There is a longstanding and established discrepancy between the Bankruptcy Act and the Life Insurance Act 1995 as to what constitutes a policy of life insurance as opposed to policy of life assurance. Until recently, this distinction was considered to underpin the principle that TPD and income protection benefits are divisible among creditors to a bankrupt insured’s estate.
The Bankruptcy Act does not include reference to the term ‘life insurance’. Instead, it refers to ‘life assurance’, which is undefined. At common law, the definition of this term has been held to mean that life assurance policies only refer to policies on the life of an insured person, as opposed to policies covering TPD, trauma/accident and income protection. These other kinds of policies, in addition to policies on the life of an insured, are considered policies of life insurance under section 9 and 9A of the Life Insurance Act.
The distinction is of particular importance where a plaintiff who is seeking payment of a benefit under a policy of life insurance (as defined by the Life Insurance Act), is declared bankrupt.
The meaning of life assurance policies under s 116 (2)(d) of the Bankruptcy Act was determined in National Mutual Life Association of Australia Ltd v Federal Commissioner of Taxation (1959) 102 CLR 29 and NM Superannuation Pty Ltd v Young (1993) FCR 182. These cases are authority for the principle that policies for disability, injury or accident are not considered life assurance policies under the Bankruptcy Act and therefore property which vests in the Trustee in Bankruptcy and divisible among creditors of a bankrupt’s estate.
Section 116 (2)(g)(i), provides another carve out for damages or compensation payable in the event of personal injury or wrong done to the bankrupt. The test for whether a cause of action in respect of personal injury or wrong is whether the action arises from “pain” on the part of the bankrupt in respect to his mind, body or character, without reference to rights of property.
This test, derived from the judgment in Cox v Journeux (No 2) (1935) 52 CLR 713, is that benefits payable under a policy of life insurance, on the meeting of a relevant definition and other criteria, is a contractual entitlement. The entitlement is not compensatory nor derived from any common law right but is based from a purely contractual relationship. The Court of Appeal decision of Cork v Rawlins [2001] Ch 792 also supports this construction.
Accordingly, until the decision of Berryman v Zurich Australia Limited [2016] WASC 196, the entitlement to a benefit under a standalone policy providing cover for TPD, IP or trauma has been taken to be property vesting in contract and divisible among the creditors of a bankrupt estate.
In Berryman v Zurich, it was held that the form of action did not, of itself, determine whether the benefit claimed was in respect of a personal injury or wrong. That the bankrupt plaintiff, Mr Berryman, was suing his life insurer to enforce a contractual right was not found to compel the conclusion that the action was outside s 116(2)(g). The Court held that Mr Berryman’s TPD claim was, in essence, a claim “in respect of” a personal injury and not properly part of the bankrupt estate.
This decision appears to leave the principle established by National Mutual Life Association of Australia Ltd v Federal Commissioner of Taxation (1959) and NM Superannuation Pty Ltd v Young (1993) intact. What it does do however, apart from extending the established ambit of the s 116(2)(g) carve out, is to challenge the accepted notion that entitlements under a policy of life insurance are contractual only. If this decision is followed, then the question of whether a cause of action for TPD benefits is “in respect of” a personal injury or wrong is a matter of the substance of the claim, not the form of the action. This would entitle bankrupt persons to personally retain TPD and income protection benefits.
This represents a marked departure from the principle established in Cox v Journeux (1935) and Cork v Rawlins [2001] and we anticipate will be elevated to an appellate court at some time where s 116 (2)(g) is considered.
This article was written by Jason Stevens, Partner and Liz Esber, Associate.