By David Slatyer, Partner

Since the Hayne Inquiry, ASIC has taken a more active posture in pursuing insurers; and buoyed by some earlier success it brought proceedings against Zurich Australia Limited (as current owner of OnePath) for, inter alia, a civil penalty and a declaration the insurer acted in breach of its duty of utmost good faith.

However, on 21 December last, in a blow to ASIC’s endeavours, Jackman J of the Federal Court dismissed the proceeding and ordered ASIC pay the insurer’s costs. What follows is a short note about the decision; ASIC v Zurich Australia Limited (No 2) [2023] FCA 1641.

The subject of the proceedings concerned the insurer’s avoidance of an Income Protection (IP) insurance policy on grounds of fraudulent non-disclosure / misrepresentation.

The policy was issued in 2016 (when OnePath was owned by ANZ), with an exclusion in relation to mental illness (as the insured had disclosed some mental health history in answer to the application form).

In late 2018 the insured made a claim for IP benefits due to a shoulder injury, which was accepted, subject to ongoing assessment.  One thing led to another, and from investigating the shoulder injury (in particular, a prior shoulder injury which the insured wrongly stated she ‘mentioned when the policy was first filled out’) the insurer uncovered details of hospital admissions relating to the insured’s prior mental health issues between 2001 and 2005; considerably, the insured’s hospitalisation on six occasions including for suicidal ideation and suicide attempts which had not been previously disclosed.

When the insurer made a request for records of the treating GP, it was informed the insured had revoked the authority.

OnePath obtained a retrospective underwriting opinion, which was to the effect that had the hospital admissions been disclosed, the IP cover would not have been underwritten. This was followed by a detailed procedural fairness letter to the insured in July 2020.

When the insured responded to the procedural fairness letter, with the assistance of a community legal centre, it was to the effect that an ANZ financial adviser helped her answer the questions and told her she did not need to ‘go back beyond 5 years’ when disclosing her medical history.

OnePath then sent a letter to the insured avoiding the IP policy from its inception, on grounds of fraudulent non-disclosure / misrepresentation in accordance with s29(2) Insurance Contracts Act.

It pursuing the case, ASIC accepted that Zurich (OnePath) formed a reasonable conclusion about the insured’s disclosure, and limited its case to one concerning the manner or process Zurich adopted in reaching that decision.

While the content of the duty of utmost good faith relies on the factual circumstances of the case, the Court commented that “much of ASIC’s argument relies on isolated judicial statements, made in relation to fundamentally different circumstances, as though they were of application to the present case, and often ignoring statements on the same judicial reasoning which qualify the statements upon which ASIC relies”.

Here we note that in ASIC v TAL, the same court earlier emphasised that ‘It is inappropriate to draw conclusions of principle or of rules from other articulated fact situations about a duty of this character’.

In considering the duty of utmost good faith, the Court referred to decisions of the High Court in CGU Insurance v AMP Financial Planning and in Allianz Insurance v Delor Vue Apartments, and in particular the comments of the majority in the latter case to the effect that ‘there is no free standing obligation upon an insurer, independent of its contractual rights, powers and obligations, to act in a manner which is decent and fair; rather the obligation to act decently and with fairness is a condition on how existing rights, powers and duties are to be exercised or performed in the commercial world’.

The Court rejected as “fanciful”, ASIC’s contention that the insurer should have made further inquiries (e.g. of the financial advisor) before avoiding the IP policy.

Further, the Court rejected ASIC’s attack that the procedural fairness letter was not sufficiently detailed and accepted Zurich’s submission that such letter need not specifically alleged fraud (and perhaps should not) before the insured had an opportunity to respond to the questions raised about disclosure.

Finally, although the final decision letter failed to inform the insured of a right of review and appeal, this was held to be an administrative error and not sufficient to amount to a breach of the duty of good faith.