By David Slatyer, Partner, and Emily Marles, Solicitor

Background

ASIC brought a claim against HCF Life (HCF), a life insurer offering products which contain exclusions in respect of pre-existing conditions. ASIC claims that HCF engaged in conduct liable to mislead the public regarding the nature, characteristics and suitability of financial services, thereby contravening section 12DF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Additionally, ASIC argued that the pre-existing condition terms were unfair within the meaning provided in section 12BF of the ASIC Act.

HCF previously adopted definitions of pre-existing conditions that aligned closely with the language of section 47 of the ICA. This section limits insurers from relying upon exclusions for pre-existing conditions where, at the time of entering the contract, the insured was unaware of and could not reasonably have been expected to be aware of the condition.

In or around August 2019, HCF revised its pre-existing condition definition to exclude coverage in circumstances where a medical professional determines that the signs or symptoms of the relevant condition were present prior to the policy’s start date. This definition at various times between 2021 and 2023 was prescribed by HCF as follows:

“any condition, illness or ailment where the signs or symptoms of which in the opinion of a registered medical practitioner, existed at any time before the Cover Commencement Date, even if a diagnosis had not been made.”

“any condition, illness or ailment where the signs, symptoms or treatment of which, in the opinion of a registered medical practitioner, existed within 5 years immediately prior to the Cover Commencement Date, even if a diagnosis had not been made.”

It is ASIC’s position that HCF was failing to inform consumers of the statutory protections of section 47 of the Insurance Contracts Act 1984 (Cth) (ICA) and misleading consumers about their rights, meaning the term was partially unenforceable.

Section 47 of the ICA provides;

“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.”

Decision

The Court was satisfied that section 47 of the ICA rendered the Pre-Existing Conditions Terms partially unenforceable, and it was ultimately found that HCF had contravened section 12DF of the ASIC Act, meaning they had engaged in misleading conduct.

In his findings, Jackman J provided two fundamental reasons that the Pre-Existing Conditions Terms were materially different from that under section 47 of the ICA.

First, that the Pre-Existing Condition Terms focus on the existence of signs and symptoms, whilst section 47 ICA focuses on the knowledge of the condition, illness or ailment wo which signs or symptoms relatte. Second, Jackman J said, “a provision that is engaged upon one individual’s satisfaction of an objective fact will inevitably be broader than a provision that is engaged only upon the actual existence of that same fact.” at [98].  The policy exclusion was engaged upon a registered medical practitioner’s opinion, whereas s47 fixes on whether “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”.

Jackman J then set out his reasoning referring to the four elements under section 12DF.

Impugned conduct in trade or commerce

It was not in dispute that HCF had engaged in conduct, that is the publishing of the PDS to members of the public which contained the Pre-Existing Condition Terms and did not explain the existence or effect of section 47 of the ICA or the potential unenforceability of the terms, nor that it did so in trade or commerce.

Meaning conveyed

The Court was satisfied that a reasonable person “would read and understand the Pre-Existing Condition Terms as being an accurate and complete statement of when benefits will not be payable under a policy by reason of a pre-existing condition” at [110].

Liable to mislead

His honour accepted that the meaning conveyed is misleading, as it presents an accurate, complete and unqualified statement about when benefits would not be payable due to a pre-existing condition, whereas section 47(2) of the ICA renders the Pre-Existing Condition Terms partially unenforceable.

Nature, characteristics or suitability of financial services

It was determined that the relevant financial service was the provision of insurance and that the nature, characteristics or suitability of that service includes the circumstances which an insurer is obligated to pay benefits to the insured.

Unfair Contract Term

Further to the above, Jackman J dismissed ASIC’s claim that the pre-existing condition terms were unfair under section 12BF of the ASIC Act, on the basis that only one of the three criteria outlined in section 12BG had been satisfied.

First, “the fact that a consumer is left confused about his or her rights and obligations does not mean those rights and obligations are imbalanced.” The Court found that the exclusion of pre-existing conditions was reasonably necessary due to the products being distributed by HCF on a “guaranteed acceptance” basis, meaning the products were not underwritten. As such, his Honour determined that HCF had not contravened section 12BF of the ASIC Act and that the term was not unfair.

Key Takeaways

Insurers, especially Life insurers, should review their policy terms to ensure that any terms which seek to limit or exclude the insurer’s liability under the policy by reference to a sickness or disability to which the insured was subject at a time before the policy was entered into, do not contradict s47 ICA.  This is most clearly pertinent to provisions dealing with pre-existing medical concerns.

In particular, policy terms which focus on something other than a sickness or disability (e.g. instead, signs or symptoms), and/or operate other than based on whether “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” (e.g., instead, a doctor’s opinion), would fall foul of s47 ICA and be rendered partially unenforceable, and hence would not have the effect sought.

Further, as a result, the insurer would be in breach of s12DF of the ASIC Act, and liable to penalty under s12GBB ASIC Act, corrective notices and costs.

This applies equally to superannuation trustees, who also provide a “financial service” by virtue of s12BAB(ea) ASIC Act.  Superannuation trustees should liaise with their insurers on the issue, and review their own deeds and materials, such as PDS and other publications.

General insurers should conduct a similar exercise on account of the similar provision in s46 ICA for “pre-existing defect or imperfection”.