In Preston v AIA Australia Limited [2013] NSWSC 282, the Supreme Court of NSW held that the exacerbation of a prior injury is not sufficient to constitute an ‘Accidental Injury’ and that interim payments made by an insurer do not constitute an acceptance of liability.

The Policy

Mr Preston (plaintiff) held a sickness and accident insurance policy with AIA Australia Limited (defendant), with a period of cover from 23 April 2008 to 29 April 2010. The policy made provision for ‘Disability Income’ benefits to be paid to the plaintiff for a period of up to five years in the event that he became ‘Totally Disabled’.

The ‘Life Insured’ would be ‘Totally Disabled’ if he became unable to perform one or more duties of his occupation as a carpenter due to ‘Accidental Injury’.

The term ‘Accidental Injury’ was defined to mean: …a physical injury which is caused solely and directly by violent, accidental, external and visible means, which occurs while the benefit is in force and which results solely and directly and independently of a pre-existing condition or any other cause in total disablement. …

The term ‘Injury’ was defined to mean: …a physical injury which occurs whilst the Policy is in force and which results solely and directly and independently of a pre-existing condition or any other cause, in Total or Partial Disablement within one year of the date of its occurrence. …

The Sprain

On 6 May 2009, the plaintiff injured his left ankle in the course of his employment. The plaintiff made a claim for entitlements under the Workers Compensation Act 1987 (NSW). The initial diagnosis was a simple sprain injury. Shortly thereafter, gout was diagnosed as a secondary injury.

On 8 July 2009, the plaintiff was referred for a MRI. The MRI revealed that when the plaintiff sprained his ankle he aggravated an earlier injury to that ankle, sparking further degeneration of the joint. That degeneration, hastened by a further injury sustained during physiotherapy, rendered the plaintiff unable to perform the duties of his occupation and resulted in his total disablement.

The earlier injury was sustained in 1996 when the plaintiff fractured both ankles in a single incident. The left ankle required internal fixation with metal screws, compromising its strength and leaving the ankle with a degenerative arthritic condition. This made the plaintiff’s left ankle vulnerable to further injury. The plaintiff had also sustained a chronic tear of the deltoid ligament and an osteochondral lesion of the superior lateral talar dome in 1996, but those injuries were only diagnosed following the MRI on 8 July 2009.

The Pain

On 16 November 2009, the plaintiff made a claim under the policy for ‘Disability Income’ benefits in respect of his total disablement. The plaintiff did not provide the defendant with any evidence in support of his claim. In mid to late 2010, following investigation of the claim, the defendant denied liability to the plaintiff under the policy.

The plaintiff commenced proceedings in the Supreme Court of NSW in respect of the non-payment by the defendant of the ‘Disability Income’ benefits to which the plaintiff claimed an entitlement.

The central issue for determination was whether the physical injury sustained by the plaintiff on 6 May 2009 resulted in total disablement due to an ‘Accidental Injury’. That is: …solely and directly and independently of a pre-existing condition or any other cause.[1] It was not in dispute that the plaintiff was disabled to the requisite degree.

It was apparent on the medical evidence that there were two causes of the plaintiff’s total disablement (the 1996 injury and the 2009 injury), and that the 2009 injury was substantially connected to the 1996 injury. [2] That the first cause (the 1996 injury) occurred well prior to the date of commencement of the policy and not: …while the benefit is in force, was fatal to the plaintiff’s case as it did not come within the introductory words of definition of ‘Accidental Injury’.[3] Similarly, the 2009 injury was not an ‘Accidental Injury’ within the meaning of the policy.

On construction, Lindsay J found that the policy was only intended to protect the plaintiff from the consequences of an accident that occurred during the period of cover. It was not intended to protect against the consequences of a pre-existing condition.[4] That finding is consistent with Giles v National Mutual Life Association of Australasia Limited (1986) 4 ANZ Ins Cas 60-751.

Lindsay J held that the policy did not respond to an event constituting an aggravation of a pre-existing condition, and that it excluded from cover any injury causally connected to an injury sustained prior to its commencement.[5] He held that the total disablement of the plaintiff fell squarely within that category and dismissed the proceeding.

The plaintiff sought to overcome the difficulties presented by Lindsay J’s construction of the policy by contending that the defendant had admitted liability under the policy by depositing $3,224.46 into his bank account on 8 January 2010. That deposit comprised a payment of $2,654.80 referable to ‘Disability Income’ benefits for the period 05/11/2009 to 04/01/2010 and a sum of $569.66 representing a refund of premiums paid under the policy from 5 June 2009 to 4 January 2010.

The plaintiff’s argument was not accepted by the court. At the time the deposit was made, the defendant was not in receipt of the plaintiff’s workers compensation claim file (containing the 8 July 2009 MRI report and other medical reports detailing the nature and extent of the 1996 injury), and had reserved its rights pending receipt of that file and verification of the plaintiff’s medical history. The defendant had communicated its reservation of rights on at least three occasions, on 25 November 2009, 22 January 2010 and 22 February 2010.

Lindsay J found that the earliest date on which the defendant could have verified the plaintiff’s medical history was on 9 July 2010, following receipt from the plaintiff’s solicitor of a medical report dated 28 March 2010.[6] In that report, the plaintiff’s GP recorded his current diagnosis as being complicated by an aggravation of the 1996 injury.[7]

Lindsay J held that the evidence did not permit a finding of fact that the defendant had admitted liability under the policy. However, he commented that had the defendant known of the plaintiff’s medical condition revealed in the 8 July 2009 MRI Report at the time it made the deposit into the plaintiff’s bank account, then: …an inference that the defendant had made an informed decision to accept liability in January 2010 might have been more readily available.[8]

Implications

This decision confirms that each contract of insurance must be construed according to its own terms and with regard to its own factual context and purpose. It also confirms that an insurer that has reserved its rights under a policy may not be taken to have admitted liability by the mere fact of it having made a payment under the policy if, at the time the payment was made, the insurer was not in a position to make an informed decision to accept liability.