Introduction
A couple of weeks ago I wrote about how the duty of utmost good faith is becoming a powerful force in Australian insurance law.
The Federal Court of Australia has recently returned to the issue with eye-catching judicial passion. It is not my preferred course to simply quote slabs of a judgment but I must make an exception for this passage. I do not think that its essence can be better captured.
‘On that day, 30 June 2014, the case manager, Ms KR, telephoned the Second Insured with the bad news. The transcript and recording of this telephone call reveal the distress and concern caused to the Second Insured (albeit she expressed herself in polite terms) by the decision. I will return to the relevance of this in due course in discussing the content and operation of the implied term of the utmost good faith. But it is appropriate to say at this point in the chronology that policies of this kind providing income protection are very important to the economic and human wellbeing of people. The content of the term implied by s 13(1) of the Insurance Contracts Act and its application in individual cases are not subjects limited to the exercise or discharge of legal rights, abstractedly analysed, though that is, of course, relevant. It involves consideration of the human context of the people concerned. It is the acting towards each other (with commercial standards of decency and fairness) that is expected of both the insurer and insured by the terms of s 13. The policy was, obviously, of the utmost importance to the Second Insured: a 39 year old woman of modest means, self-reliantly self-employed experiencing cancer of the most serious kind. From the circumstances of the disclosures that were made and from the content of TAL’s file there was not the slightest evidence of dishonesty or sharp practice in the conduct of the Second Insured. She was given this news over the phone (a letter was to follow) after not the slightest intimation of the undertaking of a “policy validity investigation” or the slightest opportunity to explain the circumstances of her treatment in 2007, 2008 and 2009 (four to six years before taking out the policy) or to explain why she had not disclosed those matters.’ (My emphasis)
Background
The Claim
In September 2013, the Second Insured[1] applied to TAL for an income protection policy of $5,000 per month.
The application process was comprehensively expressed. It closely and diligently followed the provisions of the Insurance Contracts Act and involved extensive interviews. During one of those interviews, the Second Insured mentioned blood tests which she had undertaken because of mid-cycle bleeding.
On 3 October 2013, TAL accepted the Second Insured’s application for insurance without any exclusion or qualification for anything which the blood tests (the results of which were not yet available) might disclose. The Second Insured was advised of this acceptance on 8 October 2013.
On 16 December 2013, the Second Insured was diagnosed with cervical cancer. She notified TAL that day.
The next day TAL sent the Second Insured the initial claim form which included an extensive outline of the steps which she was to follow and the information which she was to provide. She followed those steps.
On 4 January 2014, a TAL case manager commenced assessment of the Second Insured’s claim. That case manager’s preliminary conclusion was that the claim be accepted.
Even so, TAL commenced an investigation into the Second Insured’s medical history to see whether it could find grounds to reject the Second Insured’s claim or even avoid the policy. And it sought to conduct this investigation behind the Second Insured’s back.
Meanwhile on 9 January 2014, TAL wrote to the Second Insured informing her that her claim was accepted, explaining how benefits were calculated, waiving continuing premiums and asking to be kept up to date on progress.
Behind the scenes, TAL received over the next few months the numerous clinical notes and medical reports which it had sought. The TAL case manager initiated a retrospective underwriting of the risk which resulted, in light of more than five years of medical history, a recommendation that the Second Insured’s Policy be avoided. At no point in time during this review did TAL seek the Second Insured’s input or responses to the information which it had received.
On 30 June 2014, that recommendation was accepted and conveyed to the Second Insured. On 3 July 2014, TAL wrote to the Second Insured, avoiding the policy, accusing her of a breach of her duty of utmost good faith and proposing that she refund payments which TAL had made up to that point in time.
The Federal Court was extremely critical of this letter describing it, in part, as disingenuous and beyond the application of common sense and human experience.
On 5 September 2014, the Second Insured lodged a dispute with the Financial Ombudsman Service. By deed of release dated 19 May 2015, TAL and the Second Insured settled that dispute.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The Second Insured’s claim became a case study at the Royal Commission.
Based on the evidence presented to the Royal Commission in this particular case, TAL’s counsel made the following submissions and admissions: -
the accusation in the letter of 3 July 2014 that the Second Insured had breached her obligation of good faith was itself a breach of the implied term of good faith by TAL.
failing to afford a policyholder an opportunity to address TAL and any material it was relying on prior to deciding to avoid a policy was inappropriate and conduct which fell below community standards and expectations.
leaving the Second Insured with the impression that she may be liable to repay the benefits that she had received in circumstances where her claim and any non-disclosure was not fraudulent, was inappropriate and conduct which fell below community standards and expectations.
failing to afford the Second Insured any procedural fairness was inappropriate and conduct which fell below community standards and expectations.
Following the Royal Commission, the Australian Securities and Investments Commission sought in the Federal Court of Australia declaratory relief, including declaratory relief that TAL was in breach of Section 13(2) of the Insurance Contracts Act.
Breaches of Duty of Utmost Good Faith
Section 13(1) of the Insurance Contracts Act Provides as follows
‘A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.’
Section 13(2) of the Insurance Contracts Act Provides as follows
‘A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act.’
At its core of this obligation to act with utmost good faith, as the Federal Court has previously observed, lies the notion of acting with decency and fairness. With that in mind the Court considered that TAL had breached Section 13(2) by: -
failing to involve the Second Insured in its review of the decision to underwrite this policy; and
writing to the Second Insured in the manner it did on 3 July 2013.
The Court was therefore prepared to make suitably drafted declarations publicly denouncing TAL for breaching its duty of utmost good faith.
Had these events occurred more recently, TAL would have been exposed to a penalty[2] up to a maximum of $550,000.
Key Point
The Duty of Utmost Good Faith ‘involves consideration of the human context of the people concerned.’
The name of the case is Australian Securities and Investments Commission v TAL Life Limited (No 2) [2021] FCA 193