A trend in superannuation litigation is for claims against trustees to allege a failure to “do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success.” So what is everything reasonable for a trustee to do when pursuing an insurance claim for a member?
Since the introduction of SIS covenants in 2013, specifically s.52(7)(d), it is increasingly common for plaintiffs to allege that trustees have failed to take action against insurers on their behalf. For instance in O’Neill v FSS Trustee & Anor1 the plaintiff alleged he had standing to sue the insurer directly (even though he was not a party to the insurance policy) because under s.52(7)(d) he could have directed the trustee to take action against the insurer on his behalf. Further, the plaintiff alleged this entitled him to seek orders for preliminary discovery against the insurer. Ultimately this issue was not decided as the insurer conceded that s.57 of the ICA entitled the plaintiff to take direct action against it.
In Manglicmot2 the NSW Court of Appeal considered the general duties prescribed under s.52(2) and determined that these did not materially extend beyond the general law fiduciary duties of trustees to act in the interest of fund members. This could be taken to mean that s.52(7)(d) should not be regarded above trustees’ paramount duty to act in the best interest of all fund members. The Explanatory Memorandum to the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 also states that trustees should consider the likely costs and benefits with respect to all affected members of pursuing an insurance claim in determining whether it is reasonable to pursue a potentially successful claim.
Section 52(7)(d) specifically refers to pursuing claims that have ”a reasonable prospect of success” – which suggests trustees should independently form a view on the prospects of an insurance claim. The difficulty in ascertaining reasonable prospects of success should not be understated and raises numerous issues not the least being whether trustees are required to consider litigation prospects on a better than 50% chance of success.
In undertaking an analysis of a member’s claim, the trustee must give real and genuine consideration to a member’s claim.3 Depending on the circumstances, this could include making inquiries and investigations to ensure the trustee’s view on the prospects of the claim is properly informed. The use of the word “pursue” suggests the trustee must not take a passive role and leave it to the member and the insurer to deal with the claim. This does not necessarily mean incurring costs to duplicate assessments or investigations already conducted but does suggest an independent analysis of the claim and prospects is required either at the ‘procedural fairness’ stage or when a claim is declined.
In Newey v First Superannuation4 (prior to the introduction of s.52(7)(d)), Justice Rein commented that if the insurer had not formed an opinion reasonably and the trustee has not taken action on behalf of the member, the trustee will be in breach of its obligations. However, given the broader obligation for trustees, including considering the likely costs and benefits for all affected members in pursuing an insurance claim on behalf of a single member, this proposition is rather more complex.
If the trustee does not agree with the insurer’s decision, it needs to consider the prospect of taking further action in pursuing the claim against a broader costs/benefit analysis having regard to the interests of all the members of the fund. Commencing proceedings, for instance, on behalf of a member would need to account for the inherent risk in litigation and the possibility of costs orders payable by the fund. Referral to an EDR process such as the Superannuation Complaints Tribunal or Financial Ombudsman Service could potentially be a reasonable action in certain circumstances. Judicial consideration of the scope of s.52(7)(d) will be instructive but in the meantime trustees will continue to be subject to allegations of failing to do everything reasonable where litigation is commenced by fund members.
This article was written by Sylvia Quang, Senior Associate and Jason Stevens, Partner.
1[2015] NSWSC 1248
2[2011] NSWCA 204
3Finch v Telstra Super Pty Ltd [2010] HCA 36; Sayseng v Kellogg Superannuation Pty Ltd and Anor [2003] NSWSC 945
4[2009] NSWSC 1100