Fraudulent Misrepresentation in Group Life Insurance: AIA Australia Ltd v Sharma [2023] FCAFC 42

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By Nica Manosca, Lawyer, and David Slatyer, Partner

As a result of this judgment, where a subsequent insurer takes over as the insurer for a superannuation fund, from the previous insurer, it is able to rely on any remedies in the Insurance Contracts Act 1984 (Cth) (ICA) in circumstances where a fund member made a misrepresentation or non-disclosure to the previous insurer.

It was decided that a subsequent insurer in this context was within the class of persons who might reasonably be contemplated by the fund member as relying on the misrepresentation, which misrepresentation could be continuing. That was on the basis of the common practice of fund trustees to change group insurers from time to time and that new group insurers in such a scenario typically do not re-underwrite or reassess the risk.Other issues were not decided, such as whether s33 of the ICA meant the Division 3 of the ICA acted as an “exclusive code” regarding non-disclosure and misrepresentation or whether the general law can still apply in this space, and whether the duty of utmost good faith in s13 ICA can provide an insurer with a remedy in this scenario.In allowing the important appeal by AIA Australia, the Full (Federal) Court set aside the orders of the primary judge in Sharma v HEST Australia Ltd [2022] FCA 536, with costs.

Background

On 10 November 2009, H.E.S.T Australia Limited as the Trustee of the H.E.S.T Australia Superannuation Fund (the Trustee), entered into a group life insurance policy with ING Life Limited, which later changed its name to OnePath Life Limited (OnePath) but remained the insurer of the group life insurance policy until 30 November 2011.

On 26 July 2010, Dr Sharma became a member of the H.E.S.T Australia Superannuation Fund (the Fund). In that capacity, he became entitled to receive default cover with OnePath. Just like each member of the Fund, Dr Sharma was not required to submit to any form of medical examination or make any form of declaration as to the state of his health to the Trustee or the insurer.

On 22 March 2011, Dr Sharma who was a practising general practitioner at the time, made an application for additional death, total and permanent disablement (TPD) and income protection (IP) insurance cover (the Application). In that Application, which had been accepted on 12 July 2011, Dr Sharma answered a number of standard form questions, including a question which asked him whether he had ever been diagnosed with, had symptoms or signs of, or had sought treatment for “heart trouble, murmur, chest pain, palpitations”, to which Dr Sharma had answered “No”. The Application set out his duty of disclosure as required by the Insurance Contracts Act 1984 (Cth) (ICA).

It was later discovered that after suffering a myocardial infarction, Dr Sharma had a surgical procedure in 1999 during which three stents were placed into his coronary arteries.

On 1 December 2011, the Colonial Mutual Life Assurance Society Limited, which traded as CommInsure, replaced OnePath as the insurer to the Fund.

Prior to Dr Sharma’s death by heart failure on 21 April 2017, he lodged a terminal illness claim with the Trustee on 9 March 2017.  CommInsure accepted the terminal illness claim for default cover but wrote to Dr Sharma’s Estate on 16 August 2017 advising that it had decided to avoid or cancel the additional cover and would refund premiums paid in respect of it. In making that decision, CommInsure relied on fraudulent misrepresentations which had been made by Dr Sharma in obtaining the additional cover. The Trustee reviewed and affirmed CommInsure’s decision.

On 17 July 2017, Mrs Sharma made an internal complaint with the Fund and later, on 14 January 2020, made a complaint to AFCA in her capacity as administrator of the estate of Dr Sharma, to the effect that the Trustee, and in turn the insurer to the Trustee, had each failed to pay the death benefits which Dr Sharma was entitled to receive as a member of the Fund.

CommInsure remained the insurer until 1 April 2021, which is the date on which the life insurance business of CommInsure was transferred to the appellant, AIA Australia Limited (AIA).

AFCA Determination

On 21 September 2021, AFCA determined that the decision of the insurer not to pay certain insurance benefits and the decision of the Trustee whereby it adopted the decision of the insurer, were each fair and reasonable in all of the circumstances, on the basis that Dr Sharma had answered questions in the Application both falsely and fraudulently.

