In two recent cases, insurers have successfully avoided contracts of life insurance pursuant to section 29(2) of the Insurance Contracts Act 1984 (ICA).
In Montclare v MetLife Insurance Limited and Anor  VSC 306 (Montclare), the Supreme Court of Victoria upheld MetLife’s avoidance of a contract of life insurance following the suicide of a claimant who had misrepresented a significant and lengthy history of mental illness, including depression and prior suicide attempts.
In Hitchens v Zurich Australia Ltd  NSWSC 825 (Hitchens), the Supreme Court of New South Wales upheld Zurich’s avoidance of an income protection and TPD policy after the plaintiff failed to disclose, and misrepresented, a history of dependence on pain medication, chronic pain, lymphedema and mental illness.
The decisions in Montclare and Hitchens are useful reminders of the elements which must established in order to successfully avoid contracts of life insurance in circumstances of fraudulent non-disclosure and misrepresentation.
Section 29 of the ICA provides various remedies to insurers in circumstances where there has been a non-disclosure or misrepresentation by the applicant prior to a contract of life insurance being entered into.
Under section 29(3) of the ICA, where the non-disclosure or misrepresentation was innocent, an insurer’s ability to avoid the contract is restricted by a three year time limit.
This restriction does not apply under section 29(2) in cases of fraudulent non-disclosure and misrepresentation. The decisions in Montclare and Hitchens demonstrate how the elements which do need to be established to avoid a contract of life insurance for fraudulent non-disclosure and misrepresentation apply in practice, and the evidence the court may view as persuasive.
Elements required to avoid a policy for fraudulent non-disclosure or misrepresentation
The three elements can be expressed as follows:
- Was there a non-disclosure or misrepresentation (ss.29(1)(a) and (b))?
Proving there has been a non-disclosure or misrepresentation at the time of application is essentially a matter of fact. Often, insurers will need to have reference to the claimant’s specific past medical history from sources such as clinical records and contemporaneous reports from treating doctors.
In Montclare, the insured (Mr Shilton) was asked in an application form whether he had ever suffered from any mental or nervous disorder or breakdown; to which he answered “No”. In establishing this was a misrepresentation, MetLife relied on contemporaneous records from Mr Shilton’s treating psychiatrist which revealed, prior to his application, that Mr Shilton had received psychiatric treatment on at least 60 occasions, had made two serious suicide attempts and been diagnosed with dysthymia and depression. Evidence from friends of Mr Shilton regarding his mental state and comments he had made to them contemplating his suicide was also given.
In Hitchens, Zurich also successfully relied on contemporaneous evidence from the plaintiff’s various treating specialists and clinical notes from the numerous medical centres he had attended in order to prove the falsity of representations regarding the use of pain medication, chronic pain and mental illness.
- Was the non-disclosure or misrepresentation made fraudulently (s.29(2))?
A non-disclosure or misrepresentation is fraudulent for the purposes of s.29(2) of the ICA if it is knowingly false or made recklessly without care as to whether it was true or not. The key from the decided cases, including Montclare and Hitchens is in proving the extent of the claimant’s knowledge of their past medical and other history, as opposed to a ‘mere suspicion’ as to certain facts.
In Montclare, although it was clear that Mr Shilton had suffered from depression, Justice Ginnane could not be satisfied on the evidence, including clinical records from his long term treating psychiatrist, that he was ever advised of his specific diagnosis (neurotic or reactive depression). However, Justice Ginnane was satisfied by the clinical records that Mr Shilton and his treating psychiatrist did discuss the fact that he did have a form of depression and that Mr Shilton knew and understood that. That fact that Mr Shilton had asked for his treating GP to refer him to a psychiatrist and the two previous suicide attempts also supported a finding that Mr Shilton knew he was suffering from a ‘mental or nervous disorder’. Justice Ginnane also considered it was relevant that Mr Shilton had made disclosures of relatively minor medical conditions in his application form, but had misrepresented his far more significant mental health history.
A substantially similar conclusion was reached by Justice White in Hitchens. Although Justice White said it was possible the plaintiff’s treating psychologist had not told him of his precise psychological diagnosis, the circumstances, including the duration and frequency of Mr Shilton’s treatment with his psychologist and his own explanation of his symptoms to other doctors (revealed by their clinical notes) satisfied His Honour that the plaintiff ‘knew’ he had a ‘past history of depression, stress, anxiety, panic attacks or other mental or nervous disorder’, as the question in the application form had asked.
In Hitchens, as is not uncommon, the plaintiff sought to explain his non-disclosures by asserting that Zurich should be expected to make its own enquires into his health based on the information that had been provided to it. Justice White said that had the plaintiff provided details of all his prior treating practitioners in the application, this may have been a factor tending against a finding of fraud. However, the plaintiff had not provided details of all of his prior treating doctors, which Justice White considered did not put Zurich on notice of the plaintiff’s prior history and ultimately supported a conclusion that the plaintiff had acted fraudulently.
- Would the insurer have entered the same contract of life insurance had the non-disclosure or misrepresentation not been made (section 29(1)(c))?
This factor is generally a matter for underwriting evidence. Ideally the original underwriter who assessed the application for insurance would provide evidence as to what would have occurred, and any underwriting guidelines that would have been applied, had that underwriter been properly informed of the applicant’s true history.
In Montclare, MetLife was unable to call the original underwriter who assessed Mr Shilton’s application. Justice Ginnane considered this left a “gap” in MetLife’s evidence which MetLife overcame by calling a senior underwriter who had worked in the same team as the original underwriter at the same time the relevant application was assessed. Apart from the senior underwriter’s opinion that cover would not have been offered to Mr Shilton on the same terms if his mental health history was properly represented in the application, he was also able to provide examples of similar applications and underwriting decisions where cover had been denied or otherwise offered on different terms.
In Hitchens, Zurich was able to call the original underwriter who had considered the relevant insurance application. Although the original underwriter considered up to 20 applications per day and had no specific recollection of the plaintiff’s application, the Court nonetheless accepted evidence as to what her ‘usual practice’ was in assessing applications. In those circumstances the underwriter’s evidence was that if she had been aware of the plaintiff’s actual medical history, her decision would have been to decline the application (as opposed to accepting the risk on different terms). The underwriter also identified guidelines issued by Zurich’s reinsurer which supported declining cover in circumstances where drug dependence (within the previous 7 years) and anxiety or depression combined with drug abuse was indicated.
This article was written by Andrew Gawthorne, Associate and Nicholas Matkovich, Partner.