‘Court cases you should know about’

A series of court cases:Protecting yourself and your clientsZurich Financial Services Australia Limited

This information is current at its date of publication. It does not constitute legal advice and should not be relied upon. Advice should be sought on particular matters. Zurich does not accept responsibility for any errors in or omissions from this publication. This presentation may not be reproduced without prior written consent of Zurich Australia Limited. The summary information contained in the following presentation is general in nature and is only intended for use of professional advisers. It does not take into account the objectives, financial situation or needs of any person. These factors should be considered before acting on this information. The information in this presentation may not be applied by Zurich in every matter, as claims are assessed on an individual case by case basis.

Important information

Agenda

How insurance claims affect you

What the law says about disclosure and its implications for advisers

Case studies: learning from the past

Summary and conclusions

Key considerations in insurance claims

The one key issue that continues to arise at claim is non-disclosure and misrepresentation:

Source: Financial Ombudsman Service (FOS) 2008-2009 Annual Review

Key considerations in insurance claims

The one key issue that continues to arise at claim is non-disclosure and misrepresentation:

How can this impact you and what can be done about it?

How can you better protect yourself and your clients?

What are the rights of an insurer, insured and adviser?

What issues define past cases of non-disclosure and misrepresentation and how can you learn from them?

Summary of Disclosure:

What is it and what does the law say?Insurance Contracts Act 1984.

Section 21

A policyholder has a duty to disclose any known relevant information that:

Could affect the insurer’s decision on whether to accept the application for insurance

Could affect the insurer’s decision on what terms to accept the application

Section 26 excludes− reasonable belief that it was true− reasonably known not to be relevant

A misrepresentation is a statement made by a person in connection with a prepared contract of insurance that was in fact untrue

Remedies for Non-Disclosure:

What is it and what does the law say?Insurance Contracts Act 1984; Section 29: KEY CLAUSES

Section 29(3): The insurer can avoid the policy - “If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract”

Section 29(4): a misrepresentation or non-disclosure could, alternatively mean that the insurer may, within 3 years, reduce the sum insured in accordance with a specified formula based on the insurers hypothetical premium.

Section 29(1): Fraud no 3 year period

How does the law apply to you?

The insurer’s, the client’s and your obligations

Your role in explaining the duty of disclosure to the client (insured)

The consequences of client (insured) failure to fulfil duty of disclosure

Your role in outlining the ‘risks’ for the client (insured)

Is the non-disclosure risk for replacement policies or increases of a lesser concern?

−Consider the recommencement of 3-year non-disclosure period

Frazer v NMLA 2010 NSW SC45April 2010NSW Supreme Court

“..the authority to charge the account is but part of the proposal put forward by the assured and unless and until the proposal is accepted and the insurer issues a policy, there is no concluded contract”

Frazer v NMLA: Key considerations

Policy commencement / period (time) of underwriting

Non-disclosure (of depression diagnosis)

Misrepresentation (of bowel condition)

Longevity of the insured (client’s) ‘duty of disclosure’

The role of the adviser

Frazer v NMLA: Background

Mr Frazer (a mining industry worker) applied for income protection insurance from the National Mutual Life Association of Australasia on December 11, 2007

The insurer responded with a policy that contained an explosives exclusion

The exclusion was outlined to Mr Frazer’s adviser in an ‘Acceptance of Revised Terms’ form

Mr Frazer signed this new form on December 21, 2007

Frazer v NMLA: Background

The form was received by the insurer on Jan 8, 2008 and the policy was issued on Jan 11, 2008

But on January 4, 2008, Mr Frazer was diagnosed with depression and claimed on the insurance

The claim was refused and the insurer sought to avoid the policy under Section 29(3) of the Insurance Contracts Act (1984)

Frazer v NMLA: Timeline

11 Dec 2007

Mr Frazer consulted over bowel concerns

4 Jan 2008

Mr Frazer diagnosed with depression. Submits claim

10 /11 Dec 2007

Mr Frazer made the initial application / signed for initial credit card charge

21 Dec 2007

Mr Frazer signed ‘Acceptance of revised terms’

8 Jan 2008

Revised terms received by insurer

11 Jan 2008

Policy issued to Mr Frazer

Frazer v NMLA: Arguments

Insurer argued:

Mr Frazer claimed before the policy commencement

date of Jan 8, 2008

Mr Frazer did not disclose and/or misrepresented:

