Shaw, Kim --- "Useful to know: Acting for plaintiffs with concurrent life insurance claims" [2018] PrecedentAULA 70; (2018) 149 Precedent 26

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USEFUL TO KNOW

ACTING FOR PLAINTIFFS WITH CONCURRENT LIFE INSURANCE CLAIMS

By Kim Shaw

The risk of injury or sickness is unfortunately a part of life. Injury or sickness can cause permanent total disablement or total disability for a period or loss of the ability to work forever.

Lawyers often act for clients with a personal injury claim and a concurrent insurance claim for the same or even different injury or illness. Allegations of non-disclosure are distressing and difficult for clients to grasp after paying years of insurance premiums. Crucially, an awareness that sometimes one claim can affect the other is key; this article discusses the important doctrine of subrogation. It also reviews exclusion or non-disclosure clauses and whether they may be discriminatory.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is currently underway. The Round 6 hearings dealt with issues associated with the sale and design of life insurance and general insurance products, the handling of claims under life insurance and general insurance policies, and the administration of life insurance by superannuation trustees.

At the conclusion of the round 6 hearings, Counsel Assisting Michael Hodge QC published 39 policy questions covering topics such as adequacy of the current regulatory regime, product design, disclosure, sales, add-on insurance, insurance in super, scope of the Insurance Contracts Act 1984 (Cth) (the Act), regulation, compliance and breach reporting.

This article will also reference, where relevant, some of the breaches identified by Counsel Assisting Rowena Orr QC in final submissions for this round.

THE INSURANCE CONTRACTS ACT AND NON-DISCLOSURE

The issue of an insurer avoiding a policy of insurance on the basis of an allegation of non-disclosure or misrepresentation arises far more commonly in relation to retail policies that are fully and individually underwritten than to group life insurance policies, with which many Australians are insured by virtue of automatic cover under superannuation memberships.

In group life insurance policies it is common for the insurer to waive its entitlement to disclosure of matters relevant to the risk. It will insure a large group of people; it manages its risk through key features such as age profile of the particular workforce, occupation type, blue collar as opposed to white collar and other socio-economic factors. It may also use blanket exclusion clauses to manage its risk across a large group of insureds.

On occasion, however, some group insured members will take up the option of applying for further cover, which requires an application and individual underwriting process.

Clients typically seek assistance if a claim is rejected. Failure to meet the relevant definition or alleged non-disclosure/misrepresentation by the insured will often constitute the basis for the declinature; in the latter circumstance the contract of insurance will be avoided and premiums refunded to the claimant.

While there are elements of personal injury law that assist in assessing the merits of appealing such decisions, a competency in insurance law and the operations of the relevant legislation and associated case law are crucial. Alleged non-disclosure at application time is the basis on which many claimants in this area come to grief when making a claim under their life insurance policy.

The relevant legislation is the Insurance Contracts Act 1984 (Cth) (the Act).^[1]

Once the insured has proved the contract, the event and a claim, the onus then shifts to the insurer to prove the grounds on which it has avoided the contract or refused to pay the claim.

Duty of utmost good faith

Section 13 of the Act implies the duty of utmost good faith into each contract, requiring ‘each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith’.

In Edwards,^[2] the court extended the duty to act fairly in the exercise of any discretion or formation of any opinion by the insurer. On the other hand, in Mabbett^[3] the insured failed as he had breached his duty of good faith by withholding medical evidence that did not support his claim.

One of the policy questions posed at the conclusion of the Round 6 hearings of the Royal Commission by Michael Hodge QC Counsel Assisting related to s13, querying why unfair contract terms protections should not be applied to insurance contracts (currently exempt). This has been recommended by the Parliamentary Joint Committee on Corporations and Financial Services – Life Insurance Industry Report March 2018, after many submissions outlining that s13 has not provided adequate protections for consumers. Final submissions by Rowena Orr QC Counsel Assisting included that one major insurer breached the utmost good faith provisions by failing to use contemporary medical definitions and another breached the duty by its inappropriate use of surveillance and investigation techniques.

Disclosure

Clients may seek advice having received a ‘show cause’ letter alleging a failure to disclose a matter prior to inception of the contract. By operation of s21(1) of the Act the insured has a duty to disclose to the insurer every matter that is known to the insured, being a matter that the insured knew to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms or what a reasonable person in the circumstances could be expected to know to be a matter so relevant.

In reality the forms for applying for life insurance can be complicated, complex and lengthy; it is not uncommon for claimants to unwittingly err when completing these applications.

