Overview

Life insurers commonly use Pre-existing Condition clauses (PEC clauses) in contracts to exclude liability for conditions that existed before cover commenced. General insurers also use such clauses, excluding liability for defects in an item where that defect caused or contributed to a loss. Such clauses are subject to s47 ICA (for life insurance) and s46 ICA (for general insurance). In ASIC v HCF Life Insurance Company Pty Ltd the court found that where such PEC clauses are broader than s47 (and by analogy, s46) permit, such clauses are partly unenforceable and to include them in contracts constitutes conduct that is liable to mislead the public as to the nature, characteristics or suitability of financial products, in breach of section 12DF of the ASIC Act.

The Federal Court however found that the PEC clause, when read down so as to comply with s47 ICA, was not an unfair contract term. The court found that given the policies issued by HCF were “guaranteed acceptance” products and not underwritten, it was not an unfair contract term for HCF to exclude pre-existing conditions in its contract terms.

The case also provides guidance on the interpretation of s47 ICA

Key Takeaways

Life and general insurers should carefully review their policy documents to ensure they don’t include clauses that are wholly or partly unenforceable. A clause might be unenforceable due to the ICA, or the common law. In particular, insurers should consider whether Ss 45, 46, 47 and 54 ICA render policy terms unenforceable.

Please contact Catherine McAdam, or your usual contact at Moray & Agnew, should you require assistance in reviewing PDS and policy terms.

Decision

Section 47 of the Insurance Contracts Act 1984 (Cth) (ICA) provides that an insurer may not rely on an exclusion in respect of a PEC where, at the time the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability.

HCF excluded liability for PEC’s, which were defined at various times in PEC clauses providing as follows (the wording of the exclusion clause changed over time):

'any condition, illness or ailment where the signs, symptoms or treatment of which, in the opinion of a registered medical practitioner, existed at any time before the Cover Commencement Date, even if a diagnosis had not been made'.

And

'any condition, illness or ailment where the signs, symptoms or treatment of which, in the opinion of a registered medical practitioner, existed within 5 years immediately prior to eh Cover commencement Date, even if a diagnosis had not been made'.

The Federal Court found that these clauses were broader than s47 permitted, as the enquiries under the PEC clauses and s47 ICA were fundamentally different. Firstly, the PEC clauses excluded conditions by reference to the opinion of a medical practitioner, rather than by reference to whether the insured and a reasonable person, were aware of the sickness of disability. Secondly, the focus must be on the awareness of an underlying condition, illness or ailment, rather than the existence of signs and symptoms- knowledge of symptoms is different to awareness of a condition.

Thus, by including the PEC clauses in Product Disclosure Statements and Policy terms, HCF led consumers to believe that conditions that fell within the PEC clauses noted above would be excluded. This was misleading conduct, because the PEC clauses couldn’t be relied on to the extent that they were broader that s47 permitted.This finding was made despite HCF leading evidence, and the court finding, that when a claim was made, HCF only denied the claim if the PEC fell within the terms of s47 ICA.

ASIC also argued that the PEC clauses were unfair contract terms. The Federal Court rejected this argument, finding that given the products under consideration were not underwritten and were issued on a 'guaranteed acceptance' basis, it was reasonable for HCF to exclude PECs. Doing so did not cause a significant imbalance in the parties rights and obligations, the PEC clauses were prominently presented in the policy documents and clearly conveyed the operation of the exclusion as a matter of contract, and, most importantly, the inclusion of PEC clauses was reasonably necessary to protect HCF’s legitimate interests.

The case also provides guidance as to interpretation of s47 ICA, including that the awareness of the insured must be assessed at the time when the contract was entered into, and that the term “aware” means at least an actual state of consciousness of a matter.

Conclusion

This decision is important to both life and general insurers. Insurers should carefully review their policy documents to ensure they do not contain terms that are wholly or partly unenforceable. Policy terms may be wholly or partly unenforceable by virtue of the ICA or the common law.

Please contact Catherine McAdam, or your usual contact at Moray & Agnew, should you require assistance in reviewing PDS and policy terms.