In making the Determination, AFCA found, inter alia, that:

  1. Only the insurer to whom the misrepresentation was made can rely on Section 29 of the ICA;
  2. There was no clear evidence to support that any earlier misrepresentation made by Dr Sharma was of continuing effect which was relied upon by CommInsure when it became the insurer to the Fund; and
  3. The decision not to pay the benefits under the additional cover is, in its operation in relation to Dr Sharma, fair and reasonable in all of the circumstances. In particular, AFCA reasoned that “there is no unfairness or unreasonableness in refusing to pay insurance benefits where the ICA does not contemplate a change in group insurers, in a superannuation context, and the common law or equity would allow the insurer on risk at the time of the claim to recover those benefits due to the deceased’s fraudulent misrepresentation”.

Mrs Sharma’s Appeal Proceedings

On 27 September 2021, Mrs Sharma, pursuant to section 1057 of the Corporations Act, commenced proceedings in the Federal Court of Australia by filing a Notice of Appeal, wherein Mrs Sharma made an appeal against AFCA’s determination which affirmed the decisions of the Trustee and CommInsure, to deny payment of additional death and IP benefits of the deceased policy holder, Dr Sharma, on the basis he had fraudulently misrepresented his medical history.

AFCA filed a submitting notice in the initial and the current appeal proceedings.

The primary judge found that AFCA had materially erred in law in affirming the decision of CommInsure, and therefore allowed the appeal, set aside AFCA’s determination, and remitted the matter to AFCA for re-determination.

In that judgment, the Court held, inter alia, that:

  1. Upon a proper construction, the insurer in section 29 of the ICA means the insurer to whom the misrepresentation was made (per Gleeson J in Sharma v LGSS [2018] FCA 167). AFCA’s argument that the misrepresentation had continuing effect until CommInsure contracted with the Trustee to become the insurer to the Fund, sat outside Division 3 of the ICA and is therefore in error. Therefore, CommInsure was not in a position to avoid the contract pursuant to section 29 of the ICA.  The Court noted that because the ICA did not address the problem in this context of a change of insurers in group life contracts it did not permit AFCA or the Court from divining the remedy to a perceived legislative gap; rather that is for Parliament to address. 
  2. The remedies for non-disclosure and misrepresentation in Division 3 of Pt IV of the ICA operate as an exclusive code. Its effect was to limit the rights of CommInsure to those provided for in the ICA. Section 33 of the ICA therefore displaces the operation of the general common law and equitable principles that a misrepresentation or failure to disclose a material fact may entitle an insurer to rescind or avoid a contract of insurance.
  3. Having correctly concluded that CommInsure could not avoid the contract pursuant to section 29, AFCA should have concluded that section 33 of the ICA operates a code, the effect of which was to limit the rights of AIA to those provided for in the ICA and should have led it to consider whether AIA, and before it CommInsure, had any other right on the facts, found under the ICA. AFCA engaged in no more than pure speculation on a question central to the state of statutory satisfaction required by section 1055(3) of the Corporations Act.
    AIA had argued that rights existed pursuant to the duty of utmost good faith owed by the insured, in s13 ICA.  The Court said this “may be open to be relied on by AIA” however noted that the issue was not put before AFCA and “AFCA gave no consideration to that, doubtless because AIA did not clearly articulate that argument to it in this way”.  AIA also argued that “equity will intervene in a case of fraud, misrepresentation or unfair dealing” where for instance the Estate’s maintenance of the claim amounts to having unclean hands.  The Court said its role on appeal was not a general judicial review and it could not form a view about the possible application of those broader principles, but those matters “may be considered relevant by AFCA, once it proceeds upon a correct understanding of the law and makes relevant findings of fact in accordance with the materials and arguments put to it by the parties”.
  4. AFCA materially misdirected itself as to the meaning and effect of section 33 of the ICA, which misunderstanding underpins its ultimate conclusion of fairness and reasonableness. AFCA also misunderstood the limits of its statutory jurisdiction to determine the superannuation complaint made to it.

His Honour rejected AIA’s submission that Dr Sharma breached his duty of utmost good faith such that CommInsure would have had common law remedies to avoid the contract.

