Life insurance – not so terminal illness

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By David Slatyer, Partner

What was meant by “terminal illness” and “terminally ill” in a life insurance policy was disputed before the High Court of New Zealand, after Asteron denied the claim for payment of the benefit sum (circa $1.2m) and the life insured ultimately survived cancer.

The terms “terminal illness” and “terminally ill” were defined in the policy to mean:  “Your life expectancy is, due to sickness and regardless of any available treatment, not greater than 12 months.”

Mr Catherwood contended that it should be construed as a life expectancy of no more than 12 months, disregarding (“regardless of”) the effect of any available treatment.  Whereas Asteron contended it meant a life expectancy of no more than 12 months despite (“regardless of”) the effect of any available treatment.

Catherwood v Asteron Life Ltd, delivered 8/12/2022, by Dunningham J of the High Court of New Zealand[1].

Mr Catherwood was diagnosed with stomach cancer and advised by his oncologist that without treatment he would die within 12 months, but that appropriate treatment (surgery and chemotherapy) would reduce his risk of dying within 12 months to less than 10% (there was no dispute about that evidence).  He also had Trauma Cover and Asteron accepted a claim under the trauma recovery option, paying $564,185.23. However when he claimed early payment of the terminal illness benefit under the life cover, Asteron declined.  Further, Mr Catherwood had the cancer treatment and survived.

With the definition of the terms not perfectly and perhaps capable of more than one view, His Honour embarked on an objective interpretation to determine which was more likely than the other.  The starting point, however, was “by observing that as a matter of common sense, the idea that someone can be described as “terminally ill” when there is an available cure, is contradictory, and is certainly not the most logical way to read the definition”.

The next stage was to look at the “surrounding context of the policy document”. In doing so His Honour found various factors in support of Asteron’s interpretation, one of which was the separate trauma benefit being paid on diagnosis of the illness. It was stated, “there would be considerable, and in my view illogical, overlap between the terminal illness benefit and the Trauma Recovery option if Mr Catherwood’s definition was accepted”.

It was for Mr Catherwood, amongst other things, the approach should be that “while what makes sense from a commercial or “business common sense” perspective is a potentially important consideration, the Court should not conclude that a contract does not mean what it says simply because, on its plain or obvious meaning, the contract seems overly favourable to one party. Where contractual language, viewed in the context of the document as a whole, has an ordinary and natural meaning, a conclusion that it produces a “commercially absurd” result (and therefore needs to be interpreted differently) should be reached only in the most obvious and extreme cases”.

Dunningham J concluded, “In my view, it is clear that the definition of “terminal illness” and “terminally ill”, construed objectively, is intended to take account of available medical treatment and that is the only reasonable interpretation available. It would be highly strained, and artificial to suggest an insured was entitled to a terminal illness benefit when treatment was available which meant the insured was not likely to die within 12 months.”

His Honour also found his conclusion generally supported by two Australian cases (although the policies in those cases contained different definitions to the present), Tower Australia Ltd v Farkas[2] and Galaxy Homes Pty Ltd v National Mutual Life of Australia Ltd[3]. In Farkas it was said “To refuse to take account of available treatment in any and every case … would be to convert the Policy into a lottery ticket without textual justification and contrary to a fair, commercial and reasonable reading of it.”

However the decision leaves open for another day, the question of the extent that an insured may have to go to in terms of accepting available treatment in order to qualify for the benefit.  His Honour said, “Other cases may be problematical for different reasons. For example, an illness might befall a person whose financial circumstances made it uncertain whether he or she could and/or would choose to have access to treatment without which there would be a high likelihood of death within 12 months. Another hypothetical might involve an illness treatable through blood transfusion that befell a person whose religious beliefs made it unlikely that a transfusion would be accepted. I imply no conclusion in relation to those hypotheticals”.

We understand that Mr Catherwood is appealing the decision.

[1] [2022] NZHC 3296

[2] [2005] NSWCA 363

[3] [2013] SASCFC

For further information, please do not hesitate to contact us.

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