What did the judgment decide?

On 21 December 2023 the Federal Court in ASIC v Zurich Australia Limited (No 2) [1] found that Zurich had not breached the duty of utmost good faith (DUGF) in the process by which it avoided an insured’s cover pursuant to s29(2) Insurance Contract Act 1984 (Cth).

• The insured applied for (with the assistance of an advisor) and was granted income protection (IP) and life cover with OnePath Life (now Zurich) (Zurich) in 2016. The cover was subject to a mental health exclusion due to disclosures made.
• In 2018 the insured submitted an IP claim for a right shoulder injury and Zurich commenced paying IP benefits.
• While considering the IP claim, Zurich became aware that the insured had had 6 hospital admissions between 2001 and 2005 for mental health including due to suicidal ideation. This had not been disclosed as part of the insured’s mental health disclosures.
• Zurich subsequently avoided the insured’s IP cover on the basis that had the insured complied with her duty of disclosure regarding her mental health, no IP cover would have been issued. The IP cover was avoided after providing procedural fairness (PF) and considering the insured’s response.
• The insured’s response to PF included that the advisor had told her that she only needed to disclose matters related to her mental health that occurred within 5 years of the application (between 2013 and 2018) and that she thus limited her disclosures.

ASIC’s arguments and Federal court decision

ASIC conceded that Zurich had formed a reasonable conclusion that the insured had fraudulently not disclosed the relevant facts in her application form. ASIC limited its argument to the manner or process adopted in reaching that decision. Specifically, ASIC had three arguments:

• Making reasonable enquiries and giving appropriate consideration:
  
  ASIC unsuccessfully argued that the DUGF required Zurich to enquire with the advisor as to whether the advisor told the insured to limit her mental health disclosures to the previous 5 years. ASIC argued this was required as part of an alleged duty to resolve conflicting bodies of information.
  
  This argument failed. The court found there was no reasonable basis for the insured to conclude that she was only required to disclose her mental health history for the 5 years prior to application. The reasons for rejecting this argument included: that the questions as to mental health in the application were clear in their terms as requiring disclosure as to whether she had “ever” so suffered; that it was implausible that the advisor would have given the advice alleged; that even if it was accepted that the advisor provided “such grossly improper advice”, it is clear that the insured didn’t rely on that advice as she had disclosed mental health issues going back to 1999; finally, the fact that she made further disclosures about a workers’ compensation claim for mental health after being sent the Personal Statement showed that she had reviewed the Personal Statement with care and was itself “cogent evidence” that her misrepresentations regarding mental health was the product of dishonest selectivity, rather than any lack of understanding of the questions asked.

• Identifying and seeking a response regarding specific concerns as to fraud:
  
  ASIC argued that Zurich breached its DUGF by failing, in the PF letter, to adequately notify the insured of its intention to avoid the policy based on fraud.
  
  This argument failed. The court found that the PF letter provided with insured with ample opportunity to explain the circumstances in which the breach of the duty of disclosure occurred, and whether they should be regarded as fraudulent. The PF letter set out each of the answers which Zurich regarded as false, and summarised the medical information showing that the answers were false. Further, the PF letter did not need to, and it was preferable that it did not, state that the insured had been dishonest. Rather the court accepted Zurich’s argument that it was only after the insured’s responded to PF that an insurer could determine whether to rely on Section 29(2) ICA. In any event, as the PF letter made express reference to the possibility of the contract of insurance being avoided, it was obvious to any reasonable reader that Zurich was considering the possibility of avoiding the policy for fraud.

• Informing the insured of her dispute rights and appeal processes:
  
  ASIC argued that Zurich breached its DUGF by failing in the avoidance letter to advise the insured of her rights and the availability of processes, both internally to Zurich and externally, to dispute or appeal the decision to avoid her IP cover.
  
  This argument failed. The avoidance letter had not set out rights of review and appeal however the court found that it was clear that it was intended that such information was to be included in the letter (it was one of the four matters referred to at the beginning of the avoidance letter). The court found the information was omitted by oversight or administrative error, and that whether a failure was deliberate or innocent must be relevant to whether there has been a breach of the DUGF. The court also thought it relevant that the insured was represented by the Financial Rights Legal Centre, whose lawyers, the court found, would have been well aware of the insured’s rights. Finally, to the extent that it might be found that LICOP required an insured to be advised, in these circumstances of their dispute and appeal rights, LICOP does not create legal or other rights and thus a breach of LICOP cannot be actioned in court proceedings.

Implications

The decision has implications in a number of areas:

• Advisor involvement - The court described as inherently implausible the likelihood of an advisor advising an insured to provide more limited disclosure than what an application calls for. This was despite that the insurer didn’t interview the advisor. Insured’s frequently blame an advisor where the duty of disclosure hasn’t been complied with. This judgment supports that an insurer duties don’t require it to interview an advisor in these circumstances, and that a court is willing to find that it is ‘inherently implausible’ that an advisor would advise an insured to not answer the questions in the application truthfully.
• Content of PF letter - A PF letter should set out each of the questions which the insurer says has not been correctly answered and provide a detailed summary of the information that supports that a false answer has been provided. A PF letter also does not need to make an accusation of fraud and the decision supports industry practice that a decision regarding whether fraud has occurred is best made after the response to PF has been provided.
• Duty of utmost good faith - The decision confirms earlier judgments that the DUGF is not a freestanding duty, but is a condition on how existing rights, powers and duties are to be exercised or performed in the commercial world. The court also rejected that the DUGF required an insurer, in the circumstances of this case, to make an obvious enquiry and seek further information to resolve conflicting accounts. Also, whether an omission by an insurer is innocent as opposed to deliberate, is relevant to determining whether the DUGF has been breached.

The link to the decision can be found here https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2023/2023fca1641

Further information / assistance regarding the issues raised in this article is available from the author, Catherine McAdam, Partner or your usual contact at Moray & Agnew.