TPD insurance offered to employees through their superannuation fund – where do you draw the line?

Harrison v Retail Employees Superannuation Pty Limited and Anor [2015] NSWSC 1665 (10 November 2015) –https://www.caselaw.nsw.gov.au/decision/564119efe4b003c5681fa74b

An increasing number of Australians obtain total and permanent disability (TPD) insurance through their superannuation fund, often with little awareness of it.  Life insurers frequently form relationships with the trustees of superannuation funds in order to offer group insurance products, including TPD policies, which cover any member of the fund.  Insurers tend to offer these policies to the funds in bulk and at a discount.  As most Australian employees are entitled to stipulate the fund into which compulsory employer contributions are made on their behalf, the superannuation funds are in competition with each other for members, and insurance products can provide an attractive incentive for employees considering a fund.

Depending on the terms of the insurance product, the employee may pay for the premiums in pre-tax dollars.  Such policies often have “automatic acceptance” terms so that the employee is not required to attend a medical examination or even in some cases to disclose pre-existing conditions.

In a recent judgment handed down in the Supreme Court of NSW, Lindsay J has clarified the scope of TPD insurance cover, the time at which the relevant event crystalized, and the obligations lying on both the insurer and the trustee of the superannuation fund to ensure that the insured is aware of his or her rights.  The decision will be of interest to insurers and their advisors.  Group disability income insurance in superannuation has a highly fluctuating financial performance in Australia (see APRA Quarterly Life Insurance Performance June 2015 –http://www.apra.gov.au/media-centre/media-releases/apra-releases-quarterly-life-insurance-performance-statistics-june-2015) and Actuaries magazine in August 2014 described the recent TPD claims experience as “very poor” – see https://www.actuaries.asn.au/Library/AA/2014/Actuaries192AUG2014WEB.pdf at page 7.

Trustees of superannuation funds will also be interested in the decision, as it arguably reduces the risk to them for a failure to inform members of their rights and obligations under a TPD policy.

Background

The plaintiff Mr Harrison commenced employment on 1 March 2000.  He thereby became entitled to cover under a group policy of insurance provided through his Superannuation fund.¹  The “Member Account Summary” of the Superannuation Fund notified him as having joined the fund on 17 March 2000.  The employer made its first mandatory contribution to the Super Fund on his behalf on 5 June 2000 and continued to make contributions until the end of his employment.

The Superannuation fund offered a number of benefits to its members, including TPD cover with “automatic acceptance” (the TPD Policy).  That automatic cover was for a period of 12 months only, unless the employee chose to lodge an application form applying for longer cover, with premiums to be paid from his or her superannuation balance.  Neither the insurer nor the superannuation fund informed Mr Harrison that he needed to lodge an application form in order to extend his cover.

Unchallenged medical evidence stated that Mr Harrison became permanently incapable of gainful employment for which he was reasonably qualified by education, training or experience on 1 April 2001.  He was thus “Totally and Permanently Disabled” as defined by the TPD policy.  Nevertheless he soldiered on, attending work until he gave due notice to his employer and finished up on 6 November 2001.

At some point after leaving work, Mr Harrison claimed under the TPD policy for a lump-sum benefit of $43,000.  The insurer refused to pay the claim, and Mr Harrison sued the superannuation fund and the insurer in the Supreme Court of NSW.  The trustee of the superannuation fund entered a submitting appearance.  Mr Harrison contended inter alia that he was covered by the TPD Policy, or if not, that he was entitled to relief under section 54 of the Insurance Contracts Act 1984 (Cth).  The case came before Lindsay J for hearing.

Whether Mr Harrison was covered by the policy

Lindsay J found that, on the definitions contained in the TPD Policy, cover ran from 5 June 2000 (when the first mandatory superannuation contribution was made on his behalf by his employer) for 12 months until 5 June 2001.  On this basis, the insurer disputed that Mr Harrison was entitled to receive a payout.

Clause 12 of the policy provided relevantly that the event on which a benefit is payable is:

“disablement where we [the insurer] are satisfied on medical or other evidence that an insured member :

(a)   (i)   has been absent from employment for 6 consecutive months because of sickness or injury; and

(ii)   is so disabled at the start of those 6 months and continuously since that time that the insured member is unlikely to ever engage in any reasonably suitable occupation…”.

The insurer contended that this must mean that the insured cannot be said to have suffered total and permanent disablement until the expiry of the 6 month period.  Since he did not leave work until 6 November 2001, the 6 month period expired on 6 May 2002, which was outside the period of insurance.

However, Lindsay J held that the event occurred at the time that Mr Harrison medically became disabled, because of sickness or injury, from being likely ever to engage in any reasonably suitable occupation, which in this case was 1 April 2001.  Lindsay J held that the requirement for a six months absence from employment is essentially an adjectival (administrative or evidentiary) requirement, not one that controls the meaning of the substantive concept of “disablement”. The grant of insurance cover by reference to “disablement” cannot be derogated from by machinery provisions directed towards an assessment of whether or not there has been “disablement”.

Whether Mr Harrison could be assisted by section 54(1) of the Insurance Contracts Act

Lindsay J also held that if, contrary to his finding, an appeal court were to find that disablement did occur outside the period of insurance, he would nevertheless find that section 54 of the Insurance Contracts Act 1984 (Cth) (the Act) would operate to preclude the insurer from refusing to pay the plaintiff’s claim, for the following reasons:

Section 54(1) of the Act relevantly provides: “where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or some other person, being an act that occurred after the contract was entered into…, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of a claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act….” [emphasis added]

In this case, the “act” was the omission of the superannuation fund to procure from him an application for ongoing TPD cover to submit to insurer.  If this had been done, the undisputed evidence of Mr Harrison was that he would have obtained such cover.  If he had done so, he would have been covered at all times relevant to his claim.

This was in a context where the policy issued by the second defendant was a group policy and, as such, at all material times the policy itself was current.  The insurer thus could not be said to have suffered any prejudice.  This was not a case where, for example a plaintiff lets a policy expire without taking action which was within his power to take.  Rather, neither the insurer nor the superannuation fund had informed the plaintiff that he must lodge an application in order to extend his cover beyond a 12 month period.

Implications

Whilst definitions of total and permanent disability vary across TPD policies, the approach taken by Lindsay J is likely to have wide application.  There will be a greater focus on the precise date at which medical evidence identifies that the requirements for disablement under the policy were met.

This decision also illustrates the manner in which section 54 of the Insurance Contracts Act tends to bring the focus of litigation onto the insurer rather than the trustee of the superannuation fund – in effect, a member of the fund may prevail against the insurer despite a failure by the trustee of the superannuation fund to provide the member with information, a failure in which the insurer had no part.  Therefore, insurers should consider the extent to which they rely on the superannuation fund to pass on essential information about a policy to its members, and to retain records of this.

In the writer’s experience of these type of matters, the records held by trustees concerning information provided to a member in respect of an insurance policy often leave much to be desired.  This simply reflects the reality that an insurer is more likely than a superannuation fund to have the institutional knowledge of what records should be kept of information provided to an insured, and that in some cases the insurer may need to play a greater role in the administration and retention of such documentation.

¹Although it is not made clear in the case report, it seems that this was the default superannuation fund put forward by his new employer.  If the plaintiff did not nominate an alternative fund, then his employer would commence to send compulsory superannuation guarantee payments (currently 9.5% of his salary) to the default superannuation fund on his behalf, and he would become entitled to any other benefits provided by that fund, which may include insurance products.