Australia: How Much Discretion Does A Trustee Have In Choosing A New Insurer?

Superannuation Law Update
Last Updated: 9 May 2010
Article by Chris Busuttil and David Leggatt

Superannuation fund trustees have a duty to exercise their discretion in good faith, without ulterior motive, acting on a real and genuine consideration. So much is readily accepted law. However, what happens when the discretion in question is not whether to award a benefit to a disabled worker, but a decision to change the fund's TPD insurer? Are there any consequences for providing reasons for such a decision and does the Superannuation Industry (Supervision) Act 1993 have anything to add to the existing law on trustees' obligations? The recent decision of Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363 has provided some clarification on these issues.

Key Points

  • The New South Wales Supreme Court has found a properly considered decision to change insurer provides no cause for a fund member to complain. The fact that in this case, the change also resulted in an alteration to the Total and Permanent Disability (TPD) definition which arguably reduced the cover available to members, was not considered, on its own, a reason to find that the trustee had breached its obligations.
  • While the trustee gave reasons for its decision, this was no reason to change the supervisory role of the Court which was to ensure that proper process had been applied by the trustee.
  • General covenants set out in the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) do not expand the general law and therefore, did not provide the plaintiff in this case with an alternative cause of action.


Prior to the end of the 2003 financial year, Hannover Insurance (Hannover) wrote to the trustee advising that it was not prepared to renew its policy unless there was a 130% increase in premium with the continuation of the current policy or a lesser increase if the contract of insurance was not subject to a rebate for low claim years. Faced with this prospect, the trustee decided to make enquiries about alternative insurance.

CommInsure Pty Limited (CommInsure) was prepared to offer insurance to replace the Hannover cover at an increase of 80% on the existing premium and it was also prepared to guarantee level premiums for three years. The trustee and CommInsure reached an agreement. CommInsure agreed to match or better the current terms and conditions in the Hannover contract. Unfortunately for the plaintiff, the CommInsure policy contained a TPD definition which differed from the Hannover definition.

CommInsure's definition required the insurer and trustee to consider whether the worker was capable of resuming any occupation 'whether or not for reward' and the definition of 'occupation' was also less favourable requiring a consideration of whether the person could perform work on a part time as well as a full time basis.

The plaintiff had worked as a bank teller. His evidence was that he suffered pain and disability rendering him unable to work for any more than 15 hours a week as a teller. He ceased his employment after he accepted an offer of redundancy. The plaintiff made a claim on the trustee for a total and permanent disablement and the matter was referred to CommInsure. CommInsure declined the plaintiff's claim. CommInsure asserted that the plaintiff was working on a part time basis at the time he accepted the redundancy package and therefore did not meet the requirements of the CommInsure TPD definition.

The plaintiff argued that the general law allowed him to question the trustee's decision to enter into a new policy of insurance and that whatever the general law might have to say on that issue, it had been altered by section 52 of the SIS Act. The plaintiff argued that the trustee's failure to obtain cover equal to or better than the Hannover policy was a breach of the requirement that a trustee act in the best interests of its members.

The Decision

The trustee accepted that it gave reasons for its decision to change insurer. In previous cases, it had been suggested that this opened the way for a court to scrutinise the trustee's decision and to replace it with a decision of its own if the reasons did not adequately support the trustee's decision.

The New South Wales Supreme Court did not accept that view. Rather, Justice Rein held that while reference could be made to the trustee's reasons, it could only be for the purpose of determining whether the trustee had properly exercised its discretion. In other words, whether reasons had been given or not, the test remained the same.

The Court concluded that the trustee's decision to enter into the CommInsure policy was a reasonable one. The trustee took advice from its solicitors and considering the significant increase in premium, the trustee was justified in seeking alternative insurance. The trustee was bound not only to consider the benefits provided but also to meet the premiums payable which came out of the fund. In this case, the trustee not only obtained a 20% reduction in premium, but also obtained a freeze on premiums for three years.

Justice Rein also considered whether there was any additional duty imposed on the trustee which it had breached by entering into the CommInsure policy. The plaintiff referred to section 52 of the SIS Act and specifically, 52(2)(c) which provides that a trustee must, 'ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries'. The plaintiff argued that by entering into a policy which had a less favourable TPD definition, the trustee had breached that covenant.

The trustee argued that a requirement to ensure that duties and powers are performed and exercised in the best interests of the beneficiaries could not be taken literally. Otherwise, the covenant could be read as requiring trustees to be made liable for any outcome which turned out to be unbeneficial to members. The Court agreed and said that what the SIS Act required was that the trustee followed due process with an appropriate motive, which was no different to what the general law required.

Finally, the Court held that CommInsure's decision (and that of the trustee) was appropriate because the plaintiff was not entitled, on the facts, to recover under the policy. This is because he did not have six months' consecutive absence from work as a result of his disability before accepting the redundancy package.


Trustees are understandably wary of giving reasons for their decisions. It has been suggested in the past that Courts will scour the reasons given to replace the trustees' decisions with their own. This decision confirms that a Court is limited in the action it will take and that the limitation is no different to that which applies when a trustee has not given any reasons. The Court is principally concerned with the process which has been adopted by the trustee. Provided that process is legitimate, and the trustee considers and addresses the relevant issues provided for in the trust deed, the decision of the trustee shouWhile a trustee can give reasons, the Court itself acknowledged that the giving of these might make it easier to discern a breach of the trustee's duties. As there is no obligation on a trustee to provide reasons, more judicious trustees will remain careful about giving them. However, the lesson from this case is that providing reasons is not necessarily fatal and that it does not give the Courts a licence to stand in the shoes of a trustee.

Importantly, the Supreme Court confirmed that section 52 of the SIS Act does not confer any higher obligation on a trustee than already exists under the common law.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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