Courts have considered on many occasions the meaning and application of s21 of the Act and the circumstances in which a duty of disclosure arises, including the meaning of ‘known’ as opposed to suspicion or belief, known by inference or actually known. As well as a matter being known to the insured, the insured must either know the matter is relevant or a reasonable person in the same circumstances could be expected to know it is relevant to the decision of the insurer whether or not to accept the risk.

There is also a duty on the insurer to inform the insured in writing before the policy commences of the general nature and effect of the duty of disclosure. This is commonly seen in applications for insurance of this nature.

In assessing cases of alleged non-disclosure or misrepresentation, one should note that s26 of the Act covers circumstances where certain statements are not misrepresentations. A statement made by a person in connection with a proposed contract of insurance that was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, shall not be taken to be a misrepresentation (s26(1)).

A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk, and if so, on what terms (s26(2)).

The task for the court is to consider the knowledge and understanding of the person concerned. In NRG Victory Australia (NRG)^[4] the insured answered questions about a medical condition on the application form for insurance cover. The standard was that of an ordinary worker without the knowledge and understanding of a doctor as to the scope of the concept of a disease; in this case the insured failed to disclose a prior diagnosis of post occupational dermatitis. However, the appeal by NRG was dismissed.

Finally, the rights and remedies of insurers in respect of non-disclosure and misrepresentation are found in s29 of the Act. Most relevantly, for most typical life insurance contracts the insurer can avoid a contract within three years of a policy inception for conduct (that is, the failure to disclose or a misrepresentation) that is not fraudulent.

If the failure to disclose was fraudulent or the misrepresentation was made fraudulently, then the insurer may avoid the contract at any time. The onus is on the insurer to prove the contract was entered into fraudulently; a harder task usually than showing a fraudulent non-disclosure or misrepresentation. The standard of proof in fraud cases is on the balance of probabilities, and the relevant authority is Briginshaw v Briginshaw.^[5]

This part of the Act also came in for some scrutiny in policy questions posed by Michael Hodge referred to earlier, wherein he questioned whether the duty of disclosure in s21 would be better served by a duty to take reasonable care not to make a misrepresentation to an insurer.

When approaching such issues it is important to establish the date of policy inception or variation to ensure that you are applying the correct provisions of the Act.

For an insurer to establish that it had a right to avoid the actual contract of insurance, it must be able to prove that it would have issued a policy on different terms or not at all had the insured not failed to comply with his or her non-disclosure obligations. Often an underwriter’s evidence will be used to show that had relevant disclosure been made, the policy would not have been offered.

A relatively recent decision of Westpac Life Insurance Services Ltd v Guirgis (Guirgis),^[6] in the Victorian Court of Appeal, considered some of these issues. It was alleged by Westpac that Mrs Guirgis had fraudulently failed to disclose in her application for insurance that she was suffering from fibromyalgia.

In the trial the underwriter gave evidence that the policy would never have been issued had the insurer known that she was suffering from fibromyalgia and in accordance with particular guidelines. However, these particular guidelines were never produced, either by way of discovery or in the giving of evidence. Westpac failed to prove that the insurance policy should never have been issued.

Typically, application forms are detailed and ask many questions about an applicant’s health including tick a box formats and authorities to access medical records. It can be challenging to establish the insured’s state of mind when completing the application form but that is the task required of the court.

In Guirgis the Court, in assessing her state of mind at application time, noted that her GP had not diagnosed her with fibromyalgia and she had disclosed she had visited a well-renowned rheumatologist: if she had intentionally set out not to disclose her condition of fibromyalgia, she would not have disclosed her attendance to the specialist.

Finally, s31 of the Act gives the court the ability to disregard avoidance of a contract by an insurer in certain circumstances such as if it would be harsh or unfair not to do so or if the insurer has not been prejudiced or, if prejudiced, it is minimal or insignificant. In exercising this power courts must have regard to the need to deter fraudulent conduct in relation to insurance and weigh the culpability of the insured against the magnitude of the insurer’s loss.

Lawyers should take instructions about the circumstances of the completion of the application form – those present, who completed it – and examine each and every answer on the form. This will assist you in your ability to provide initial advice to a client attending with a letter from the insurer avoiding the contract of insurance in circumstances such as these.

SUBROGATION

If personal injury clients are receiving income protection payments under a life insurance policy while waiting for a resolution of a common law damages claim for pecuniary and non-pecuniary loss damages, a personal injury practitioner ignores the recovery rights of the life insurer at their peril; understanding your client’s obligations to the insurer is vital.

