ASIC obtains declaration that an insurer breached its duty of utmost good faith to an insured

The Federal Court of Australia has recently held that an insurer breached its duty of utmost good faith to an insured by avoiding a policy without affording the insured an opportunity to respond. This is the second occasion in recent months where ASIC has successfully brought an action for declaratory relief pursuant to s14A of the Insurance Contracts Act 1984 (ICA) in relation to an insurer's breach of s13 of the ICA.

Author: Mark Frewen-Lord
Judgment date: 9 March 2021
Citation: Australian Securities and Investments Commission v TAL Life Limited (No 2) [2021] FCA 193
Jurisdiction: Federal Court of Australia

Principles

• Investigations into possible non-disclosure, which could result in the avoidance of a policy of insurance, must be carried out recognising the obligation of the utmost good faith.
• An insured ought to be given a right of reply in relation to allegations of non-disclosure which threaten the validity of a policy. The Court will not look favourably on an insurer who is seen to delay matters or treat the insured unfairly in any way.

• ASIC can bring an action for declaratory relief pursuant to s14A of the ICA against an insurer for breach of a duty of utmost good faith owed to consumers. A failure to act in good faith can entitle ASIC to bring further action pursuant to the Corporations Act 2001 for a failure to comply with financial services law.

Background

A consumer known only as 'the Second Insured' applied for an income protection policy with TAL Life Limited (TAL). As part of the application process, the insured disclosed her medical history which included recent blood tests she had completed, the results of which were pending. Her application was accepted by letter dated 3 October 2013 when the results of the blood tests were still unknown.

On 16 December 2013, the Second Insured was diagnosed with cervical cancer and subsequently lodged a claim on her policy. TAL began investigating the claimant's medical history and subsequently avoided her policy due to her failure to disclose a period of depression from 2007 to 2009. In doing so, TAL advised the claimant, by phone and in writing, that she was in breach of s13 (duty of utmost good faith) and s21 (duty of disclosure) of the ICA and could potentially be liable to repay approximately $24,000 in benefit payments.

The Second Insured appealed this decision internally and then to the Financial Ombudsman. The matter was subsequently settled informally with a payment of $25,000 made by TAL to the Second Insured, although TAL remained of the view that the policy remained void ab initio. As the matter was informally settled, the questions before the Court did not concern the merits of TAL's decision to void the policy, but rather its conduct in arriving at that conclusion and thereafter.

This matter was brought to light as a result of the Financial Services Royal Commission. ASIC subsequently brought proceedings against TAL in the Federal Court for misleading and deceptive conduct and a breach of s13 of the ICA under powers granted to it pursuant to s14A of the ICA.

Decision

The Court held that TAL failed to act towards the Second Insured with the utmost good faith, and therefore breached s13 of the ICA, by:

• failing to advise her of the investigation that was ensuing and provide her with a proper opportunity to address the non-disclosure of her prior medical condition;
• telling the Second Insured that she had acted without good faith;
• threatening to recover the $24,000 in benefit payments, in circumstances where those payments were made after TAL commenced its investigation into the validity of the policy.

No finding of misleading or deceptive conduct on the part of TAL was made.

Relief was granted to ASIC in the form of declarations to be made by TAL that it had breached s13 of the ICA however no award for damages was sought or made.

Why this case is important

An insurer's duty to act in the utmost good faith should be considered in a 'human context' rather than through the strict application of legal principles.

Investigations into non-disclosure or misrepresentation and possible avoidance of policies of insurance should be conducted transparently, with proper enquiry into the evidence and by affording the insured a right of reply.

References made to an insured's breach of the duty of utmost good faith and possible recovery of claims paid should not be made lightly by insurers as the Court will have regard to the significant impact this can have on the mental and economical wellbeing of policyholders.

While ASIC only sought declarations that the insured had breached s13 of the ICA, it has powers under s14A to bring further action under the Corporations Act 2001 for a failure to comply with financial services law.