Remedial Provisions in the Insurance Contracts Act 1984 (Cth)

Authored by Philip Nolan

Introduction

When being confronted with pursuing an Insurance claim on behalf of a client, it is not uncommon for insurers to strictly enforce the terms of the Insurance Policy, which results in an unjust or unfair outcome. The Insurance Contracts Act 1984 (Cth) (‘ICA’) provides a number of provisions which can assist in circumventing that injustice, notwithstanding what is written into the contract. These provisions, in my view, are underutilised. This paper provides a summary of the main ones which can potentially be applied to life insurance products, inside and outside Super.

Pre-Existing Condition Clauses – Section 47

Most life insurance policies will contain a clause which excludes or limits liability for any sickness or disability that existed prior to the contract being entered into. If such a clause is strictly applied, then it can operate to prevent insurers from paying out a claim for a condition that the insured had no knowledge of prior to entering into the contract. For example, it is common for people to have degeneration in their spines for many years, but do not know about it until the condition starts producing symptoms. It would seem unjust for an insurer to rely on a pre-existing illness clause in circumstances where the disabling effects of the condition arise during the policy period, but the disease itself, in its dormant state, existed prior to the inception of the contract.

Section 47 of the ICA applies to remedy this injustice. That section states:

47   Pre-existing sickness or disability

(1)   This section applies where a claim under a contract of insurance is made in respect of a loss that occurred as a result, in whole or in part, of a sickness or disability to which a person was subject or had at any time been subject.

(2)   Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into.

Clearly, the example about the degenerative but dormant back condition provided above would engage section 47. The insured or a reasonable person in the insured’s circumstances could not be expected to have known about an asymptomatic, dormant back condition.

It is clear that if the insured is given a diagnosis prior to entering into the contract, then section 47 cannot be engaged to preclude an indemnity for the re-emergence of the same condition under the contract, even if the pre-contractual diagnosis was many years ago.¹ However, the line can become blurred if the insured was aware of the symptoms prior to the policy commencing, but was diagnosed with the disability for the first time after the contract was entered into. Section 47 states that the insured must have been aware of “the sickness or disability”, and so it is arguable that merely having symptoms of the sickness, without knowing what the sickness actually is, engages section 47.

There does not seem to be any case law directly on this point, however the Financial Ombudsman Service produced a circular which addressed this very issue.² The FOS have taken the position that an “awareness” of the disability depends of the severity of the symptoms. The example of a sore throat prior subsequently becoming throat cancer would engage section 47, but the coughing up of blood and undergoing investigative tests pre-contract and diagnosis of stomach cancer post-contract would not engage the provision.³

With respect, this seems to be importing words into the statute that are not there. The existence of symptoms and the undergoing of investigations to find a diagnosis certainly indicates that the person might have the sickness, but it seems a person cannot be aware of “the” sickness until it has been diagnosed. The pre-existing symptoms and investigations are matters that should probably be disclosed to an insurer, and it can then choose to insure the person or not. If those matters are not disclosed, then the Insurer has the option of avoiding cover under the non-disclosure provisions of the ICA. But that issue should not distract the operative words of section 47. If the insurer chooses to not ask for disclosure before deciding to insure a person, then it cannot try and use pre-existing exclusion clauses to circumvent that legislative process.

That said, the fact that an insured has not received a formal diagnostic label may not preclude a finding that the insured was not aware of the “sickness”, however described. It remains to be seen how this issue will be resolved in the Courts.

Acts or Omissions Not Contributing to the Loss – Section 54

The second noteworthy remedial provision in the ICA that is section 54. That section states:

54   Insurer may not refuse to pay claims in certain circumstances

(1)   Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.

(2)   Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

(3)   Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.

(4)   Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.

(5)   Where:

(a)   the act was necessary to protect the safety of a person or to preserve property; or

(b)   it was not reasonably possible for the insured or other person not to do the act;

the insurer may not refuse to pay the claim by reason only of the act.

(6)   A reference in this section to an act includes a reference to:

(a)   an omission; and

(b)   an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.

The section prohibits insurers from refusing to pay a claim because the insured or a third party has done some act (or omitted to do some act) after the contract was entered into, which is not capable of causing or contributing to the loss that is the subject of the indemnity. In accident insurance policies, the “loss” would be the accident and consequential harm and loss giving rise to an entitlement to the benefit.⁴

The elements of section 54 are summarised as follows:

(a)   The act or omission must have occurred by the insured or some other person after the contract was entered into.

