On 17 December 2010, the NSW Supreme Court delivered its decision in Apostolovski v Total Risk Management [2010] NSWSC 1451.1 This judgment highlights the need for superannuation trustees to adopt a sound and timely case management and decision-making process.

Facts and main findings

The case concerned Total Risk Management Pty Ltd’s (Trustee) handling of a claim by a member of the BHP Billiton Superannuation Fund (Fund) for a total and permanent disablement (TPD) benefit. The key question for determination was whether interest and damages were payable by the Trustee due to the lengthy delays in consideration of the member’s claim.

The member first injured his back on 25 December 1994 and again on 16 February 2000. The member first informed the Trustee that he wished to make a claim for a TPD benefit on 29 November 2005. On 29 March 2006, the Trustee responded to the member, saying that the Trustee had requested information from the employer in relation to the claim and acknowledged the member’s extreme financial pressure.

From 10 August 2006, the Trustee had on-going communications with the Fund’s insurer (Comminsure) and former insurer (AMP Life) regarding who was ‘on risk’. On 23 October 2006, Comminsure asserted that it was not on risk. The claim was then referred to AMP Life and on 16 March 2007, AMP Life denied that it was on risk. On 15 June 2007, Comminsure accepted that it was on risk but denied the member’s claim on 25 March 2008. Subsequently, the Trustee denied the member’s claim on 10 July 2009 but finally accepted the claim on 12 November 2010 ‘just days before the trial’.

The court held that there was ‘no evidence’ that the Trustee sought an early decision by Comminsure in light of the financial pressures being experienced by the member or that the Trustee sought an early decision from both insurers when the claim was first submitted.

On 17 December 2010, the court found that due to the ‘gross’ delay in the Trustee considering the member’s TPD claim, the Trustee was liable to pay:

  • $89,571.93 in interest, and
  • $200,000 in damages for loss caused to the member as it had failed to exercise the required standard of care under trust law and under section 52(2)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).  

Decision

When should interest on the TPD benefit start to accrue?

The member argued that a decision by the Trustee ought to have been made by 18 November 2006 and therefore interest should run from that date. The member argued that this date was the one to be used on the basis that the Trustee should have approached both insurers at the time of the initial claim and that this date still allowed a ‘reasonable time’ from Comminsure’s initial decision that it was not on risk. The Trustee argued that it was reasonable for it to take until 10 July 2009 to decide the TPD claim, being the date of the Trustee’s first rejection of the claim.

Justice Gzell held that it was ‘impossible to nominate a finite date by which the Fund should have finalised its investigations and obtained Total Risk’s decision on the claim’ but held that the member’s ‘proposed date from which interest should run is closer to the mark’.

Justice Gzell held that the Trustee was liable to pay interest on the TPD benefit from 7 September 2007 on the grounds that:

  • the Trustee was aware that the member was under extreme financial pressure, and
  • if the Trustee had analysed Comminsure’s first refusal (on 23 October 2006 on the ground that it was not on risk) and told Comminsure that it considered Comminsure was on risk, the 10 month period it took for Comminsure to consider and reject the claim would most likely have run from 7 November 2006 (when the Trustee sent the letter to the member) until 7 September 2007 – and not from 3 May 2007 until 25 March 2008.  

Are damages payable?

Breach of trustee duties: Applying the High Court’s decision in Finch v Telstra Super Pty Ltd [2010] HCA 36; (2010) 84 ALJR 726, Justice Gzell held that a decision by a trustee about the likelihood of a member ever engaging in gainful work was an element in the performance of a trust duty. Accordingly, it is not a discretionary decision in the sense used in Karger v Paul [1984] VR 161.

Justice Gzell held that, by 7 September 2007, the Trustee had breached its duty to act with the same degree of care, skill and diligence as an ordinary prudent person would exercise by being ‘grossly in excess of the period any ordinary prudent man of business would take to come to a decision that [the member] was entitled to a permanent disablement benefit out of the Fund’. The factors Justice Gzell relied upon in reaching this conclusion were:

  • the Trustee did not examine Comminsure’s first refusal (on 23 October 2006 on the ground that it was not on risk) and simply accepted Comminsure’s response and sent the claim to AMP Life causing a 10 week delay
  • the Trustee was aware that the member was in desperate need of money to pay out his mortgage (the member’s solicitor and finance broker repeatedly wrote to the Trustee about this issue)
  • the Trustee did not place any pressure on Comminsure or AMP Life to make a decision
  • the Trustee did not explain the ‘gross delay’ after 7 September 2007 in accepting the member’s claim, and
  • an independent claims assessor made an urgent assessment of the claim in 14 days.  

Accordingly, Justice Gzell found that the Trustee failed to act with ‘reasonable dispatch’ which was a breach of fiduciary duty and, as a consequence, the member was entitled to equitable compensation.

Breach of section 52(2)(b) of the SIS Act: The member also claimed damages against the Trustee under section 55(3) of the SIS Act for breach of the covenant in SIS Act section 52(2)(b) that a trustee must exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide.

For the same reasons set out above, Justice Gzell held that the Trustee breached section 52(2)(b) and, therefore, the member was entitled to recover his loss or damage from the Trustee under section 55(3). He also made the following observations:

  • Section 55(3) of the SIS Act (the right of recovery for loss or damage as a result of a contravention of a covenant) is not limited in its operation to sections 52(2)(f) and (g) (the covenants regarding formulation of an investment strategy).
  • In relation to the standard of care in section 52(2)(b) of the SIS Act:
    • Justice Gzell doubted that the words ‘for whom the trustee feels morally bound to provide’ adds any stringency to the trustee’s obligation, and
    • it is likely to be no different from the standard of care imposed by the general law.  

Exoneration of the Trustee: The Trustee sought relief under section 310(1) of the SIS Act which states:

If, in a civil proceeding against a superannuation official for official misconduct in a capacity as such a person, it appears to the court that the official is or may be liable in respect of the official misconduct, the court may, if subsection (2) is satisfied, relieve the official either wholly or partly from the liability, on such terms as the court thinks fit. (emphasis added)

Under section 310(2), relief is available if the official has acted honestly and having regard to all the circumstances of the case, including those connected with the official’s appointment, he or she ought fairly to be excused for the official misconduct.

Justice Gzell noted that the term ‘superannuation official’ is defined to include a trustee of a superannuation entity and an officer of a corporate trustee of a superannuation entity. Justice Gzell held that section 310(1) ‘is suggestive of a limitation to individuals’ and does not apply to a corporate trustee. We note that these comments are obiter dicta as Justice Gzell concluded that this provision would not apply to the present case due to the Trustee’s gross lack of diligence.