Recent amendments to the Insurance Contracts Act 1984 (Cth) (ICA) provide some relief to life insurers, particularly in relation to the remedies available for non-disclosure.  Amendments to section 29 and other consequential changes go some way to addressing a regime that many considered to be unduly weighted in favour of insureds.

In the interim, the recent Western Australian decision in Graham v Colonial Mutual Life Assurance Society Limited (No 2) [2014] FCA 717 highlights the difficulties insurers face in obtaining redress for seemingly blatant non-disclosure. In any event, many of the difficulties encountered by the insurers in this case will remain under the new ICA regime.

The misadventure begins

On 16 January 2010, Mr Elwaly of Wattle Grove, Western Australia, died in unfortunate circumstances and as an unintentional consequence of his own seemingly deliberate actions.  Elwaly’s accounting business was experiencing financial difficulties and, in an apparent attempt to destroy computer and business records, he set fire to the premises.  Elwaly subsequently perished in the blaze with the deputy state coroner later determining the cause of death to be ‘smoke inhalation and burns that arose by way of misadventure’.

Several years earlier, Elwaly applied for a Total Care Plan policy with Comminsure (the Policy).  Elwaly was required to fill out an application, which included a number of questions.  At the time he had a long medical history7 which included medical consultations in respect to alcohol consumption (albeit as an incidental issue to obesity), depression (he had been prescribed antidepressants on several occasions) and numerous fainting episodes (some of which required hospitalisation).

Notwithstanding his medical history, Elwaly answered the following questions (and others regarding any other condition or prescribed medication) in his application in the negative:

Have you ever used or injected yourself with any drug not prescribed by a doctor or received counselling or treatment for the use of alcohol or drugs?

Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following: …Depression or mental disorder (Including but not limited to stress, anxiety, panic attacks, behavioural or nervous disorders)?

Have you ever had or sought advice or treatment, experienced symptoms or suffered from any of the following: Epilepsy, fits of any kind, fainting episodes or recurring headaches or migraines? … (emphasis added)

A period of approximately 5 months passed before the Policy was entered into.  Elwaly signed a ‘Declaration of Continued Good Health’ on 12 May 2007, prior to the issue of the policy.  Elwaly had continued to seek medical advice from his doctor during this period in respect of depression and anxiety, as recently before the declaration as 7 May 2007.

Following his death, Elwaly’s wife brought a claim for the Life Care Benefit under the Policy.  Comminsure declined the claim and avoided the Policy under s 29(2) of the ICA on the basis that Elwaly had fraudulently breached his duty of disclosure in respect of his medical history.  Comminsure asserted it would never have entered into the Policy had Elwaly disclosed the extent of his medical history. 

Ms Graham commenced proceedings against Comminsure.

Twists and turns

Knowledge and non-disclosure

Section 21 of the Insurance Contracts Act 1984 (Cth) (ICA) provides:

  1. Subject to this Act, 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:
    1. 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
    2. A reasonable person in the circumstances could be expected to know to be a matter so relevant. …(emphasis added)

In assessing whether Elwaly had breached his duty of disclosure, McKerracher J assessed the relevant medical history in light of the questions extracted above.  His Honour paid particular attention to what was 'known' by the life insured.  He noted the majority decision of the High Court in Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (In Liq)8 to the effect that 'knows' means more than 'believes', 'suspects' or even 'strongly suspects'.9

Applying this reasoning, McKerracher J considered Elwaly had not failed to disclose his medical consultations concerning alcohol consumption as alcohol consumption was only an incidental issue to the primary purpose of the consultations – his obesity.  Elwaly's drinking was only ever raised in the context of other consultations or counselling (marriage counselling) and it was not affecting his health. The evidence adduced by Comminsure in this regard was therefore considered inadequate.10 

In respect to Elwaly's representation that he had never suffered depression, McKerracher J held Elwaly was not fraudulent as the question was directed to 'disorders'.  In any event, his Honour determined that, based on the medical evidence put forward by Ms Graham, Elwaly had not suffered from 'depression' per se but instead experienced 'reactive depression' from stress and anxiety based on life events (such as business troubles and having a new baby).  Elwaly's general practitioner gave evidence that he had only prescribed Elwaly anti-depressants in a low dose intended to ease stress. 

