Fraud! What Does it Mean in Disability Insurance?

This article is intended to provide only a general overview of the concepts and issues if an allegation of fraud is made in respect of a claim under a policy of disability insurance and its importance for the different remedies available.

A brief history of the role of disclosure and misrepresentation in insurance

The law before the ICA

A contract of insurance, particularly life or disability insurance, is one in which the ability to assess the particular risk which is proposed for cover lies uniquely with the proposed insured. 

Because of these unique circumstances, from an early stage, contracts of insurance were classified as contracts “uberrimae fidei”, a contract of utmost good faith.[1]

As such, the law required the prospective insured to disclose “all facts which a prudent insurer would regard as relevant to the assessment of the risk”.[2]

Protection of insurers in relation to their initial assessment of risks was is achieved through rules relating to non-disclosure and misrepresentation.  The former imposes on the insured a duty to volunteer relevant information to the insurer.  The latter penalises a failure to answer accurately relevant questions put to the insured at the time when the contract is arranged.[3]

At law, the operation of the rules regarding non-disclosure, or, misrepresentation, of a fact material to the prudent insurers assessment of the risk was harsh.  The application of the duty of disclosure (and not to make a misrepresentation) was not dependent on either the insured’s awareness of its existence nor the appreciation of what was, or was not, material to the contract of insurance.[4]

An insurer must be able to make a fair assessment of the risk from a fair presentation of the risk.  At law if there was a fair presentation of the risk, the underwriter was presumed to have acquainted itself with the entity, and the practice of the operation of the entity, it insures and, if there was a fair presentation of the risk is taken to waive the need for any further knowledge it is put on notice of.[5]  But it had to be a fair presentation of the risk, whether the prospective insured knew of the matters affecting risk or their relevance.

Further, whether the insured’s breach was innocent, or fraudulent, the insurer could avoid the contract.  The contract was not void but remained in force until avoided: that is; it was voidable.  Once avoided the avoidance took effect ab initio (from the beginning) so that the contract is treated as never having existed.[6]

Consequently, avoidance was effective to defeat a claim, even when the breach was only discovered after a loss had occurred and a claim had been made.  In the absence of wilful or fraudulent concealment, the premiums paid by the insurer had to be repaid as there had been a total failure of consideration because the insurer was never on risk.  But if the insured was guilty of fraud it was not entitled to recovery of the premium.[7]

At law, in the case of life insurance, the duty of disclosure extended to matters of which the insured becomes aware before the commencement of the cover.  Consequently, at law, an insurer was entitled to avoid a contract for non‑disclosure of medical advice received after the date of the proposal, but before completion of the contract.[8]

A brave new world – after the ICA before 5 October 2021

ALRC 20 resulted in a complete overhaul of the law in relation to non-disclosure and misrepresentation which is now governed by Part IV of the Insurance Contracts Act 1984 (Cth) (“ICA”).  It is a code of remedies.[9]

The ICA set up a distinct regime which distinguished between fraudulent and non‑fraudulent non-disclosure and misrepresentation.

So far as fraud is concerned, it is such a serious breach of duty of the utmost good faith the ALRC 20 report recognised that there had to be a disincentive against it.[10]

Both under general insurance (section 28) and Life/TPD insurance (section 29) the remedy for fraud is different from that for non-fraudulent misrepresentation or non-disclosure.

An insurer can elect to avoid the contract ab intitio for fraud. Whereas, as will be seen, the remedy for non-fraudulent misrepresentation or non‑disclosure is curtailed and also limited in time.

The ICA will apply to “life insurance” unless it states it applies only to “general insurance”, which is defined as being insurance other than life insurance. “Life insurance” is defined in section 11[11] of the ICA to mean “a contract that constitutes a life policy within the meaning of the Life Insurance Act 1995 (Cth)”.  That in turn is defined in such a way as to pick up a “continuous disability insurance policy” within the meaning of the Life Insurance Act 1995 (Cth).[12]  It suffices to observe that these definitions are broad enough to comprehend, inter alia,:

1. Total and permanent disability (TPD) insurance and partial disability insurance;
2. Income protection policies (IPP) of insurance.

The duty of disclosure set out in section 21 of the ICA:

1. Existed in its original form until 28 December 2015 when certain 2013 amendments took effect;
2. Was in a post-28 December 2015 form from that date;
3. However, on or after 5 October 2021 a new duty applies in respect of Life and TPD policies that are originally entered into on or after that date or certain contract variations to the extent of those variations.

A braver new world – the ICA from 5 October 2021

From 5 October 2021 the insured’s disclosure obligation is removed in respect of a “consumer insurance contract”. 

It is replaced by a duty to take reasonable care not to make a misrepresentation to the insurer before the contract was entered into or varied.[13]

A “consumer insurance contract” is defined in section 11AB of the ICA to be one “obtained wholly or predominately for personal domestic or household purposes of the insured”. 

