Insurer successfully avoids liability under a life insurance contract on the grounds of fraudulent misrepresentation.

In Issue

Whether insurer entitled to avoid a contract of insurance because of fraudulent misrepresentation pursuant to Insurance Contracts Act 1984.

The Background

In 1998, the applicant, John Montclare (Montclare), applied for life insurance through Rivkin Direct Management Pty Ltd (Rivkin) from Metlife Insurance Ltd (Metlife), formerly known as Citicorp Life Insurance Ltd (Citicorp), over the life of his partner, Graeme Shilton (Shilton).

As part of the application process, Montclare was provided with a Customer Information Brochure (the brochure) issued by Citigroup and Rivkin. The brochure indicated that the insurance sought was linked to a group life master policy, which was never provided to Montclare. The brochure contained an application form which specifically asked whether Shilton had ever suffered from a psychiatric condition, in answer to which Shilton responded, ‘no’.

In January 1999, the application was approved by Citigroup and Montclare was issued a certificate of insurance by Rivkin for the amount of $300,000 and later increased to $1.1 million (the first and second certificates).

On 22 January 2001, Shilton committed suicide and Montclare claimed a life insurance benefit of $1.1 million. Metlife denied the claim pursuant to s 29(2) of the Insurance Contracts Act 1984 (Cth) (the ICA), on the basis that fraudulent misrepresentations were made with respect to Shilton’s medical history prior to the contract of insurance being entered into.

Montclare issued proceedings claiming that the master policy was the relevant contract of insurance, and he was not a party to it, but rather, a third party beneficiary and as such he was not subject to the obligations of disclosure or penalties for misrepresentation under the ICA.

The Decision at Trial

The trial judge concluded the first and second certificates alone constituted the contracts of insurance between Montclare and Citicorp. Consequently, Montclare was considered to be a party to the contracts of insurance and an ‘insured’ within the definition of the ICA and therefore subject to the provisions thereunder. The misrepresentation with respect to Shilton’s medical history was fraudulent and by virtue of s 25 ICA, the misrepresentation by the life insured, Shilton, had effect as though it was made by Montclare. The court was also satisfied that Citicorp would not have entered into the contract had the misrepresentation not been made and that Metlife had validly avoided the contracts of insurance pursuant to s 29(2) of the ICA. The proceedings were dismissed.

The Issues on Appeal

Montclare argued that the judge erred in finding that the first and second certificates constituted contracts of insurance, and that the scheme of insurance under the master policy was never implemented for Montclare.

The Decision on Appeal

The Court of Appeal upheld that the trial judge’s decision.

In reaching this conclusion, the Court of Appeal adopted a different reasoning from the Trial Division, determining that the first and second certificates of insurance did not exhaustively contain the terms of the contract of insurance, but rather the terms of the contract were derived from a range of documents including the master policy, the brochure and the Policy Information Statement.

The Court of Appeal held that whilst the certificates of insurance gave Montclare a right to claim the benefit from Citicorp, the source of the insurance cover was the master policy. The Court of Appeal found that, having reviewed all of the relevant documents, the benefits were payable under the master policy because Montclare participated in the group scheme (subject to the terms of the certificates).

Implications for you

This case reinforces that a contract of insurance may not have its source in a single document and the terms of the contract may be derived from a number of documents. In addition, a contract of insurance may be avoided pursuant to s 29(2) of the ICA where there is non-disclosure or fraudulent misrepresentation and the insurer would not have entered into the contract had the non-disclosure or misrepresentation not been made.