Introduction
In recent times, courts and bodies such as the Australian Financial Complaints Authority have been required to determine disputes arising out of the commercial relationships between Insurers and their Insured customers (Insureds) once a claim is made. These decisions and determinations have focussed upon issues such as the duty of utmost good faith, procedural fairness and Insurers’ claims handling processes.
In 2022, ASIC brought proceedings against Zurich Australia Ltd (Zurich) seeking orders and declarations under the Insurance Contracts Act 1984 (Cth) (ICA) and Corporations Act 2001 (Cth) whereby Zurich had breached the duty of utmost good faith implied by section 13(1) ICA. This was the first action taken by ASIC seeking the imposition of a civil penalty for a breach of s.13 ICA.
Late last year, Justice Jackman of the Federal Court handed down his decision of Australian Securities and Investments Commission v Zurich Australia Limited (No 2) [2023] FCA 1641. This decision sheds further light upon the relationships between, and processes involving, Insurers and Insureds once a claim is made.
Facts
In 2016, the Insured (whose name was withheld to protect her privacy and to avoid unnecessary personal distress) received income protection (IP) and life cover with Zurich 1.
To obtain IP cover from Zurich, the Insured utilised the services and assistance of a financial advisor (Advisor) who was an employee of ANZ bank in Grafton. The Application Form (Application) signed by the Insured in 2016 provided a detailed description of the Insured’s duty of disclosure and the consequences of not complying with that duty of disclosure.
The Application requested disclosure about any prior “form of mental health condition, or fatigue related illness”. The Insured made detailed disclosure about her pre-existing depression.
Once the Application was processed, the IP cover was provided by Zurich to the Insured, but subject to a mental health exclusion due to disclosures made by the Insured.
In 2018, the Insured submitted an IP claim for a right shoulder injury sustained whilst working as a nurse. Pursuant to the policy, Zurich started paying IP benefits to the Insured.
In the process of investigating the Insured’s claim, Zurich became aware that the Insured had 6 hospital admissions for mental health reasons between 2001 and 2005. Certain admissions were due to suicidal ideation. These historical admissions had not been disclosed by the Insured as part of her mental health disclosure to Zurich in 2016.
Zurich formed the view that the Insured’s non-disclosure was fraudulent.
Zurich informed the Insured that had she complied with her duty of disclosure regarding her mental health, the IP cover would not have been issued by Zurich. Zurich provided procedural fairness to the Insured by way of written correspondence and sought her responses for clarification (Inquiry).
The Insured responded by stating that the Advisor had told her that the Insured needed to only disclose matters related to her mental health which occurred within 5 years of the Application. As a result, the Insured relied upon the Advisor’s guidance and refined her disclosure.
After considering the Insured’s response, Zurich avoided the Insured’s IP cover pursuant to s.29(2) ICA.
Court process
ASIC elected to take this matter to the Federal Court to clarify the steps which an Insurer must reasonably take before avoiding an insurance policy on the basis of fraudulent non-disclosure.
ASIC argued that Zurich breached the duty of utmost good faith when avoiding the policy because:
- Zurich avoided the policy without first making enquiries with the Advisor regarding the explanation for the Insured’s non-disclosure;
- Zurich decided to avoid the policy without adequately notifying the Insured of its intention to avoid the policy on the basis of fraud; and
- Zurich failed to inform the Insured of her right to dispute or appeal Zurich’s decision to avoid the policy.
ASIC formed the view that this was an important case to bring because it was appropriate for procedural fairness to be provided by an Insurer before avoiding an Insured’s insurance policy 2.
Judgment
On 21 December 2023, Federal Court Justice Jackman found against ASIC on all counts.
Justice Jackman found:
- The questions in the Application pertaining to the Insured’s mental health were clear in their terms. They required disclosure as to whether the Insured had “ever” suffered from mental health conditions.
- There was no reasonable basis for the Insured to believe she was required to only disclose her mental health history for a period of 5 years prior to the Application.
- The Advisor would not have given advice to limit the Insured’s disclosure. In any event, the Insured must not have relied upon that advice because she disclosed mental health issues dating back to 1999.
- The Inquiry listed the Insured’s answers which Zurich regarded as false, and summarised the medical information showing that the answers were false.
- The Inquiry gave the Insured ample opportunity to explain the circumstances in which the breach of the duty of disclosure occurred, and whether the breaches should be regarded as fraudulent.
- When Zurich advised the Insured in writing of its intention to avoid the Insured’s IP cover, it was an oversight or administrative error whereby Zurich failed to inform the insured of her rights and the availability of processes, both internally to Zurich and externally, to dispute or appeal the decision to avoid her IP cover.
Takeaways
The decision is a very useful resource for Insurers when it comes to investigating claims, making enquiries with Insured customers, drafting procedural fairness letters and determining the best process of avoiding claims for fraud.
For Insured customers, the decision is a timely reminder to properly, honestly and carefully answer all queries asked by an Insurer, especially when the queries are clear and specific.
The decision also provides caution to Insured customers who seek to allege that a third party intermediary, such as a financial advisor, recommends that the Insured refine or limit their answers to an Insurer’s queries and/or blame the third party intermediary if the duty of disclosure is not observed.
More information
If you would like more information about this article, please contact:
David Giacomantonio
Consultant
M: 0418 154 138
E: dgiacomantonio@pageseager.com.au
1 Zurich Australia Ltd (Zurich) provides life insurance products such as life cover, income protection and trauma cover. OnePath Life (One Path) was a subsidiary of ANZ Limited until 31 May 2019, when it was acquired by Zurich. Under a Scheme of Arrangement, OnePath’s life insurance business was transferred to Zurich on 1 August 2022. Therefore, for the purposes of this article, we refer to the insurer as Zurich, and not One Path.
2 ASIC enforcement action plays an essential role in testing legislation to ensure it affords consumers with appropriate protection. ASIC has previously taken action against Youi Pty Ltd and TAL Life Limited for alleged breaches of the duty of utmost good faith when handling Insureds’ claims.
Published: 22 January 2024