A life insured will typically obtain life insurance or TPD insurance for personal purposes.   As such, a life insurance or TPD contract will be a “consumer insurance contract”.

By virtue of section 32 of the ICA the new duty will apply to a life insured under a group life contract, and by virtue of section 32A, under a retirement savings account, regardless.

This new duty will also apply to life insurance contract (which includes TPD contracts) originally entered into before 5 October 2021, but only where such contract is varied on or after that day if:

1. the variation is to increase the sum insured in respect of one or more lives insured or is to provide one or more additional kinds of insurance;
2. the variation was not an automatic variation, but was required to be expressly agreed between the insurer and the insured;and only to the extent of the variation of the contract.

Section 20B(2) of the ICA provides that whether or not an insured has taken reasonable care not to make a misrepresentation is to be determined with regard to “all the relevant circumstances”.

Section 20B(3) of the ICA provides that, without limiting subsection 2, certain matters may be taken into account and those matters are listed in 20B(3)(a)-(f).

For example, in section 20B(3)(c) a relevant matter is “how clear and how specific any questions asked by the insurer of the insured were”.

Section 20B(4) states that any particular characteristics or circumstances of the insured of which the insurer was aware, or ought reasonably to have been aware, are to be taken into account.

In the ordinary course it will be the insurer which will allege a failure to comply with this new duty.  It can be readily predicted that it will be vigorously contested under sections 20B(2), (3), (4).  I discuss this further below.

Section 20B(5) states that an insured is not to be taken to have made a misrepresentation merely because the insured failed to answer a question or gave an obviously incomplete or irrelevant answer to a question; that is, the insurer is required to address these issues before entering into the contract if it wishes to avail itself of the remedy.

Section 20B(6) states that a misrepresentation made fraudulently is a breach of the duty.

A non-disclosure or misrepresentation comprising a breach of duty to take reasonable care not to make a misrepresentation is now collectively referred to in section 27AA of the ICA as a “relevant failure”.

Section 29 of the ICA, which contains the remedy, now refers to a “relevant failure”.

Consequently, it is important to determine when the particular contract was entered into to determine the duty of disclosure, or, in certain cases, when defined variations were made to it.

What does “fraud” mean?

The ICA did not define, and does not, what a fraudulent non-disclosure or fraudulent misrepresentation was.  ALRC 20 also did not address it but distinguished the need to discourage fraud but, on the other hand, it stated that the insured needed to be protected from consequences which were seriously disproportionate to the harm caused.

Few words have such a pejorative accusation as “fraud”.  The natural meaning of the word is “deceit, trickery, sharp practice or breach of confidence, by which it is sought to gain some unfair or dishonest advantage”.[14]

It requires some falsity or inaccuracy.  But it also requires proof of a particular state of mind.

Fraud or dishonesty is a state of mind.[15]  It is assessed by reference to the standard of an ordinary honest person and is not a term of art.[16]

As a state of mind it involves some consciousness or intention.

It is important to recall this when assessing whether a state of affairs amounts to “fraud” or is “fraudulent”.

What must be proved is a subjective state of mind which involves some consciousness or intention, although that will be objectively ascertained from the evidence and can be inferred.

What is the state of mind to be proved?

The state of mind comprising consciousness or deliberateness is an indispensable element for proof of fraud.[17]

The better view was that the meaning of “fraud” was not restricted by sub-section 21(1)(a) of the ICA so that fraud is not restricted to proving that the insured person “knows” the non-disclosure or misrepresentation to be untrue.[18] 

The preponderance of authority favours a reckless failure to comply with the duty of disclosure being able to constitute fraudulent non-disclosure for the purposes of section 29(2).[19]  In Queensland there is Court of Appeal authority to that effect.

A leading decision is that of the Queensland Court of Appeal in Australian Casualty and Life Pty Ltd v Hall.[20]  The Court adopted the well-known formulation of fraud in the civil sense dating back from Derry v Peek[21]which held that a statement can be made fraudulently if it is made:

1. knowing it to be false;
2. without belief in its truth; or
3. recklessly, not caring whether it is true or false.

In ACL v Hall, Shepherdson J, who in effect gave the judgment of Court, held that each of those alternatives required some element of “moral turpitude”.  The finding in that case was that there had been a deliberate decision made not to mention certain information but that it was made honestly because the insured did not consider it to be relevant.