This knowledge would have prevented the insurer from entering the policy

Consultations with medical practitioners prior to Dec 11, 2007

Diagnosis of depression and cessation of work prior to January 2008

A referral to a colorectal specialist prior to Dec 11, 2007

Frazer v NMLA: Arguments

Insured (Frazer) argued:

The depression diagnosis did not occur until after the contract’s formation on Dec 21, 2007

He did not seek medical consultation for depression prior to Dec 11, 2007

The answers he gave in application he believed to be true:

Mr Frazer did not consider the referral to the colorectal specialist an issue worth mentioning

The Jan 4, 2008 diagnosis of depression occurred once he had signed the ‘Revised Terms Form’

Frazer v NMLA: Outcome

The court found…

The policy was not ‘entered into’ or formalised until Jan 11, 2008

Mr Frazer was obliged to disclose his diagnoses of depression on Jan 4, 2008

Mr Frazer was in breach of his duty to the Insurer under Section 21 of the ICA

Mr Frazer was found to have misrepresented the nature of his bowel disorder

The insurer would have deferred or rejected the initial application if it were aware of his bowel condition and depression

Frazer v NMLA: Issues for advisers

Policy commencement dates

The terms of the pre-contractual documents (ie: PDS and the ‘Acceptance of Revised Terms Form’)

“..the authority to charge the account is but part of the proposal put forward by the assured and unless and until the proposal is accepted and the insurer issues a policy, there is no concluded contract”

Frazer v NMLA: Risk Mitigation

Gather health info prior to application (fact find)

+ check past applications

Use of electronic

submission (eApp + forms)

Ensure ‘duty of disclosure’

clearly outlined at application

Copy of application to client before policy issue

(reminder on Duty)

11 Dec 2007

Mr Frazer consulted over bowel concerns

4 Jan 2008

Mr Frazer diagnosed with depression. Submits claim

10 /11 Dec 2007

Mr Frazer made the initial application / signed for initial credit card charge

21 Dec 2007

Mr Frazer signed ‘Acceptance of revised terms’

8 Jan 2008

Revised terms received by insurer

11 Jan 2008

Policy issued to Mr Frazer

Phillips v ING Life Limited2009; FCA

“Section 29(4) permits an insurer, in circumstances where an insured has failed in the duty of disclosure under s 21 of the Act or made misrepresentations, to vary the sum insured in accordance with a prescribed formula. In a nutshell, the formula results in a reduced sum insured when a higher premium would have been charged for the same cover had the true facts been known”

Phillips v ING Life Limited:

Key issues

Duty of disclosure

Misrepresentation

Use of a paramedical provider

Issue of waiver and insurer’s obligations

Terminology in insured’s medical condition

S29 (4): Sum payout variance

Phillips v ING Life Limited:

Background

Mr Phillips applied for a life insurance policy with ING in October 2002 and underwent a medical examination as requested

In 2003 Mr Phillips developed & died of esophageal cancer

Mr Phillip’s wife made a claim for $700k under the policy

The insurer claimed the Mr Phillips had failed to disclose his condition (diagnosed in 1997)

As such the insurer reduced the payout to $466,667 (as a loading would have applied)

The applicant commenced an application to the Federal Court claiming the difference between the reduced payout and the full amount payable

Phillips v ING Life Limited:

Timeline

October 2002

Mr Phillips applied for life insurance with ING

2003

Mr Phillips developed a malignant esophageal ulcer

2004

Mrs Phillips claimed on policy

1997

Mr Phillips diagnosed with Barrett’s oesophagus

2001

Mr Phillips had the last of three gastroscopies – no cancer

Phillips v ING Life Limited: Arguments

Insurer argued:

Mr Phillips failed to disclose and misrepresented

information

ING would have changed the terms of the application:

Reduced sum payout based on misrepresentation:

Increased the premium on the contract by 50%

Under Section 29(4): “Failure to disclose or misrepresentation allows a varied sum in accordance with prescribed formula”

Phillips v ING Life Limited: Arguments

Claimant (Mrs Phillips) argued:Mr Phillips could not ascertain, and therefore outline to the insurer, the specific term of his medical condition

Failure of Notice under S29(4)

ING waived compliance with the Duty of Disclosure as the insurer accepted:

‘crossed out’ sections of the application

absence of specific questions about Barrett’s condition

No misrepresentation – ‘condition’ vs. ‘illness’ or ‘injury’