(b)   The act or omission must not be a restriction or limitation that is inherent in the claim made. In occurrence based policies, such restrictions would be the indemnifying events occurring during the period of cover.⁵ These should be contrasted from acts or omissions which limit or restrict the scope of cover that is provided under the contract.⁶

(c)   The act or omission must be distinguished from a state of affairs or description of a relationship⁷, however includes acts or omissions that have the effect of altering the state or condition of the subject-matter of the contract or allowing the state or condition of that subject matter to alter.

(d)   The act or omission must the reason why the Insurer has refused to pay the claim.

(e)   The act or omission must not be capable of causing or contributing to the loss in respect of which insurance cover is provided.

(f)   However, if the act or omission is capable of contributing to the insurable loss, section 54 can still be engaged if:

(i)   if can be shown that the act or omission did not actually contribute to the loss suffered in the claim actually made;

(ii)   the act or omission was necessary to protect the safety of a person or to preserve property; or

(iii)   it was not reasonably possible for the insured or other person not to do the act or avoid the omission.

(g)   If the Insurer’s interests have been prejudiced by the act or omission (apart from the requirement to pay the benefit⁸), the claim is to be reduced by the amount that fairly represents the extent to which the Insurer’s interests were prejudiced.

Section 54 has, surprisingly, not been judicially considered often in life and disability insurance claims. Some examples of where the provision has been successfully applied are as follows:

(a)   In Harrison v REST, the Insurer refused to pay the member’s TPD claim because the insured member failed to complete an application form on time to go from a “deemed” member to a “full” member, and thus his disablement occurred after his cover “ceased”. The Court held that section 54 could be implemented in these circumstances, because the failure to complete the application on time did not cause or contribute to the development of the plaintiff’s disability in any way.⁹

(b)   In Hannover Life Re of Australasia Ltd v Farm Plan Pty Ltd, the Insurer refused to pay a death benefit claim for a life insured because the Trustee of failed to make an insurance premium on time, thereby ceasing cover under the policy in respect of the life insured before he died. It was held that the failure on the part of the Fund to pay an insurance premium, ceasing the policy, did not contribute to the Plaintiff’s death, which was the insurable event in that case.¹⁰

(c)   In Martin v TAL Life Limited, the Insurer refused to pay out on an Income Protection policy because the insured was not, according to the Insurer, regularly undergoing medical treatment. This was a requirement under the Policy. Whilst the failure to undergo medical treatment was capable of prolonging the disability, the Court found that evidence did not establish that the Insured would have recovered to a point where he would be able to return to work, even if he did have the treatment. The omission therefore did not contribute to the loss suffered.¹¹

Reliance on Terms in Breach of Utmost Good Faith – Section 14

Another underutilised, but powerful, provision is section 14. That section states:

14   Parties not to rely on provisions except in the utmost good faith

(1)   If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.

(2)   Subsection (1) does not limit the operation of section 13.

(3)   In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise.

The intention behind this section is to “provide sufficient inducement to insurers and their advisers to be careful in drafting their policies and to act fairly in relying on their strict terms”¹².

Importantly, an Insurer does not need to be dishonest to establish a breach of utmost good faith’. The phrase ‘utmost good faith’ simply requires the insurer to act consistently with commercial standards of decency and fairness, with due regard to the interests of the insured.¹³

Again, surprisingly, there has been very little cases that have sought to apply section 14 in life insurance claims. In Ibrahim v Greater Pacific Life Insurance Co Ltd¹⁴ the insured claimed payments under an income protection policy but was declined. Because of this, he accessed Social Security payments, and claimed the income protection payments in Court. The insurer argued that, even if the insured was entitled to the income protection, the amount payable had to be reduced to account for the Social Security payments, based on an offset clause in the policy. The problem with this is that the Social Security Legislation would still require a repayment of the pension out of the income protection that had already been reduced by the Social Security payment. The Court held that, by force of section 14 of the ICA, the Insurer would be failing to act with the utmost good faith by relying on the offset clause.