The result was that an honest decision not to disclose, even if careless or mistaken, could not be fraudulent. In Tyndall Life v Chisholm Debelle J expressed a similar view, his Honour stating:

“It is not enough that the [insured] may have acted carelessly.  [The insurer] must show that the [insured] lacked an honest belief in the truth of his answer.  If he was consciously indifferent to the truth of his answers, he was reckless …”[22]

“Recklessness” means a conscious indifference.  It is different from an honest deliberate decision (ACL v Hall) or mere, or even gross, carelessness.[23]

The difference between carelessness, even gross carelessness, on the one hand, and the state of mind comprising a conscious indifference was helpfully discussed by Meagher JA[24] in Prepaid Services Pty Ltd v Atradius Credit Insurance NV.[25]

In Prepaid it was explained that a false statement made through carelessness and without reasonable grounds for believing it to be true may be evidence of fraud, but does not necessarily amount to fraud.[26]

For “recklessness” to amount to fraud, what is required is the proof of a state of mind of actual indifference, which is deliberate or conscious, because it means more than mere, or even gross, carelessness.  It means it is a positive or actual state of mind (which must be put to the insured in cross-examination) that the insured “did not care and that at the time he signed the proposal whether the answers in it were correct or not”.[27]  In other words there needs to be a finding of a subjective state of mind of the insured of being an actual indifference to whether or not the answer was true or not:

“The fact of that indifference is the basis for the conclusion as to the absence of any real belief, which is a finding as to the relevant person’s state of mind.”[28]

On the other hand, mere carelessness, even gross carelessness, (if that is all it is) is not enough.

Of course, it is a question of fact and degree. The original section 21(1(b) of the ICA shows a test of reasonableness applies. As was stated in Plasteel:

“The fact that a reasonable person in the circumstances could be expected to know that the matter not disclosed was relevant (section 21(1)(b)) may be evidence sufficient to sustain a finding that the disclosure was made recklessly, without care, whether it be true or false. Indeed, in some circumstances, such a finding may be sufficient to sustain a finding that the misrepresentation by non-disclosure was made without belief in its truth.”

In other words, objectively, a non-disclosure may be so far removed from that which a reasonable person could be expected to know that it may indicate that, subjectively, there was more than mere carelessness involved.

This indicates the nature of forensic battle to prove the requisite state of mind.

Standard of proof and professional obligations

Fraud is a serious allegation, which although need not amount to a crime, often can be.[29]

As a serious allegation of conscious wrongdoing, it attracts the well-known “Briginshaw” standard of proof.[30]  That standard of proof is still on the balance of probabilities to be made out to the reasonable satisfaction of a tribunal “But reasonable satisfaction is not a state of mind that is attained or established independently the nature and consequences of the fact or facts to be proved.  The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of a tribunal”.[31]

Reasonable satisfaction of the fact finder could not be reached “by inexact proofs, indefinite testimony, or indirect inferences”[32] or “by slender and exiguous proofs or circumstances pointing with a wavering finger to an affirmative conclusion”.[33]

Actual persuasion is required and that could not be achieved “as a result of a mere mechanical comparison of probabilities independently of any belief in its reality”.[34] “Weight is given to the presumption of innocence, and exactness of proof is expected”.[35]

In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd[36], the plurality said “The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities.  That remains so even where the matter to be proved involves criminal conduct or fraud.  On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a Court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct”.

It will usually be the insurer that makes the allegation and it will have the burden of establishing fraud.  It is necessary to plead the facts which constitute the fraud alleged.[37]  In Queensland UCPR 150(f) provides that, without limiting UCPR 149, fraud is a matter which must be specifically pleaded.  This also requires pleading the material facts from which the state of mind is to be inferred: UCPR 150(2). 

The seriousness of the allegation also permeates the ethical and professional obligations of those pleading fraud.  Rule 64 of the Bar Association of Queensland Conduct Rules imposes an obligation on Counsel to have “reasonable grounds” that there is available material by which the allegation could be supported which provides a “proper” basis for it.  Also Counsel must ascertain that the client wishes to make the allegation after having been advised on the seriousness of the allegation for the client and if the case is not made out.  However, Rule 65 enables a barrister to rely upon their instructing solicitors to inform them about the case and the factual material available. 

Rule 21.4 of the Australian Solicitors Conduct Rules has a similar rule to Bar Association of Queensland Rule 64.

Case illustrations

In Graham v Colonial Mutual Life Assurance Society Ltd (No. 2)[38] the insured answered “No” to the following question in a declaration of “good health” on 12 May 2007:[39]

“Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following: Epilepsy, fits of any kind, fainting episodes or recurring headaches or migraines”[40]

In truth, between 1994 and 1997, the insured had suffered episodes of fainting and on one occasion had received advice or treatment in relation to this.[41]

McKerracher J found[42] that the only clearly incorrect answer was that part of the question which asked whether he had ever had or sought advice or experienced symptoms or suffered from fainting episodes.  At the time of the Application and the Declaration of Continued Good Health the insured must have, or should have known, the correct answer was “Yes”:

“The answer was at the very least careless, but given the specific nature of the question and his history, I must conclude that his answer was reckless and therefore fraudulent within the meaning of s 29(2) ICA.”[43]

This was a finding that there was an actual state of mind of, at the least, deliberate or conscious indifference to what was true because the history was florid and the question was specific, as a minimum, signified an indifference to any real belief as to its truth.

This is usefully contrasted with Australian Casualty & Life v Hall.[44]  The insured was a barrister.  She provided to the insurer a proposal for insurance on 21 September 1990 and based on that proposal a policy of professional income replacement was entered into on 5 December 1990.

