ASIC continues to test the limits of the Duty of Utmost Good Faith:

Australian Securities and Investments Commission v Zurich Australia Limited (No 2) [2023] FCA 1641. This case concerns an insurer’s decision to avoid an income protection policy for fraudulent non-disclosure under section 29(2) of the Insurance Contracts Act 1984 (Cth) (ICA).

Background 

The insured took out income protection cover with OnePath Life Limited (the Insurer) in June 2016 (via a financial advisor). Her policy included a mental health exclusion after making a series of disclosures in her application. In November 2018 the insured made a claim under the policy. In the course of assessing the claim the Insurer obtained additional medical information which identified the insured had failed to disclose the full extent of her medical history at the time of her application. Had the Insurer been provided with the additional information, it would not have entered into the policy.

The Insurer issued a procedural fairness letter in respect of the non-disclosures on 9 July 2020 (Procedural Fairness Letter). The Procedural Fairness Letter set out the medical questions asked in the insurance application, detailed the medical information subsequently obtained and the inconsistencies with the insured’s answers in the application. The letter set out the Insurer’s avoidance remedies under section 29 of the ICA and the insured was provided opportunity to explain her answers. 

On 29 September 2020, the insured responded to the Procedural Fairness Letter, via her solicitors, and said she had relied on advice from the financial advisor when completing the application and believed she was only required to disclose her medical history for the past five years (the relevant medical history taking place outside this five year limit) (Response Letter). The Insurer rejected the explanation in the Response Letter and on 7 October 2020 informed the insured it had avoided the policy from inception pursuant to section 29(2) of the ICA for fraudulent non-disclosure (Avoidance Letter).

Penalty Proceedings

ASIC commenced pecuniary penalty proceedings against the Insurer in relation to alleged contraventions of the duty of utmost good faith (DUGF) and breach of the pecuniary penalty provision set out at section 13(2A) of the ICA. The three alleged contraventions were:

1. A failure to make reasonable enquiries and give appropriate consideration
2. A failure to identify and seek a response regarding specific concerns as to fraud
3. A failure to inform the insured of her dispute rights and appeal processes

ASIC sought a declaration under section 75A of the ICA, a pecuniary penalty pursuant to 75B of the ICA, and an adverse publicity order pursuant to section 1101B(1) of the Corporations Act 2001 (Cth) (CA) in respect of the penalties sought. 

On 28 June 2023 orders were made to substitute Zurich Australia Ltd (Zurich) for the Insurer in the proceeding following the transfer of the Insurer’s life insurance business to Zurich pursuant to part 9 of the Life Insurance Act 1995 (Cth). 

Judgment

ASIC was ultimately unsuccessful on all three counts with the Court finding the Insurer did not breach its DUGF. We set out the key arguments considered by the Court in respect of the three alleged contraventions below:

1. Failure to make reasonable enquiries and give appropriate consideration

ASIC was critical of the insurer’s decision to avoid the policy being made so swiftly after receipt of the Response Letter and submitted that the DUGF required the Insurer to make further enquiries of the financial adviser once in receipt of the conflicting information about the ‘five year limit’.

Noting that ASIC accepted the insured’s actions constituted fraudulent non-disclosure, this argument was rejected by the Court. The Court found the insured’s explanation so implausible, given the medical questions contained clear and unambiguous terms, that it did not require the insurer to obtain more information. 

It also noted that the fact the insured was selective in providing her answers meant her dishonesty was self evident. The Court praised the timely manner in which the Avoidance Letter was issued by the Insurer, and the fact it engaged with and explicitly dismissed the insured’s explanation, which the Court considered to be consistent with the DUGF.

2. Failure to identify and seek a response regarding specific concerns as to fraud

It was alleged that the insurer had deliberately failed to notify the insured in the Procedural Fairness Letter of its concerns that her non-disclosures were fraudulent because it had referred to its remedies for non-disclosure in general terms. 

The Court did not consider the DUGF required an insurer to expressly state that it thought an insured was dishonest, but it was sufficient here that it had discussed the avoidance remedies in general terms and provided the insured with an opportunity to explain her failure to disclosure and/or accurately represent her medical history in the application. 

The Court was critical of the suggestion that insurers should expressly inform an insured that they have concerns of fraud, confirming, consistent with the Court’s findings in ASIC v TAL Life Limited (No 2) [2021] FCA 193; (2021) 389 ALR 128 (ASIC v TAL), a preference for insurers to avoid making “hurtful” statements to insureds (such as asserting fraud before giving an insured the opportunity to provide a cogent explanation). Given it was more than three years since the contract had been entered into the Court considered it was obvious that the Insurer was considering its remedies for fraud in any event.    

3. Informing the insured of her dispute rights and appeal processes

It was also alleged that the Insurer breached its DUGF by failing to inform the insured of her rights of appeal of the Insurer’s decision in the Avoidance Letter. Particular reference was drawn to section 8.19 of the Life Insurance Code of Practice 1.0 (LICOP) pursuant to which signatories agree to notify insureds of their right of review of a declined claim and details of the complaint processes. 

Whilst information concerning the insured’s right of review was not included in the Avoidance Letter, the Court considered it relevant that the omission did not appear to be deliberate and was likely administrative in nature. It was also relevant that the insured had legal representation from a firm specialising in financial services. 

Crucially the Court confirmed that LICOP was not intended to create, nor give rise to legal rights between and insured and an insurer, and therefore was not prescriptive of the DUGF. The Court also accepted the Insurer’s submissions that LICOP was not a mandatory or enforceable code of conduct for the purpose of ss 1101AC or 1191AF of the CA.

ASIC’s website states that it is reviewing the decision.

Take Away

Whilst this decision provides some useful take-aways for insurers when drafting procedural fairness letters, it also confirms the position adopted by the Court in ASIC v TAL, that the content of the DUGF will be prescribed by the circumstances of each case. 

The Court was loathe to extend the DUGF and apply “isolated judicial statements, made in relation to fundamentally different factual circumstances” to the case, distinguishing between legal principles arising out of an insurer’s decision-making functions under the terms of a policy (such as a subjective disablement definition), and the exercise of a contractual or statutory right of avoidance, which is question of objective fact. 

This case is the first time ASIC has sought to pursue its enforcement powers under section 13 of the ICA to seek a civil penalty for a breach of the DUGF, following the introduction of subsection 13(2A) of the ICA on 13 March 2019. It follows a spate of recent actions in which ASIC has tested its enforcement powers with respect to claims handling, and the limits of the DUGF, key decisions being ASIC v Youi Pty Ltd [2020] FCA 1701, ASIC v TAL and ASIC v MLC Limited [2023] FCA 539. Crucially, those proceedings involved conduct occurring prior to the March 2019 amendments, as a result ASIC only sought declaratory relief in relation to breaches of the DUGF (although it is also worth noting that this is not the first time it has sought an adverse publicity order).

ASIC has indicated that one of its enforcement priorities for 2024 is insurance claims handling. It can be expected that it will continue to test the limits of the DUGF and the pecuniary penalties in the next twelve months.