In Dumitrov v SC Johnson and Son Superannuation Pty Ltd & Anor¹⁵ the Plaintiff was a member of a superannuation fund, and claimed a total and permanent disablement policy. After claiming under the policy, he discovered that the relevant TPD definition required him to be unable ever to engage in work, rather than the less harsh unlikely ever to engage in work. He argued that the Insurer’s reliance on this harsher definition was a breach of utmost good faith. The Court held that there was no evidence that the TPD definition was unusual or unduly harsh, and in light of the decided cases in which similar clauses appear without challenge to their operation, the Court did not see a basis for concluding that the Insurer’s reliance on the definition would constitute a failure to act with utmost good faith.¹⁶

The case of Dumitrov should not discourage insured’s from considering the application of section 14. Peter Mann, Barrister, who is also the author of the Annotated Insurance Contracts Act text, has co-authored an article on the application of section 14, calling it a “powerful remedy” which is “not always appreciated”.¹⁷ In fact, he states that the potential of section 14 can be “envisaged in terms of the frequency with which life insurers rely on the terms of life insurance contracts to refuse to pay claims”. He gives the example of a member of a superannuation fund suffering an injury and as result loses his job. The contributions therefore stop and his cover ceases before the end of the six month qualifying period. He felt that in this circumstance, there is “scope” for that member to invoke section 14.¹⁸

It is very common for life insurers in Superannuation funds to reject claims by strictly relying on contractual terms, which operate in a very harsh way. A number of examples immediately become apparent. Insurers commonly decline claims because the employer makes a super guarantee contribution late. Members are also sometimes assessed under harsh “Activities of Daily Living” (ADL) type definitions, as opposed to the usual “unable to work” definition, because the employment contract says that they are “casual” employees, when for all intents and purposes, their employment is regular and permanent. Members are also commonly placed in the tougher ADL definitions due to their employment status being “risky”, when the events giving rise to their disablement have nothing to do with their employment. The fact that these sorts of assessments are always done retrospectively, and after the member has become disabled, adds significant weight to the harshness with which these policy provisions are applied.

Unusual Terms – Section 37

The final remedial provision that can be briefly addressed is section 37. that section states:

37   Notification of Unusual Terms

An insurer may not rely on a provision included in a contract of insurance (not being a prescribed contract) of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the contract was entered into the insurer clearly informed the insured in writing of the effect of the provision (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise).

The effect of this section is probably not as far reaching as the others. The Plaintiff in Dumitrov v SC Johnson and Son Superannuation Pty Ltd & Anor¹⁹ also argued that that the harsher “unable” TPD definition, as opposed to the “unlikely” TPD definition, was an unusual term pursuant to section 37 of the ICA. In rejecting this argument, the Court noted that there was no expert evidence called to establish that the unable definition was, from an industry point of view, unusual.²⁰ The Court held that the mere fact that the definition created a harsher definition of TPD does not mean that the definition is necessarily unusual.²¹

There are additional limitations. The section requires the insurer to clearly inform the “insured” in writing of the effect of the alleged unusual term. The “insured” in the context of a Superannuation claim is the Trustee of the Fund, and so there is, arguably, no need to inform the member.²² Even if the obligation to inform does extend to members of the Fund, it would be unusual for a Fund to not publicise material informing members of any changes to the insurance wording. Accordingly, it is likely to have limited effect in Super claims.

However the section may be relevant in retail policies, where there is a hidden clause which is not commonly seen in similar types of policies.

1 Galaxy Homes Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2013] SASFC 66 at [88].
2 “The FOS Approach to section 47 of Insurance Contracts Act” – version 1 – March 2015.
3 See part 2.2
4 Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25, at [54]
5 Maxwell v Highway Hauliers [2014] HCA 33 at [25]
6 Maxwell, at [23].
7 Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25 at [42]
8 Ferrcom Pty Ltd v Commercial Union Assurance Company of Australia Ltd [1993] HCA 5, at [12]
9 Harrison v Retail Employees Superannuation Pty Ltd [2015] NSWSC 1665, at [71] – [72]
10 Hannover Life Re of Australasia Ltd v Farm Plan Pty Ltd [2001] FCA 796, at [35]
11 Martin v TAL Life Limited [2015] VCC 921, at [174] – [184]
12 Australian Law Reform Commission – Insurance Contracts [1982] ALRC 20, at [51]
13 CGU v AMP (2007) 235 CLR 1 at [15]
14 (1996) 9 ANZ Ins Cas 61-330.
15 [2006] NSWSC 1372
16 at [67]
17 “Utmost Good Faith, unconscionable conduct and other notions of fairness – where are we now?” Peter Mann and Stanley Drummond (2017) 29 ILJ 1 at page 14
18 Page 13
19 [2006] NSWSC 1372
20 at [13]
21 at [12]
22 Although, see Gorczynski v W&FT Osma Pty Ltd [2010] NSWCA, where (at [96]) it was held that the expression “the insured” is sometimes used loosely in the ICA to mean any insured person under the contract of insurance being a person who is expressly entitled to a benefit under such a contract.