Among many questions the proposal asked whether the insured had “received advice or treatment with respect to any other condition or injury”. The insured answered “No”. 

The insured indicated in response to further questions that she “did not suffer from any impairment, deformity or departure from good health”.

In fact the insured had consulted medical advice on various occasions since 1987 and in relation to a variety of symptoms. She suffered from headaches and migraines and sharp intermittent chest pain.  Diabetes was also mentioned by her doctor but there was no evidence that she had ever been informed of a pre-disposition to that condition. On each occasion she was informed by her doctors that she was in good health.

The insured suffer from a disabling virus in 1992 and became totally and permanently disabled by severe schizophrenia in 1994.  She made a claim for full benefits of $5,000.00 per month from the insurer.  The insurer paid the benefits for five years at 75% of the gross income by reference to the 1990/1991 financial year.  Then on 8 October 1996 the insurer purported to terminate the policy because of the breach of duty of disclosure as it then existed under then section 21 of the ICA.  The insurer contended that in light of the answers compared to the symptoms and medical consultations there had been a false representation and non-disclosure, that the omissions exceeded mere carelessness, amounted to dismissiveness of the insurer’s right to relevant information and was “fraudulent” within the then meaning of section 29(2) of the ICA.

A unanimous Court of Appeal held for the insured on a number of grounds.  Relevantly, for present purposes, the evidence established that the state of mind of the insured was that she did not think that her existing symptoms were relevant:[45]

“It is quite clear that the respondent [the insured] did not know (truly believe) that the symptoms about which she saw Dr Campbell were relevant to the decision of the appellant [the insurer] whether to accept the risk and if so on what terms. Indeed she thought them irrelevant because Dr Campbell told her she was ‘as fit as a fiddle’ and in my view the learned trial judge justifiably found that the advice she received from Drs Marnane and Campbell were that her problems were minor.”[46]

Additionally, on the issue of non-disclosure or misrepresentation of diabetes:

“Thus there was no evidence that the respondent [the insured] was aware at the time of the proposal that Dr Campbell had made what the learned trial judge called ‘his very guarded comment’.  And so, when the respondent answered ‘No’ to the question, ‘Have you ever had or been told you had or received advice or treatment for diabetes?’, she gave an answer of what she knew – what she truly believed.”[47]

In light of those findings, the Court,[48] after referring to the Derry v Peek formulation of fraud, noting that it required actual fraud, personal dishonesty or moral turpitude, held that even though there was a deliberate decision not to disclose, and a consequent failure to disclose, the fact of the consultation with Dr Campbell and the symptoms about which she saw him, it did not amount to reckless indifference and, at best, was categorised as carelessness.[49]

Remedies

The different treatment of non-fraudulent (which is a better term than “innocent” because it may be careless or even grossly careless) and fraudulent non-disclosure and misrepresentation has infused the provisions of the ICA from the very start as a result of ALRC 20.  This continues in the 2020 amendments commencing at the various times in 2021 set out earlier.[50]

Indeed, in light of the different treatment afforded fraudulent misrepresentations in section 20B(6) of the ICA, with effect from 5 October 2021,[51] there will be now a very significant focus by insurers on whether the misrepresentation was made “fraudulently”.

This is because section 20B(6) of the ICA (with effect from 5 October 2021) deems a misrepresentation made fraudulently to be a breach of the duty to take reasonable care not to make a misrepresentation.

Pathway to remedy – pre 5 October 2021

The starting point is that there must be an omission or statement which is false or inaccurate.

The centre piece of the earlier statutory regime was the duty of disclosure of the insured in section 21, which was a statutory modification of the need for materiality.

As originally enacted the duty to disclose, before the relevant contract was entered into, was in respect of matters “known to the insured”.

“Known” is a strong word. “It means considerably more than believes or suspect or even strongly suspects”. [52]

In Permanent Trustee a majority of the High Court expressed the obiter view that the relevant knowledge is the knowledge of the insured and not an insurance intermediatory such as a broker.  The minority in Permanent Trustee took a wider view that the knowledge of the insurance broker was to be imputed to the insured who had delegated performance of its duty to that agent.  The issue remains unresolved but by dint of single judge, and intermediate appellate court, authority which has had to consider the issue directly it seems to be generally accepted that the position under the ICA with respect to imputed knowledge reflects the common law position which is that actual not constructive knowledge both on the part of the insured, and on the part of any agent or employee whose knowledge can be imputed.[53]

Then, if it was established the matter was “known” to the insured, there were two subcategories, being matters that:

1. The insured knows to be a matter of relevance to the decision of the insurer whether to accept the risk and, if so, on what terms; or
2. A reasonable person in the circumstances will be expected to know to be so relevant.  This was limited to “extrinsic” factors and not “intrinsic” or idiosyncrasies of the insured.[54]  This is to be contrasted with new section 20B(4) of the ICA, with effect from 5 October 2021 as stated earlier.