Economic loss in injuries matters is not awarded merely because the claimant’s earning capacity has been diminished, but because that diminution is productive of actual financial loss.^[7]

It is settled law in Australia that negligent tortfeasors are unable to reduce economic loss damages by reason of the plaintiff having received payment under an accident insurance policy.^[8]

The justification for this principle largely stands as a matter of public policy – it would be unjust and unreasonable to reduce the damages of prudent plaintiffs who insure themselves against accident, and allow the negligent tortfeasor to benefit from that prudence.^[9]

The position of the income protection insurer is very different, and it may have rights in the event that a plaintiff successfully secures common law damages for the same injury. An insurer’s right of recovery may be enlivened contractually and/or by way of the equitable doctrine of subrogation.

Contractual offset clauses in the policy

Most policies have ‘clawbacks’ which enable the insurer to reduce its monthly liability if payments from a workers’ compensation insurer for loss of wages are being received in the same period. If the policy clearly allows for a reduction where a person also receives common law damages, then look no further. However, these clauses are often not well drafted and are unclear whether or not the clause applies to damages.

Income protection policies commonly allow for a reduction in benefits payable if the insured also receives compensation (via a common law settlement) for loss of ‘income’. Yet often a plaintiff will receive damages for loss of ‘earning capacity’: a different concept to loss of income.

This distinction was considered in Stocks v Royal & Sun Alliance Financial Services Ltd.^[10] Weekly payments were received by Mr Stocks under an ACT workers’ compensation scheme and finalised pursuant to a deed of release following termination of the payments. The plaintiff received an ‘undissected’ lump sum (as is common in many common law settlements). His application for income benefits under an income protection policy held by the employer was rejected on the basis of the offset clause in the policy which noted a reduction if the insured received ‘workers' compensation or equivalent payments in respect of loss of income (whether under legislation or otherwise)’.

After considering what was ‘in respect of loss of income’ the court determined that the workers’ compensation payments were not for loss of income; the court noted that the deed of release extended to common law damages which would have included damages for pain and suffering and loss of earning capacity, and held that the plaintiff did not receive equivalent payments in respect of loss of income, and could receive the income protection benefits, in addition to the workers’ compensation settlement.

This approach was confirmed in a recent case of Buswell v TAL Life Ltd^[11] where Mrs Buswell was in receipt of a Total Disability Benefit under a group salary continuance policy held by First State Super with TAL Life. She also commenced a common law damages claim against her employer and received a damages lump sum of $350,000. TAL applied an offset clause in the policy to reduce her benefit from $6,061 to $1,061.

Mrs Buswell commenced proceedings in the Supreme Court of NSW seeking a declaration that the lump sum did not fall under the definition of ‘Other Disability Income’ and an order that her full benefits be reinstated.

The court held that the settlement sum did not fall within the definition of Other Disability Income because it was not income, it was not a benefit under the workers’ compensation legislation nor was it any other income payment.

Unless the common law settlement is ‘undissected’ it makes it very difficult for the insurer to contractually recover from the insured in these circumstances and because of the generally poor drafting of offset clauses in the policies.

The common law doctrine of subrogation

Regardless of whether the insurer can apply an offset clause, insurers are increasingly relying on the doctrine of subrogation to minimise indemnity.

Subrogation is defined in Sutton^[12] as follows:

(a) That the insurer who has indemnified the insured can step into the insured’s shoes and pursue in his name any right of action available which may diminish the loss insured against; and

(b) That the insured cannot make a profit from the loss and is accountable to his insurer for any profit the insured does make.

State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd^[13] established a number of principles regarding subrogation.

An insurer has a right to benefit from and enforce the rights that the insured has against someone else in respect of the same loss that is the subject of the indemnity. These rights apply only to indemnity insurance policies; an insured may not release, diminish or compromise the insurer’s rights and any attempt to do so will be ineffective against the insurer if the third party has knowledge of the insurer’s interest. If the insured’s compromise is effective against the insurer, then the insurer may be able to seek damages against the insured for monies paid and it does not matter whether the compromise occurs before or after the occurrence of the loss giving rise to the insurer's liability to indemnify.

An indemnity policy

Simply put, an indemnity policy is one that indemnifies the insured for actual financial loss suffered.

Many common law practitioners will be familiar with death and total and permanent disability cover (TPD), which provides a lump sum on the occurrence of an event regardless of the existence or extent of financial loss – these are contingency policies.

Income policies had been generally treated in the same way and the doctrine wasn’t applied: however, the case of Insurance Commission of Western Australia v Kightly^[14] changed that entirely and is the leading authority that every personal injury practitioner should be familiar with in order to sufficiently understand the application of the doctrine.

