Group Life Insurance – misrepresentation, fraud, remedies available to takeover insurers, and AFCA’s “pure speculation” on a central question Sharma v H.E.S.T Australia Pty Ltd [2022] FCA 536

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by Nica Manosca, Solicitor and David Slatyer, Partner

In Sharma v H.E.S.T Australia Pty Ltd, the Federal Court concluded that AFCA materially misdirected itself in law, and therefore allowed the appeal and ordered for the complaint to be remitted to AFCA for redetermination in accordance with the Court’s reasons.

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 made an application for additional death, total and permanent disablement (TPD) and income protection (IP) insurance cover (the Application). In that Application, 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 answered no. The Application set out his duty of disclosure as required by the Insurance Contracts Act 1984 (Cth) (ICA).

On 12 July 2011, Dr Sharma was advised by the Trustee that the Application had been accepted with effect from 11 July 2011 by OnePath. It was later discovered that Dr Sharma had a surgical procedure in 1999 during which three stents were placed into his coronary arteries after suffering a myocardial infarction.

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 his death by heart failure on 21 April 2017, Dr Sharma 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. 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 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”.

Federal Court 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.

The parties to the proceeding are the Trustee as the first respondent, AIA as the second respondent and AFCA as the third respondent. The first and third respondents each filed a submitting notice, whilst AIA sought to uphold the AFCA determination, and also relied on a Notice of Contention.

In the proceeding, McElwaine J of the Federal Court (in Victoria) considered the following issues:

  1. Whether AFCA erred in interpreting sections 29 and 33 of the ICA;
  2. Whether AFCA erred in concluding that common law or equitable principles may operate in cases of fraudulent misrepresentation under group life policies where there is a change of insurer, despite section 33; and
  3. Whether the conclusion that the decision of the insurer to avoid the individual group life policy and of the trustee to affirm that avoidance were each fair and reasonable in operation was reached on a correct understanding of law.

The Court found that AFCA had materially erred in law in affirming the decision of CommInsure. AFCA’s determinations were therefore set aside and the complaint was remitted back to AFCA for redetermination.

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 did not permit AFCA or the Court from diving the remedy to a perceived legislative gap; rather that is for Parliament to address.

  1. 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.
  2. 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 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”.

  1. 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.

The Court also accepted that as a general proposition, a misrepresentation may have a continuing effect until it is withdrawn or the truth is discovered.  Hence it will be interesting to learn of AFCA’s redetermination (if the matter is not resolved), particularly as AIA will look to clearly articulate the argument that the misrepresentation constitutes a breach of the implied term of utmost good faith under s13 ICA and this is a remedy “otherwise” allowed by s33 ICA.

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