With effect from 28 December 2015 subsection 21(1)(b) of the ICA was amended to include two non-exclusive “extrinsic” factors to which regard may be had in determining whether a reasonable person in the circumstances could be expected to known a matter was relevant to the decision of the insurer and, if so, on what terms:

1. The nature and extent of the insurance cover to be provided under the relevant contract of insurance;
2. The class of persons who would ordinarily be expected to apply for insurance cover of that kind.

Subsection 21(2) excluded from the duty of disclosure a matter:

1. that diminishes the risk;
2. that is of common knowledge;
3. that the insurer knowns, or in the ordinary course of the insurer’s business as an insurer, ought to know; or
4. as to which compliance with the duty is waived by the insurer.[55]

Subsection 21(3) deemed an insurer to have waived compliance with the duty of disclosure in relation to a matter and in accordance with section 21(2)(d) where a person:

1. failed to answer; or
2. gave an obviously incomplete or irrelevant answer to a question included in a proposal form about a matter.

There was a separate regime in sections 21A and 21B in relation to an “Eligible contract of insurance” which did not include life or TPD policies.  That has now changed.  Those sections have been repealed.  The “new duty” for “consumer insurance contracts” replaces it.

Notice of the duty of disclosure has to be given in terms required by section 22 of the ICA otherwise the insurer loses rights.[56]

Division 2 of Part IV of the ICA specifically dealt with misrepresentations (as opposed to non-disclosure) by the insured:

1. Section 23 in effect objectified answers to ambiguous questions if “a reasonable person in the circumstances would have understood the question to have had the meaning the person answering the question apparently understood it to have”. That meaning shall be deemed to be meaning of the question;[57]
2. Section 24 of the ICA prohibited the statements made in, or in connection with, a contract of insurance attributable to the insured with respect to the existence of a state of affairs from having the effect of the warranty.  It only has the effect of a representation;[58]
3. Certain statements were deemed not to be misrepresentation by section 26.  The focus again is the actual state of mind (objectively ascertained) of the insured.  If the statement was in fact untrue but made on the basis of the belief that the insured actually held, but a belief which a reasonable person in the circumstances of the insured would have held, it will not be a misrepresentation.[59]  Further, it shall not be taken to be 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;[60]
4. By section 27 of the ICA a person was not taken to have made a misrepresentation by reason only that the person failed to answer a question including in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.

A number of these provisions regarding misrepresentation were therefore aligned with the duty of disclosure in what was then section 20(1) including that the answer was obviously incomplete.[61]

The pathway to remedy after 5 October 2021

As mentioned earlier, a life and TPD policy will usually fall within the definition in section 11AB of the ICA to be a “consumer insurance contract”.

Again, the starting point is an omission or statement which is false or inaccurate.

The distinction between non-disclosure and misrepresentation has been swept away and replaced with a “new duty” under section 20B of the ICA.

The relevant distinction now is between a “consumer insurance contract” or some other form of insurance contract.[62]  The latter may be loosely categorised as commercial general insurance.

The duty to take reasonable care not to make a misrepresentation to the insurer is a single duty.

Noticeably, the new duty does not expressly mention, as a matter to be taken into account as to whether there was a breach of the new duty, or as a condition of the operation of the new duty, that:

1. a matter need be known to the insured; or
2. it was known to be relevant to the insurer’s decision to accept the risk (and, if so, on what terms) or reasonably ought to have been so known to the insured.

The omission is a significant contrast to section 21(1) of the ICA.  Nor are the matters exempted from the duty of disclosure in section 21(2) of the ICA mentioned.

Nonetheless, a Court can be expected to be pressed with a submission to the effect that those matters remain highly relevant in a given case to whether there was a misrepresentation, particularly when their presence is relevant to the less protected variety of contracts of insurance, commercial general insurance, continues to operate and take into account such matters in section 21.

It is an unlikely manifestation of legislative intent that a “consumer insurance contract” would be afforded less protection than the commercial general insurance.

An examination of the matters relevant to whether there has been a breach to the duty not to make a misrepresentation section 20B of the ICA will require some understanding, and perhaps detailed evidence, (on both sides) as to the risk and relevance and why the disclosure (or omissions in disclosure), or other statements made were relevant to the particular risk and, relevantly, a false representation.

Importantly, it is not to make a representation to the insurer. This may lead to contest of evidence about whether that particular insurer could in the circumstances be taken to have had a misrepresentation made to it.  It is not the reasonable or prudent insurer but the particular insurer.  Many insurers in the Life/TPD area are specialists and have specialist underwriters.

For example, a particular expression in an answer may be well understood by a specialist insurer and is not misleading or a misrepresentation to that particular insurer but could be misunderstood and a misrepresentation to another insurer.

It suffices to say that section 20B bristles with possible contestable issues.

Section 20B of the ICA applies to a life insured under a group life contract whether or not the group life contract is a “consumer insurance contract”:[63] section 27A(2) and section 32 of the ICA.

It is therefore apt to pick up those group life plans annexed to superannuation.