Mr Kightly crushed his leg while performing a training exercise organised by Surf Lifesaving Western Australia (SLSWA). He recovered approximately $70,000 under a personal accident policy of insurance taken out by SLSWA for the benefit of lifesavers, which included payments for medical expenses, travel expenses and loss of income. Mr Kightly then brought an action in negligence against SLSWA and recovered an additional $145,000 plus costs. SLSWA was unaware of this claim until after the matter had settled.

The personal accident insurer sought recovery of the sum it had paid to Mr Kightly.

One of the arguments for recovery was made pursuant to the terms within the policy. Under that policy, the compensation payable was to ‘be reduced by such amount as [Mr Kightly was] entitled to receive as compensation and/or damages under or from... (ii) any other source whatsoever in respect of the same injury’.

The Court of Appeal held that the medical expenses, travel expenses and loss of income were clearly repayments for financial losses that had actually been incurred and the policy was clearly one of indemnity and not contingency.

Relevantly, following Kightly, most income protection policies would be considered indemnity in nature, and an insurer would face a prima facie right of subrogation to recover income protection benefits paid against a common law damages claim for the same injury.

The WA Court of Appeal also referred to the principle that the insured must not diminish or compromise the insurer’s rights to subrogation and that a failure to notify of the settlement either in advance or at the time meant that there was no genuine consideration of the insurer’s interests.

The insured breached the duty of the doctrine of subrogation owed by him. And the fact that the settlement sum in this instance was not apportioned was of no assistance to Mr Kightly.

In other words, where the insured is not insured for the full amount of the loss, and reaches a compromise settlement with a third party not taking into account the insurer’s interests, the insurer is entitled to recover the sum paid by them from the insured instead – on the basis that the insured has made it impossible for the insurer to ascertain whether the settlement applies to uninsured losses or losses covered by the policy.^[15]

Waiver of subrogation pursuant to policy terms

It is possible that the insurer may agree not to exercise its right of subrogation. Typically this would involve writing to the relevant insurer and alerting them to the proceedings on foot and any settlement conferences or trial.

This was considered in the case of Bupa.^[16] Mr Shaw pursued a medical negligence claim against a surgeon for allegedly performing the wrong type of surgery on him. During the course of the claim, Mr Shaw died; however, the executor of his estate continued the action.

After some initial correspondence between the parties, some ten months passed with no further correspondence. Bupa then requested an update from the estate’s lawyers, to be told it had settled subject to a release.

Bupa then commenced proceedings against the estate for recovery of the insured amounts paid.

Waiver of subrogation by conduct

An insurer can expressly agree not to exercise its rights to subrogation from an insured.^[17] Arguably, inaction on the insurer’s part having been notified of the proceedings on foot could be a waiver by conduct.

In Bupa, this was argued by the estate; that Bupa knew of the proceedings yet had elected not to intervene in any way. This argument was rejected. The court noted that while on notice of the proceedings, Bupa was not advised about the mediation until some months after so it could not seriously be contended that it should have intervened. Relevantly, the court observed that the position might have been different had Bupa been notified prior to the mediation and not acted.

Part VIII of the Insurance Contract Act 1984 (Cth) must briefly be mentioned. The Part regulates subrogation in insurance, but only contracts of general insurance. Income protection is considered to be life insurance, which is treated separately under the Act. There is no equivalent part for life insurance.

Be prudent in relation to subrogation

Several steps should be taken to protect your client from an unexpected recovery action by an insurer under a policy of indemnity in relevant circumstances. The relevant policy and other documentation should be thoroughly examined and your client’s obligations explained to them. The ramifications of failing to notify should be spelled out.

A FINAL WORD: MENTAL HEALTH EXCLUSIONS

Under the Disability Discrimination Act 1992 (Cth) (DDA) (and state disability legislation) disability discrimination is unlawful – with exceptions. Insurance and superannuation are specifically the subject of a limited exemption under the DDA.

Section 46 of the DDA provides that it is not lawful for a person to discriminate against another person on the ground of disability by refusing an insurance policy; but if the discrimination is based upon actuarial or statistical data on which it is reasonable for a person to rely, is reasonable having regard to the matter of the data and other relevant factors, or in a case where no such actuarial or statistical data is available and cannot reasonably be obtained, the discrimination is reasonable having regard to any other relevant factors.

Where personal injury practitioners are faced with a client who has had a life insurance policy denied, be it income protection, TPD insurance or other policies such as travel insurance, the DDA and state-based equivalents may indeed provide some relief.

A 2015 decision by the Victorian Civil and Administration Tribunal of Ingram v QBE Insurance (Australia) Ltd (Human rights)^[18] is worth considering, not only in its applicability to travel insurance policies but life insurance policies generally.