Phillips v ING Life Limited:

Outcome Non-Disclosure: The court found that the insured had

not complied with their Duty of Disclosure, because:- He knew/had awareness of his ‘condition’- Undertaking medication and surveillance

Misrepresentation: The court found that the insured gave incomplete answers on his personal statement and with the paramedical provider- Vague terminology: ‘In the near future’

Waiver of compliance: The court found no waiver of compliance with the duty of disclosure

S29(4) Reducing the amount payable: The court dismissed the application for the payout difference and failure of Notice

Phillips v ING Life Limited:

Risk Mitigation

Adviser conducts own thorough investigation

October 2002

Mr Phillips applied for life insurance with ING

2003

Mr Phillips developed a malignant esophageal ulcer

2004

Mrs Phillips claimed on policy

1997

Mr Phillips diagnosed with Barrett’s oesophagus

2001

Mr Phillips had the last of three gastroscopies – no cancer

Gather health info prior to application (fact find)

+ check past applications

Ensure ‘duty of disclosure’

described in plain language

** Use this case as an example

(choice at uw)

Phillips v ING Life Limited:

Learning points

S29(4) is an effective tool for insurers and notice need not be provided to the insured

Full-disclosure of all medical history and knowledge of any potential conditions

- Misrepresentation also arises from 'incomplete' answers

Duty of disclosure is not restricted to matters related to specific questions

Additional cases advisers should be aware of

Financial OmbudsmanCase 18995

Questionable advice and replacement policies

Financial Ombudsman (18995):

Case details

The complainant claimed the adviser failed in his duty of care

The complainant claimed the adviser had misrepresented the policy

The complainant demanded compensation of $235k+ from the insurer and adviser when he underwent heart surgery

The claim against the adviser failed because:

- The complainant did not suffer any loss

- The complainant had necessary details and understanding of

policy under question

Financial Ombudsman (18995):

Implications for advisers Replacement policy and ‘trauma’ definition:

- Adviser’s questions and recommendation process- Adviser’s research

Duty of care:- The probability of being found negligent of ‘duty of care’ to

a client- The case highlights the importance of file notes and the link between client needs and recommendations

Documentation:- Lack of signatures on documentationProfile client for risk (quality Vs

price)

Ensure advice (SoA) reflects

client objectives

Replacement policy

implications – made clear

* Data collection -signed

* Comms - retrievable

“The purpose of the policy is to give indemnity not where a person suffers a heart attack in lay or medical parlance, but where a person suffers a heart attack as defined”

Medical Terminology

Larwint Pty Ltd vs Norwich Union Life Australia LtdVic Supreme Court, 2007

Larwint Pty Ltd vs Norwich Union Life Australia Ltd

Case details Claim for heart attack declined on the basis that the plaintiff

had not suffered a heart attack as defined under the policy “The purpose of the policy is to give indemnity not where a

person suffers a heart attack in lay or medical parlance, but where a person suffers a heart attack as defined”

The claim was dismissed by both the Lower Court and Court of Appeal

Implications for advisers Be aware of the gap in medical terms as defined under

policies versus general medical usage Ensure clients understand it’s about the definitions, not

about the ‘headings’

“If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract”

Period of deferral

Davis v Westpac Life Insurance Services Ltd NSWCA 175, 2007

Davis v Westpac Life Insurance Services Ltd

Case details Westpac avoided the policy on the basis it would not have issued

cover if known about initial referral Davis challenged the avoidance under S29(3) The submission was rejected David applied to Court of Appeal, which was dismissed Critical issue: whether s29(3) imposed a time limit decision (is a

deferral good enough?)

Implications for advisers S29(3) does not impose a time limit decision on policy avoidance An insurer can prove no cover offer (or avoid cover) based on

deferral

Davis diagnosed with potential Sleep Apnoea

9 days later Davis applied for policy (Nov 2001)

Davis confirmed with Sleep Apnoea (Jan 2002)

Davis claims under policy (June 2003)

Westpac avoids policy (Jan 2004)

ConclusionYour role: Mitigating risk for yourself, your business and your client

Articulating the basis of advice and ‘quality’ recommendations

Managing replacement policies−Recommencement of non-disclosure period−Communicating pros and cons

More effective (life) risk-profiling−Budget / Value / Quality

Role of electronic applications and communication

The importance of speed in underwriting process

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