The explanatory memorandum[64] explained that, while the duty to take reasonable care not to make a misrepresentation applies to each individual life insured in a group life contract, the duty does not apply to the superannuation fund trustee or authorised representative who enters into the group life contract with the insurance company for the purposes of offering the insurance to fund members or employees.  Like other commercial contracts this relationship is subject to the ordinary duty of disclosure.

Section 32 of the ICA extends the failure to comply with the duty of disclosure and misrepresentation under the previous regime and the failure to comply with the duty to take reasonable care not to make a misrepresentation to the insurer under the current regime under a group life contract in respect of a proposed life insured under that group life contract.

In effect it provides that this section applies as if the contract was an individual contract in respect of the proposed life insured entered into at the time when the proposed life insured because a life insured under the group life policy.  The duty to take reasonable care, for example, not to make a misrepresentation to the insurer applies to a life insured under a group life contract whether or not the group life contract is a consumer insurance contract.[65]

Section 32 also extends to blanket insurance contracts entered into before the date of commencement but only insofar as those contracts relate to people who became members of the relevant scheme after that date.[66]

The purpose of section 32 is that a blanket contract of insurance normally pre-dates any failure to take reasonable care not to make a misrepresentation (or previously a misrepresentation or non-disclosure) by the particular member in question.

Under section 32 an insurer is entitled to remedies for the failure to take reasonable care not to make a misrepresentation (or previously a misrepresentation or non-disclosure) by a member as if a single contract between the insurer and the trustee (which will be the insured) had been entered into when the member joined the scheme.

In other words, it individualises the obligations to the particular member.

Section 20E displaces Division 1 of Part IV including the section 21 duty of disclosure, (which is now expressed to be “subject to the Act”) from application to “consumer insurance contracts” or proposed contracts that would become “consumer insurance contracts”.

Further, section 23A displaces sections 23 to 27 from having application to “consumer insurance contracts”.

Instead:

1. Section 20B(5) mirrors section 27 for “consumer insurance contracts”;
2. Section 20C mirrors section 24 for “consumer insurance contracts”.

An important provision is section 27AA of the ICA which now defines what a “relevant failure” is.

In essence, section 27AA(1) bifurcates a “relevant failure” in relation to a contract of insurance between:

1. If the contract is, or would be, a “consumer insurance contract”: a misrepresentation made by the insured in breach of the duty to take reasonable care not to make a misrepresentation.  This would pick up a fraudulent misrepresentation which is deemed to be a breach of that duty;
2. Otherwise either a failure by the insured to comply with the section 21 duty of disclosure or a misrepresentation made by the insured to the insurer before the contract was entered into.

Section 27AA(2) of the ICA deals with the position where the contract of life insurance is for the benefit of a person other than the insured becomes the life insured i.e. life insurance in respect of another person or “key person” life or TPD insurance.

To deal with this situation section 27AA(2) of the ICA deems a misrepresentation by the person whose life or disability is the subject matter of the policy to be a relevant failure whether or not the contract is a “consumer insurance contract” if two conditions are satisfied:

1. The life insured made a misrepresentation during the negotiations for the contract but before it was entered into; and
2. The misrepresentation would have been a breach of the duty to take reasonable care not to make a misrepresentation if that duty applied to the life insured in relation to the contract.

The remedy – section 29 of the ICA

Non-fraudulent failures

Section 29 has had four iterations.

However, for present purposes, for non-fraudulent failures, the most important are:

1. The version which applied before 28 June 2014.  Importantly, section 29(3) the remedy for non-fraudulent failure, contained a phrase that the insurer “would not have been prepared to enter into a contract of insurance with the insured on any terms if the duty of disclosure had not been complied with or the misrepresentation had not been made”.  If that was so then within three years after the contract was entered into the insurer could avoid the contract even for non-fraudulent, non-disclosure or misrepresentation.  This is to be compared with section 29(1)(c) which stated that the section (and therefore the remedy) even for fraud did not apply if the insurer would have entered into the contract even if there had not been a failure to comply with the duty of disclosure or the misrepresentation;
2. From 28 June 2014, an amendment to section 29(3) removed the phrase “would not have been prepared to enter into a contract of life insurance on any terms”. That meant the insurer no longer had to prove that it would not have been prepared to enter into a contract of insurance (i.e. it would not have declined the risk), if (without fraud) the duty of disclosure had been complied with or the misrepresentation had not been made.  The three year limit remained;
3. Section 29 was amended with effect from 1 January 2021 applying to contracts of life insurance entered into after 1 January 2021. That includes a contract of life insurance varied to increase the sum insured or to provide additional kind of insurance, to the extent of that variation. One of the amendments was to reverse the 26 June 2014 amendment to section 29(3).  The pre 28 June 2014 text was reinstated. The three year limit remained.

Reverting to the original wording effects the remedy for non-fraudulent relevant failures.[67]  Section 29(3)(b) reverts to “a contract of life insurance with the insured on any terms, if the relevant failure had not occurred”.  It permits avoidance within 3 years.  After that the insurer has no remedy.