AIA’s Appeal to the Full Court

AIA appealed the primary judge’s decision and submitted the following appeal grounds:

  1. AIA contends that the primary judge erred in finding that AIA/CommInsure could not rely on s 29(2) of the ICA to avoid the additional cover.
  2. AIA contends that the primary judge erred in holding that s33 of the ICA acted as an “exclusive code” and ought to have concluded that it did not limit the rights of AIA to those provided for in the ICA.
  3. AIA contends that the primary judge erred in failing to uphold AFCA’s determination that the decision of HESTA and CommInsure did not operate unfairly or unreasonably in the circumstances.

The Full Court found, inter alia, that:

  1. It is well established that for a fraudulent misrepresentation to be actionable it is not necessary that it should be made to a particular person; it can be made to a group which the plaintiff belongs so that the plaintiff is one of those intended to be deceived.
  2. It can be said that as a matter of law, it is possible that Dr Sharma’s misrepresentations made initially to HESTA and OnePath could be regarded as also being made to CommInsure.
  3. Once its focus was on misrepresentations made to CommInsure, AFCA made the factual findings that Dr Sharma made the fraudulent misrepresentation for the purpose of obtaining insurance cover and it was unlikely that he cared whether it was one insurer or another that relied on his false answers to provide additional cover.
  4. As a fact, CommInsure was within the class of persons who might reasonably be contemplated as relying on the misrepresentations.
  5. “With respect to the primary judge, his Honour seems to have overlooked, or misunderstood, that the contention was that there was a misrepresentation to CommInsure that enabled CommInsure to rely directly on s 29(2), and it was not that there was a misrepresentation made to OnePath that CommInsure could rely on or that CommInsure sought to rely on rights outside of the ICA. As a consequence, it was no answer to the contention to say, as his Honour did, that s 29 “cannot be relied on” and that Div 3 of the ICA is a code.
  6. The point is that on the factual findings of AFCA, albeit that they were made in the context of a discussion of common law and equitable remedies in order to underpin a finding of “fair and reasonable”, Dr Sharma made continuing misrepresentations to CommInsure as a member of a class of persons who could be expected to act on the misrepresentations. Those misrepresentations were made, in a continuing sense, by Dr Sharma “during the negotiations for a contract of life insurance [and] before it was entered into”, the relevant contract being the new cover between HESTA as insured and CommInsure as insurer with effect from 1 December 2011. Therefore, s 29(1)(b), when read with s 27A, was satisfied in that the misrepresentations were made to the insurer before the relevant “unbundled” contract was entered into. Also, s29 was not disapplied by s 29(1)(c) because, on AFCA’s finding, CommInsure would not have entered into the contract in respect of Dr Sharma’s additional cover had Dr Sharma not misrepresented his relevant cardiac history. On that basis, CommInsure could rely on s 29(2) directly to avoid the contract of insurance insofar as it related to Dr Sharma’s additional cover in reliance on the fraudulent misrepresentations made to it.
  7. There is no identifiable error by AFCA on a question of law in making the factual findings that underpin the conclusion that Dr Sharma made continuing misrepresentations to CommInsure that CommInsure was entitled to rely on in avoiding cover under s 29(2)… The misrepresentations were not spent as having been acted on by the acceptance by OnePath of the application for additional cover because, on AFCA’s finding, CommInsure was a member of a class of persons who could be expected to act (again) on the misrepresentations. That was presumably on the basis of the common practice of trustees to change group insurers from time to time and that new group insurers in such a scenario typically do not re-underwrite or reassess the risk. Although the submissions on behalf of Mrs Sharma are critical of that finding, it remains a finding of the AFCA panel and there is no error on a question of law that displaces it in the appeal process to this Court under s 1057 of the Corporations Act.”

On that basis, the Full Court upheld AIA’s appeal ground 1 and the orders of the primary judge were set aside. It was unnecessary for the Court to address the other grounds of appeal.

The Full Court ordered that the appeal against the determination of AFCA be dismissed with costs on the basis that although AFCA decided in the insurer’s favour on a different basis, the outcome before AFCA would be the same.

The Full Court stated that Mrs Sharma should pay AIA’s costs.It remains to be seen whether any future change is made to the ICA.  However for now the Court’s judgment is an important one for the industry, especially fund trustees and their insurers in being able to rely on remedies in Div 3 of the ICA.

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