Replacing group insurers, sliding doors – Sharma v H.E.S.T. Australia Ltd [2022] FCA 536

1. Key learnings

1.1 Section 27A of the Insurance Contracts Act 1984 (Cth) (ICA) is clear in its retrospective application to “a contract of life insurance” entered into before or after 28 June 2013.

1.2 The reference to the insurer in section 29 (2) of the ICA should be construed as limited to the original insurer on risk, and does not extend to a different insurer who is on risk when a claim is made.

1.3 The remedies for non-disclosure and misrepresentation in Division 3 of Pt IV of the ICA operate as an exclusive code.

1.4 Section 33 of the ICA is all-exhaustive and displaces the operation of common law and equitable principles of rescission after misrepresentation, subject to situations where the failure to disclose was a breach of the duty of utmost good faith under section 13 of the ICA. There are no rights at common law for avoiding contracts of insurance for fraudulent non-disclosure.

1.5 The requirement under section 1055 (7) of the Corporations Act 2001 (Cth) not to make a determination of a superannuation complaint that would be contrary to law implicitly requires that AFCA, where it considers a legal principle to be relevant to its decision, proceed by correctly identifying and stating the principle, and providing satisfactory reasons for its decision, in order to comply with that obligation.

2. Background/Facts

2.1 The appeal was made by Mrs Pragya Sharma against the Australian Financial Complaints Authority Limited’s (AFCA) determination affirming the decisions of H.E.S.T Australia Limited (the Trustee), and CommInsure, to deny payment of additional death and income protection (IP) benefits of the deceased policy holder, Dr Deepak Sharma, on the basis he had fraudulently misrepresented his medical history.

2.2 Dr Sharma became a member of the H.E.S.T Australia Superannuation Fund (the Fund) on 26 July 2010, and at that time received default cover with OnePath Life Limited (OnePath) without the requirement of a declaration of health.

2.3 On 22 March 2011, Dr Sharma applied for additional death, total and permanent disablement (TPD) and IP insurance (the Application). The Application was underwritten, and was ultimately accepted by OnePath with effect from 11 July 2011.

2.4 In the Application, Dr Sharma answered a number of standard form questions as to his medical history, including a question which asked him whether he had ever been diagnosed with, had symptoms or signs of, or had sought treatment for ‘heart trouble, murmur, chest pain, palpitations‘, to which Dr Sharma answered no. In fact, in 1999 Dr Sharma, a GP, had had three stents placed into his coronary arteries after suffering a myocardial infarction.

2.5 OnePath remained the insurer to the Fund until 30 November 2011. On 1 December 2011, CommInsure replaced OnePath as the insurer to the Fund.

2.6 On 21 April 2017, Dr Sharma died from heart failure. Prior to his death, Dr Sharma lodged a terminal illness claim with the Trustee.  CommInsure wrote to Dr Sharma’s estate advising that it had accepted the terminal illness claim for default cover, but that it had determined to avoid the additional cover. CommInsure’s decision was affirmed by the Trustee.

2.7 On 14 January 2020, Mrs Sharma made a complaint to AFCA, in her capacity as administrator of the estate of Dr Sharma, that the Trustee and CommInsure had each failed to pay the death benefits that Dr Sharma was entitled to receive as a member of the Fund.

2.8 On 21 September 2021, AFCA determined that the decision of CommInsure not to pay insurance benefits and the decision of the Trustee to confirm CommInsure’s decision,  were fair and reasonable on the basis that Dr Sharma had answered questions in the Application both falsely and fraudulently, and affirmed those decisions (the Determination).

2.9 In making the Determination, AFCA found, inter alia, that:

1. Section 29 of the ICA can only be relied upon by the insurer to whom the misrepresentation was made;
2. There was no clear evidence that any earlier misrepresentation made by Dr Sharma was of continuing effect and had been relied upon by CommInsure when it became the insurer to the Fund; and
3. The decision not to pay the benefits under the additional cover is, in its operation in relation to Dr Sharma, fair and reasonable in all of the circumstances. AFCA’s reasoning was that there is no unfairness or unreasonableness in refusing to pay insurance benefits where the ICA does not contemplate a change in group insurers, in a superannuation context, and the common law or equity would allow the insurer on risk at the time of the claim to recover those benefits due to the deceased’s fraudulent misrepresentation.

3. Issues Considered

3.1 Whether AFCA erred in interpreting sections 29 and 33 of the ICA;

3.2 Whether AFCA erred in concluding that common law or equitable principles may operate in cases of fraudulent misrepresentation under group life policies where there is a change of insurer, despite section 33; and

3.3 Whether the conclusion that the decision of the insurer to avoid the individual group life contract and the decision of the trustee to affirm that avoidance were each fair and reasonable.

4. Decision

4.1 Appeal allowed. The Court found that AFCA had materially erred in law in affirming the decision of CommInsure. AFCA determinations 693811 and 711994 were set aside, and the complaint was remitted back to the AFCA for redetermination.

4.2 Section 27A of the ICA, which operates to create individual contracts of life insurance, is clear in its retrospective application to a ‘contract of life insurance’ entered into before or after 28 June 2013.

4.3 With respect to AFCA’s arguments set out in 1.9 above, the Court held that:

1. Section 29 of the ICA did not apply to the current circumstances. Upon a proper construction, the insurer in that section means the insurer to whom the misrepresentation was made. AFCA’s contention that the misrepresentation had continuing effect until CommInsure contracted with the Trustee to become the insurer to the Fund sat outside Division 3 of the ICA and is therefore in error. CommInsure was not in a position to avoid the contract pursuant to section 29.
2. Section 33 of the ICA displaces the operation of the general common law and equitable principles that a misrepresentation or failure to disclose a material fact may entitle an insurer to rescind or avoid a contract of insurance. The remedies for non-disclosure and misrepresentation in Division 3 of Pt IV of the ICA operate as an exclusive code, the effect of which was to limit the rights of CommInsure to those provided for in the ICA;
3. Having correctly found that CommInsure could not avoid the contract pursuant to section 29, AFCA should have confined its subsequent consideration of other principles to those remedies that may arise by operation of the ICA and not by speculating about other common law or equitable principles which are not provided for in the ICA; and
4. AFCA materially misdirected itself as to the meaning and effect of section 33 of the ICA, which misunderstanding underpins its ultimate conclusion of fairness and reasonableness. On this basis, there is no common law right of avoidance of the contract of insurance between OnePath and Dr Sharma, or any subsequent insurer.

This article was written by Nicholas Matkovich, Partner and Rebecca Kort, Solicitor.