This reversion means the authority of Schaffer v Royal & Sun Life Assurance Australia Ltd[68] will apply again:

“What that means is this: for a right of avoidance under section 29(3) to arise it must be shown that, on the insured’s offer, on the assumption that it had stated the true facts, the insurer would not have been prepared to enter into a contract on any terms; in other words, the insurer would have declined the risk.”[69]

The other changes refer to the “relevant failure” as defined in section 27AA of the ICA.  Further, if section 27AA(1), (3) or (4) applies to a contract of life insurance, different remedies may be available to the insurer in respect of each separate contract of life insurance that is taken to exist by virtue of that subsection.  It is an “unbundling” provision.

From 5 October 2021, a non-fraudulent non-disclosure or representation, allows the insurer to avoid the contract:

1. if the insurer would not have been prepared to enter into the contract of life insurance with the insured (section 29(1)(a)) and enter in to a contract of life insurance with the insured on any terms, if the “relevant failure” had not occurred (section 29(3)(b));
2. within three years after the contract was entered into;

Alternatively, if the insurer has not avoided the contract (whether fraudulent or innocent) the insurer may by notice in writing vary the contract in accordance with the formula in subsection 4 but subject to sections 29(5), (6) and (7).  This is a retrospective variation.[70]

Further, if the insurer has not avoided the contract, or has not varied under section 29(4) the insurer may by notice in writing vary the contract in such a way to place the insured in the position (but subject to section 29(7)) in which the insurer would have been if the relevant failure had not occurred.  This does not apply to a contract which has a surrender value or provides insurance cover in respect of the death of a life insured under section 29(10).  Section 29(7) does not allow a section 29(6)variation which is inconsistent with the position in which “other reasonable and prudent insurers” would have been if they had entered into “similar contracts of life insurance” to the relevant contract and there had been no relevant failure in relation to the similar contracts.  What is “similar” is defined in section 29(8).

Fraudulent failures

Throughout all of these changes, section 29(2) of the ICA has continued to exempt fraudulent misrepresentations or non-disclosures, or currently a fraudulent relevant failure, if it has passed through the relevant pathway and “fraud” is proved as explained above. 

Fraud does not have a time limit unlike non-fraudulent which was (and is) limited to three years from policy inception.

Summary – from 5 October 2021

In summary, under the new post 5 October 2021 regime, in the case of a “consumer insurance contract”:

1. The insurer may have a remedy under section 29 of the ICA for a breach by the life insured of the duty to take reasonable care not to make a misrepresentation which is a kind of “relevant failure” under section 27AA;
2. The insurer has no remedy for misrepresentation by the life insured where the conduct does not constitute a breach of the duty to take reasonable care not to make a misrepresentation;
3. The insurer has no remedy for a non-disclosure (which is absorbed into the singular duty of the life insured not to make a misrepresentation) if the conduct in question does not constitute a breach of the duty to take reasonable care not to make a misrepresentation.

Again, fraud is treated differently because under section 20B(6) if the misrepresentation is made fraudulently, it is a breach of the duty to take reasonable care not to make a misrepresentation.

This likely has the effect of overriding section 20B(3), including, for example, the failure of the insurer to clearly communicate to the insured the importance of answering the questions asked of by the insured and the possible consequences of failing to do so or how clear the questions were.

However, those type of matters may be highly relevant to deciding if an insured had the state of mind necessary for a finding of fraud at all.

Conclusion – brave new past and braver new future

The importance of the differential treatment of fraud from non-fraudulent conduct under the ICA has remained constant.

“Fraud” is a serious allegation, requiring serious proof, of a state of mind of the insured .  That does not mean it cannot be proved directly, or circumstantially, but any assertion of fraud needs to be scrutinised carefully by those making it and those defending it.

[1] Carter v Boehm (1776) 3 Burr 1905, 1909.

[2] The Australian Law Reform Commission report which resulted in the ICA: [1982] ALRC 20 (“ALRC 20”) at [24]; “Sutton on Insurance Law” 4th Edition by Enright & Merkin at [7.19].

[3] ALRC 20 at [150].

[4] ALRC 20 at [152].

[5] Hitchens v Zurich Australia Ltd [2015] NSWSC 825; Cf: section 21(2)(d) of the Insurance Contracts Act 1984 (Cth) (“ICA”); “Sutton on Insurance Law” 4th Edition by Enright and Merkin at [6.480].

[6] “Sutton on Insurance Law” (supra) at [7.1140].

[7] Maye v The Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 414; “Sutton on Insurance Law” at [7.1140]; ALRC 20 at [152].

[8] Dalgety & Co Ltd v Australian Mutual Providence Society [1908] VLR 481.

[9] Section 33 of the ICA; The circumstances in which it is appropriate to refer to the antecedent common law are “extremely limited”: Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606, 615..

[10] ALRC 20 at [194], ]196].

