In brief - Insurers may avoid contracts for fraud and misrepresentation
While it may not always be easy for insurers to avoid a life insurance contract, it is critical that you err on the side of caution when considering your duty of disclosure, particularly in regard to your prior medical history.
Failure to disclose may lead insurer to avoid life insurance contract
Life insurance is serious business. After all, it is designed to ensure that if you die or are permanently injured, you have the security of knowing that your life insurer will pay a claim allowing you to take care of your (and your family's) future financial needs.
However, obtaining life insurance cover is not a simple matter of mindlessly filling out a form and sending it through to the insurer.
The Insurance Contracts Act 1984 (ICA), provides that an insured has a duty to disclose certain matters to the insurer before a contract of insurance is entered into. If an insured fails to do so, section 29 of the ICA allows the insurer to avoid the contract.
So, what matters should be disclosed by a potential insured, and what are the grounds upon which an insurer can avoid the contract?
Insureds must have actual knowledge of matters relevant to disclose
The relevant section of the ICA dealing with an insured's duty of disclosure is found in section 21 ("The insured's duty of disclosure"). It says:
- Subject to this Act [the ICA], an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
- the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
- a reasonable person in the circumstances could be expected to know to be a matter so relevant.
The reference to "knows" in section 21(1)(a) means more than "believes" or "suspects" or even "strongly suspects". It means actual knowledge (see Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd  NSWSC 1006). So, the insured must have actual knowledge of a matter the insured knows would be relevant to an insurer's decision on whether to agree to insure that person.
Whether a matter is a "matter" that the insured knows to be relevant to an insurer's decision making can be gleaned by considering:
- The type of insurance being sought. In the case of life insurance, any information which deals with your medical history is considered a relevant matter to an insurer.
- If an insurer asks a particular question on a proposal form, then that will usually suggest that any information relating to that question would be a matter relevant to the insurer's decision.
- If an insurer has asked certain questions on a previous occasion, such as in the course of completing a prior proposal form.
Section 21(1)(b) takes things a step further and says that even if the insured did not know a matter was relevant, it is enough that a reasonable person in the circumstances would have known the matter was relevant. The reference to the circumstances in section 21(1)(b) has in mind extrinsic factors such as the type of policy in issue, or exposure to advertising, rather than the particular attributes of the insured, such as mental capacity or business skills. (See Twenty-First Malux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd  VR 919, at 925.)
Fraudulent non-disclosure and misrepresentation among grounds to avoid a life insurance contract
Section 29 of the ICA sets out the remedies available to a life insurer in circumstances where an insured has failed to comply with the duty of disclosure or made a misrepresentation to the insurer before the contract was entered into.
Section 29(2) provides that an insurer can avoid a contract if the insured's failure to comply with the duty of disclosure was fraudulent or the misrepresentation was made fraudulently. Fraudulently, in this context, means to provide answers which would have been deliberately false and dishonest to one's knowledge.
For example, if an insured was to answer "no" to medical history questions that in hindsight an insurer asserts should have been answered "yes", an insurer needs to show the answers given were "made with an absence of actual and honest belief in its truth: a deliberate decision to mislead or conceal something from the insurer or recklessness amounting to indifference about whether this occurs". (See Sutton, Insurance Law In Australia, 3rd ed, LBC, Sydney, 1999, para 3.138 cited in Graham v Colonial Mutual Life Assurance Society Ltd (No 2)  FCA 717 at .)
Onus is on insurer to prove fraud
In order to rely on this remedy, an insurer must be able to demonstrate that the fraudulent non-disclosure or fraudulent misrepresentations were relevant and induced it to accept the risk, and that it would not have entered into the contract on the same terms if the matters not disclosed had been disclosed, or the matters misrepresented had been represented correctly. (See Tyndall Life Insurance Co Ltd v Chisholm (2000) 11 ANZ Ins Cas 90-104 at .)
Section 29(3) allows an insurer, within three years after the contract was entered into, to avoid the contract if the insured fails to comply with the duty of disclosure or misrepresented a fact prior to the contract of insurance being entered into.
The non-disclosure or representation can be made honestly and unintentionally, there is no requirement in this provision that the non-disclosure or representation be fraudulent.
In order to avoid the contract under section 29(3), an insurer must show:
- that a reasonable person in the circumstances could be expected to have known that the matter (which was not disclosed) would have been relevant to the decision of the insurer whether to accept the risk, or
- that a reasonable person in the circumstances could be expected to have known, that the statement (which was misrepresented) would have been relevant to the decision of the insurer whether to accept the risk.
The insurer is not entitled to avoid the contract if it discovers the innocent misrepresentation or non-disclosure more than three years after entering the contract.
Bundled life insurance policies: what happens when these are avoided?
Contracts of life insurance often provide for more than one type of cover, i.e. life cover as well as cover in the event of total and permanent disability (TPD).
Section 27A, which was inserted into the ICA on 28 June 2013, allows an insurer to "unbundle" a life insurance policy (that is, treat them as if they comprise two or more separate policies) for the purpose of seeking a remedy for non-disclosure or misrepresentation. This means that a combined policy offering life cover and TPD cover can be split allowing an insurer to avoid the TPD cover without having to avoid the life cover.
This amendment is retrospective. Schedule 5 of the amending Act (Insurance Contracts Amendment Act 2013) states, in respect of the Section 27A amendment, that: "The amendments made by this Part apply to a contract of life insurance whether originally entered into before or after the commencement of this item."
Past medical history particularly important to disclose
One of the most recent court decisions, Graham v Colonial Mutual Life Assurance Society Limited (No 2)  FCA 717, which considered the application of sections 21 and 29 of the ICA, found in favour of the insured's beneficiary, demonstrating that the insurer's ability to avoid a life insurance contract may not be an easy one. This is even in circumstances where it appears on its face to be a clear case of non-disclosure.
Nevertheless, an insured should always think carefully when answering questions on an insurance application form, and, if in doubt, err on the side of caution about what should be disclosed, particularly when it comes to disclosing prior medical history when taking out life insurance.