Ella Ingram was in Year 11 in late 2011 when she signed up to a school tour scheduled for 30 March to 11 April 2012.

Ella’s mother paid for insurance from QBE to cover the trip. Unfortunately, Ella experienced symptoms of depression in January 2012 for the first time in her life and was unable to go on the trip. In April 2012 Ella’s mother contacted QBE to claim for the cost of the trip under the policy; QBE rejected the claim, relying upon a general exclusion clause in its policy excluding cover where the claim arises directly or indirectly due to mental illness.

In particular, in a letter to the applicant’s mother dated 4 December 2012, the respondent said that the decision to refuse the claim was based on detailed statistical modelling and analysis of claims arising from a range of causes including mental illness. The respondent said that mental illness is excluded from the policy because its statistics demonstrated that in travel policies there is a high risk of cancellation because of mental illness.

An application was lodged about this decision and Ella argued that she had been treated unfavourably due to her disability, that the insurer had discriminated against her in the terms on which it provided insurance, and that is was unlawful discrimination.

During the hearing of the application, QBE provided actuarial data only by way of a report obtained for the purposes of the litigation, and conceded that it had not actually relied on any such data when it included the exclusion clause in the policy and made its decision about Ella’s application. QBE struggled to produce evidence to show a direct link between its decision to include the general exclusion and the statistical data (of which there was very little). What it did provide was found to be wanting; for example, the data was from several years after the policy was issued. The respondent also tried to argue an unjustifiable hardship submission which was rejected by the tribunal.

Ultimately the respondent was not entitled to rely upon any exemptions and the discrimination was found to be unlawful.

Ella was awarded the sum of $4,292.48 for economic loss and $15,000 for non-economic loss for hurt and humiliation caused.

Given the increasing prevalence of applications for insurance not being accepted, often on grounds of mental health, and the increasing prevalence of the use of general or blanket exclusion clauses (particularly, again, on grounds of mental health) it is worthwhile putting insurers to the test and requesting the actuarial or statistical data that they have relied upon to positively discriminate.^[19] It may be that the insurer does not produce it because it just does not have it; or does not wish to produce it for commercial reasons – either way, it may be a way to overcome what would otherwise be very distressing for a client in a difficult situation.

Kim Shaw is Principal Lawyer and National Practice Team Leader in the Superannuation and Insurance practice at Maurice Blackburn Lawyers. She was awarded Lawyers Weekly Partner of the Year Insurance Law in 2018, is an accredited Specialist in Personal Injury Law and Chair of the Personal Injury Advisory Committee at the LIV. PHONE [phone] EMAIL [e-mail].

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^[1] Note this article refers to the Act as amended effective from 28 June 2014, however practitioners should be aware that the inception date of a contract of insurance will determine whether the prior or post Act amendments will apply.

^[2] Edwards v Hunter Valley Co-Op Dairy Co Ltd [1997] 7 ANZ Ins Cas 61-113.

^[3] Mabbett v Watson Wyatt Superannuation Pty Ltd [2008] NSWSC 365.

^[4] NRG Victory Australia Ltd v Hudson [2003] WASCA 291.

^[5] [1938] HCA 34; (1938) 60 CLR 336.

^[6] [2015] VSCA 239.

^[7] Graham v Baker [1961] HCA 48; (1961) 106 CLR 340, [10].

^[8] Bradburn v Great Western Railway Co [1854] EngR 538; (1874) LR 10 Exch 1; National Insurance Company of New Zealand Ltd v Espagne [1961] HCA 15; (1961) 105 CLR 569, [22]; Parry v Cleaver [1969] UKHL 2; Redding v Lee [1983] HCA 16; (1983) 151 CLR 117, [11].

^[9] Redding v Lee [1983] HCA 16; (1983) 151 CLR 117 per Mason and Dawson JJ, [13].

^[10] (2002) ACTSC 62.

^[11] [2018] NSWSC 1507.

^[12] W I B Enright and R M Merkin, Sutton on Insurance Law, 4th ed, Thomson Reuters, Australia, 2014, 299.

^[13] (1969) HCA 59.

^[14] (2005) WASCA 154.

^[15] See above note 12, 382 and 383.

^[16] Bupa Australia Pty Ltd v Shaw (as Joint Executor of the Estate of Norman Shaw) & Anor [2013] VSC 507, [17].

^[17] Scholle Industries Pty Ltd v AEP Industries (NZ) Ltd [2009] SASC, [22].

^[18] (2015) VCAT 1936.

^[19] As proposed by submissions made to the Royal Commission by organisations such as PIAC, the ALA and beyondblue.