[11] Contract of life insurance.

[12] Which is also defined in section 11 of the ICA by reference to the Life Insurance Act 1995 (Cth).

[13] Section 20B of the ICA.

[14] Macquarie Concise Dictionary 9th Edition.

[15] McCarthy v St Paul Insurance Co Ltd (2007) 157 FCR 402 per Kiefel J (as Her Honour then was) at [33] and [34]-[35].

[16] McCarthy (supra) at [34] per Kiefel J.

[17] Cf:  NRG Victory Australia Ltd v Hudson [2003] WASCA 291 at [32].

[18] see for example Plasteel Windows Aust. Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZIC 60-926;  Twenty-first Maulux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd (1990) VR 919.

[19] Graham v Colonial Mutual Life Assurance Society Ltd (No. 2) [2014] FCA 717 at [149]-[150].

[20] (1999) 151 FLR 360.

[21] (1889) 14 Appeal Cases 337 at 374;  see also Tyndall Life Insurance Co Ltd v Chisholm (2000) 11 ANZIC 90-104.

[22] (supra) – underlining added.

[23] Poole v Chubb Insurance Company of Australia Ltd [2014] NSWSC 1832 at [152].

[24] With whom Macfarlane and Emmett JJA agreed.

[25] [2013] NSWCA 252.

[26] Prepaid at [39] citing Forrest v Australian Securities and Investment Commission (2012) 86 ALJR 1183 at [22] per French CJ, Gummow, Hayne and Kiefel JJ.

[27] Poole (supra) at [152], citing Prepaid at [42].

[28] Prepaid Services Pty Ltd (supra) at [40] – underlining added.

[29] McCarthy (supra) at per Kiefel J.

[30] Briginshaw v Briginshaw (1938) 60 CLR 336.

[31] At 361-2 per Dixon J, 347 per Latham CJ, 350 per Rich J, 353 per Starke J, 372 per McTiernan J.

[32] Per Dixon J at 362.

[33] Per Rich J at 350.

[34] Per Dixon J at 361.

[35] Per Dixon J at 363; Hurley v Clements [2010] 1 Qd R 215 at [27].

[36] (1992) 67 ALJR 170 – underlining added.

[37] Millhouse IAG v Environautics Pty Ltd [2000] QDC 196 at [12]-[18]; Bell Group Ltd (In Liq) v Westpac Banking Corporation No. 5 [2004] WASC 273.

[38] Supra.

[39] At [92].

[40] Underlining added.

[41] At [129].

[42] At [149].

[43] At [149] – underling and italics added.

[44] (1999) 151 FLR 360.

[45] At [68] – per Shepardson J, with whom the other members of the Court agreed.

[46] At [77].

[47] At [81]-[82] – underlining added.

[48] At [104]-[105].

[49] At [108]-[109].

[50] Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth).

[51] Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) schedule 2 item 37.

[52] Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (In Liq) (2003) 214 CLR 514.

[53] Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd [2002] NSWSC 1006 at [56] citing Commercial Union Assurance Co Australia Ltd v Beard (2000) 11 ANZ Ins Cases 61-458 (the issue was not decided on appeal [2003] NSWCA 356; see also A & D Douglas Pty Ltd v Lawyers Private Mortgages Pty Ltd [2006] FCA 520.

[54] CGU Insurance Ltd v Porthouse (2008) 235 CLR 103 at [52]-[53].

[55] As to which see Hitchins (supra) regarding a fair presentation of the risk.

[56] See section 22(3) of the pre-28 December 2015 version of section 22 of the ICA; the post-28 December 2015 version contains section 22(5) which was amended again after the 2020 amendments which are now address by the new consumer insurance contract provisions under Part IV Division 1A.  With operative effect from 9 November 2014 certain “Prescribed” contracts by regulation had to also give a “Key Facts Sheet” also:  sections 33A to 33D of the ICA.

[57] See Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cases 60-8.3, 74,994.

[58] Genworth Financial Mortgage Insurance Pty Ltd v KCRAN Pty Ltd (In Liq) No. 2 (2011) 205 FCR 295.  This applies to both oral and written negotiations: Herbohn v NZI Life Ltd (1998) 149 FLR 21.

[59] Section 26(1) of the ICA.

[60] Section 26(2). Note the section extends to the person who becomes a member of a superannuation retirement or other group life scheme: section 26(3) of the ICA.

[61] See Orb Holdings Pty Ltd v Lombard Insurance Co (Aust) Ltd [1995] 2 Qd R 51.

[62] See section 20A and 20B of the ICA.

[63] “Group Life Contract” is defined in section 11.

[64] To the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020.

[65] Section 27A(2) of the ICA.

[66] Section 4(2).

[67] Section 29(3)(a).

[68] [2003] QCA 182 per Davies JA, approved in Davis v Westpac Life Insurance Services Ltd [2007] NSWCA 175.

[69] Underlining added at [43] per Davies JA.

[70] See section 29(9) of the ICA.