair in all the circumstances. Fair to both parties.”

Sounds utopian? Maybe it is. The fairness of the fairness agenda, it seems, is in the eye of the beholder. Depending on who you ask, a determination is either just or unjust.

AFCA decisions are binding on the financial services it adjudicates on, and insurers’ ability to challenge a decision in court is unlikely to succeed. They are tied to the scheme and its decisions.

Last month Brisbane-based QSuper backed away from an appeal against a ruling by the Full Bench of the Federal Court upholding an AFCA determination which the superannuation fund said “exercised an impermissible exercise of judicial power”.

Last December the court upheld AFCA’s ruling on the matter, while accepting that QSuper had likely complied with its statutory obligations.

It said AFCA’s powers to settle disputes “are not judicial in nature” and therefore are not binding.

When AFCA has reached a decision on a dispute it “lacks conclusiveness” as it cannot force a company to obey it.

Therefore AFCA’s decision did not involve an exercise of sovereign power “but was a result of [financial services companies’] voluntary submission to the AFCA scheme”.

“A member is not compelled to do anything by AFCA’s determination itself. The inability of an entity charged with determining complaints to enforce its own determinations negates the conclusion that it is exercising judicial power.”

But AFCA does have support through the industry regulators. It can refer an issue of non-compliance to either the Australian Prudential Regulation Authority, Australian Securities and Investments Commission or the Commissioner of Taxation for possible further action.

“However, even action by any of those entities may not be the enforcement of the determination but effectively a sanction for the failure to comply with it,” the Federal Court said.

Legal sources say QSuper’s abandonment of the appeal was wise, because the courts are supportive of the alternative dispute resolution system.

As to AFCA’s overall performance, an independent review of AFCA was to have taken place in May, when the dispute mediator reached the 18-month milestone, as required by legislation. The Treasury-led review has now been put on hold because of the coronavirus pandemic and will most likely take place next year.

Administering fairness: AFCA’s John Price

Fairness over-rides everything that AFCA does. It is our over-arching principle to do what is fair in all the circumstances.

The feedback from insurance executives, law experts and consumer advocates will have to make do for now. And not surprisingly, their opinions are divided.

Consumer advocates like the way AFCA is handling disputes so far. But the insurance industry and lawyers are not so sure. A few cases in particular have left them concerned.

An industry source, who preferred not to be named, told Insurance News insurers “are deeply concerned about some of the decisions but they are not going to say that at this time”.

A dispute reported in April by insuranceNEWS.com. au was somewhat puzzling, if not downright unnerving for the industry.

AFCA ruled in favour of a complainant who had failed to disclose his prior claims history when taking out a comprehensive motor policy. It agreed Hollard had clearly informed the claimant of his duty of disclosure when the policy was purchased in 2018. But it did not accept Hollard’s submission that the policy would not have been issued had the claimant disclosed he had made five previous claims.

Furthermore, AFCA said two of the five claims would not have been counted within Hollard’s underwriting guidelines.

Some critics saw this decision as an attempt by AFCA to expand its remit by involving itself in an insurer’s underwriting guidelines.

Dean Pinto, Special Counsel in Wotton+Kearney’s national financial lines team, believes this decision is possibly a sign of what to expect from AFCA in future.

“The decision raises questions as to whether this will be used as a precedent by AFCA going forward and, if so, the evidentiary burden that an insurer must discharge to satisfy AFCA as to what it would or would not have underwritten had the insured complied with its legal obligations,” he tells Insurance News.

“The decision must be of concern to insurers in terms of assessing where that burden now sits and how they can convince AFCA of their underwriting processes and intentions.

While it would be preferable that every customer who suffered a loss could be covered, that is commercially not viable if the insurance industry is to continue to provide affordable insurance products.

“A balanced and independent assessment of insurance disputes that gives due consideration to the application of the law, including the legal obligations of parties to an insurance contract, are fundamental aspects of the business of insurance.

“While it would be preferable that every customer who suffered a loss could be covered, that is commercially not viable if the insurance industry is to continue to provide affordable insurance products.”

A financial services lawyer, who requested anonymity in order to speak candidly, called the ruling against Hollard “appalling”.

“This is actually a decision about whether or not the law, the Insurance Contracts Act, gave the insurer the power to avoid paying the claim and AFCA has concluded that the insurer didn’t bring itself within section 28 of the Insurance Contracts Act,” the lawyer tells Insurance News.

“To my mind, that is entirely a question of law and that’s an exercise, in my view, of judicial power.

“This is very concerning because as best as I can see, AFCA is making decisions which are not consistent with the decisions that the financial firms are able to make consistently with their legal obligations.

“And it’s difficult because if you are a financial firm and you have a whole lot of legal obligations, you think you are complying with them but there is always the prospect that an individual might complain and AFCA might think the financial firm’s decision is unfair to that person.”

Cat Newton, Senior Policy Officer at the Consumer Action Law Centre, disagrees. She says AFCA is taking the right approach, and relying solely on legal principles is not enough to enable a fair outcome.

“I think most people would acknowledge the actual blackletter law is often imperfect and it often does lead to unfair outcomes when applied very narrowly,” she says. “That’s why it’s important to have that additional criteria in AFCA’s decision-making that it also has regard to fairness in all the circumstances to capture those times.

“It’s not going to be in every decision, but there are going to be times when a strict legal view really doesn’t do justice to the dispute at all or to consumers.”

Key AFCA cases

In October last year the Australian Financial Complaints Authority (AFCA) began naming financial firms in its published determinations.

While most insurance disputes were the normal vanilla-type complaints, a number stood out, either because they were quirky in their detail or because of the reasoning behind a decision. Here’s our pick of some of the less-routine cases:

Case number: 656359 Insurer: Hollard Insurance Company

AFCA ruled in favour of a claimant whose vehicle damage claim was declined because he failed to disclose his prior claims history. AFCA agreed Hollard had clearly informed the claimant of his duty of disclosure when the comprehensive policy was purchased in October 2018. But it did not accept the insurer’s submission that it would not have issued the cover had the claimant disclosed he had made five claims in the relevant period.

Case number: 670570 Insurer: Zurich Australia

The claimant suffered a panic attack just before boarding a plane to see his lover in the UK. His claim was declined, and AFCA accepted the insurer’s submission that the panic attack was triggered by a pre-existing medical condition the claimant had been diagnosed with after consulting a clinical psychologist. The claimant had provided conflicting evidence from his psychologist about his condition, compromising his credibility, AFCA ruled.

Case number: 669081 Insurer: AAI Limited

The landlord won his dispute with the Suncorp-owned insurer over a claim for damage to his property caused by methamphetamine contamination. AFCA rejected the insurer’s argument that the contamination fell within its policy exclusions for “biological, chemical and other pollutants or contaminants”. Suncorp said the general exclusions were intended to cover any damage caused by chemicals or contaminants and should be read in terms of individual clauses. It said methamphetamine – a drug more commonly known as ice – is a chemical as well as a contaminant. But AFCA disagreed, saying “it is not appropriate to give an exclusion a meaning other than its plain meaning”.