Within the litigated life insurance space, we have become familiar with the 2-stage process. This is where the Court first considers the reasonableness of an insurer determination of a claim. If the decision has held not to be reasonable, the Court itself determines whether the claimant satisfies the relevant TPD definition under the policy of life insurance.
There is an acceptance in the case law that “reasonable persons may reasonably take different views” (Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113), supporting the notion that reasonableness is the yardstick by which a Court will determine whether an insurer’s decision should be set aside. This principle is repeatedly attributed to McClelland J in Edwards v The Hunter Valley Co-op Dairy Co Ltd (Edwards) and has long been applied in the context of insurance contracts.
The assessment of reasonableness does not require the Court to determine whether it would have made the same decision as the insurer. This is not the role or function of the Court. It follows that if the Court finds the insurer’s decision was reasonable on the evidence, there is no cause for it to continue to the second stage determination of whether the plaintiff meets the relevant TPD definition.
Courts of first instance and appeal in New South Wales (Hannover Life Re of Australasia v Sayseng [2005] NSWCA 214; Birdsall v MTAA [2015] NSWCA 104), Victoria (Hannover Life Re of Australasia v Colella [2014] VSCA 205), Western Australia (HCF Life Insurance Company Pty Ltd v Kelly [2002] WASCA 264) and Queensland (McArthur v Mercantile Mutual Life Insurance Co Ltd [2002] 2 Qd R 197) have considered the body of case law and applied the 2-stage process consistently.
In the event that a Court determines that it was not reasonable for an insurer to reach a decision based on the evidence available, it can proceed to determine whether or not the plaintiff satisfies the relevant TPD definition based on all the evidence before it at hearing. This will invariably include evidence that was not before the insurer at the stage of assessing the claim.
Following stage 1, it is open to the Court to remit a trustee’s decision for redetermination, without requiring the Court to assess the merits of the available evidence. Indeed the High Court of Australia made such a direction in the matter of Finch v Telstra Super Pty Ltd [2010] HCA 36 (Finch) concerning the determination of the trustee, which was remitted to it.
The TAL Life Limited v Shuetrim; MetLife Insurance Limited v Shuetrim decision has further endorsed the 2-stage process espoused by McClelland J in Edwards as good law and an established principle in this growing body of case law not just in the NSW jurisdiction but also in Queensland, Victoria and Western Australia where the 2-stage process for insurers has been approved.
The NSW Court of Appeal in Sheutrim referred to Malcolm CJ in Beverly v Tyndall [1999] WASCA 198 at 331: “in the assessment of the claim under a policy, the insurer is [in] a very real sense acting as a judge in the insurer’s own cause“. This was in the context of the 2 stage process. The court must decide whether, in reaching its decision on a claim, the insurer has acted in accordance with its obligations of good faith (noting that an insurer is not a fiduciary, as a trustee is). The NSW Court of Appeal applied the authority of the Western Australian Supreme Court in HCF Life Insurance Company Pty Ltd v Kelly: “if the insurer fails to meet the objective standards which govern the exercise of its discretionary judgment when making a determination as regards its liability, then the insurer loses the benefit of that condition and it becomes appropriate for the court to consider the matter itself.”. This means that the court sets aside the decision of the insurer. It then stands in the shoes of the insurer and makes the determination on the claim.
Sheutrim states that the practical reality is that this question is settled in Australia. As Leeming JA said in the leading judgment, courts have rewritten parties’ contracts for many decades. His Honour said that where the insurer breaches its duties and the claimant exaggerates symptoms, the solution adopted by the substantial body of appellate systems in the two stage approach “is a sensible way to deal with the need to resolve such disputes in a way which is fair to insured and insurer“.
Written by Matthew Harding, Partner and Elizabeth Esber, Associate.