In these circumstances, his Honour concluded that Elwaly would not have 'known' that this aspect of his medical history was relevant to Comminsure.11 This was despite 'depression' being clearly differentiated from 'mental disorder' in the application form (including separate references to mere 'stress' or 'anxiety') and Elwaly being  prescribed anti-depressant medication on numerous occasions. 

In contrast, Elwaly was held to have made a fraudulent misrepresentation regarding whether he had ever experienced symptoms or suffered from fainting.  Elwaly had suffered numerous fainting episodes in the previous decade, a number of which required hospitalisation.  McKerracher J held that Elwaly's failure to disclose this aspect of his history was 'at the very least careless, but given the specific nature of the question and his history, … his answer was reckless and therefore fraudulent within the meaning of Section 29(2) of the ISA'.12

Did it make any difference?

However, for Comminsure to avoid the Policy under s 29(2) it needed to also establish that it would not have entered into it had the duty of disclosure been complied with. Section 29 of the ICA provides:

  1. This section… does not apply where:
    1. the insurer would have entered into the contract even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into; or … 
      Insurer may avoid contract
  2. If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract… (emphasis added)

Given his Honour's findings regarding non–disclosure, the only relevant aspect of Elwaly's medical history remaining was his fainting episodes.  Comminsure asserted it would not have entered into the Policy had it known the full extent of such episodes.
However, McKerracher J considered that Comminsure's actual underwriting process (including evidence from the relevant underwriter) and internal correspondence did not support this assertion.  Comminsure had failed to request a full medical history despite obvious shortcomings in the medical information initially provided (the medical report only covered the past 2-3 years).  Further, obvious errors in the 'Declaration of Continued Good Health' were not followed up leading to the conclusion that Comminsure was already satisfied with the risk.13

Given his Honour's finding that Comminsure would have entered into the Policy even if Elwaly's fainting episodes had been fully disclosed,  the notorious 'little bit of fraud' provision (s31 of the ICA) did not come into play.

Public Policy

Finally, Comminsure contended that Elwaly's death arose during his commission of a serious crime and the Court should not assist a party who founds his cause of action on an immoral or illegal act.  McKerracher J adopted a narrow view, finding that the death was not the result of arson (if established), but rather the subsequent entrapment resulting in asphyxiation from smoke inhalation. This outcome was unforseen, unexpected and unintentional.

Further, his Honour noted the Policy did not contain a general exclusion for death caused by deliberate or criminal acts and held that no such exclusion could be implied into the Policy.  The Policy merely contained the common exclusion in relation to suicide within a year from commencement. Accordingly, his Honour dismissed Comminsure's assertion that the claim should not be allowed for public policy reasons.

Avoiding the issues

ou have a minuteThe judgment of McKerracher J demonstrates the myriad of issues that must be overcome (or avoided) before a life insurer can avoid a policy, particularly prior to the ICA amendments.  The insurer must first establish non-disclosure and often fraud (given the 3 year time-frame to rely on innocent non-disclosure to avoid a contract in s 29 of the ICA14).  This may be a difficult task following the approach in this instance as to what is known by an insured and known to be a matter relevant to the insurer.

Even where fraudulent non-disclosure is established, the insurer must still establish that it would not have entered into the Policy if proper disclosure had been made.  This can be difficult if the insurer cannot establish both clear underwriting guidelines/procedures and a practice of following them. Section 31 also remains as a final avenue for a ‘little bit of fraud’ to be forgiven.

In light of these difficulties, which will remain a legacy issue and in any event continue to be pertinent to many aspects of a claim despite changes to the ICA, this decision serves as a timely reminder for insurers to ensure:

  • underwriting guidelines clearly set out what risks are, and are not, acceptable
  • guidelines and procedures are followed (including documenting compliance)
  • all application forms are checked to ensure they are correctly completed and executed (to the extent this can be determined)
  • any gaps in medical histories or other questions arising during the underwriting process are diligently followed up.