Dr Gregory Moore v The National Mutual Life Association of Australasia Limited [2011] NSWSC 416
An insurer was entitled to avoid an income protection policy because of non-disclosure and fraudulent misrepresentations. However, monies already paid out by the insurer were not recoverable
Facts
In 1993, Dr Moore purchased an income protection policy.
When Dr Moore applied for the policy, he failed to disclose that he had had a long standing history of drug use. He described his occupation as 'psychiatrist' even though he was no longer able to work in that occupation. He reported an income of $8,000 per month, when his income was much less than that amount.
In 1995, Dr Moore made a claim on the policy. The insurer originally accepted the claim, however, in 2002, it denied liability to make any further payments. It argued that it was entitled to avoid the policy. Dr Moore argued that the insurer had waived its rights to rely on his misrepresentations, or alternatively, had affirmed the contract.
Non-disclosure and misrepresentation
Pursuant to the Insurance Contracts Act 1984 (Cth), an insurer may avoid a contract of insurance, if an insured fraudulently failed to comply with the duty of disclosure, or made fraudulent misrepresentations, and the insurer would not have entered into the contract of insurance, but for the insured's conduct.
Here, the court found that if the insurer had known the true facts about Dr Moore's background, it would not have issued the policy on the terms that it did. The policy provided for payment of an amount which was fixed by reference to the income reported in the application form. The court accepted the underwriter's evidence that the insurer would not have agreed to provide cover for an amount greater than 75% of that amount.
The Court accepted that the insurer would have declined cover in respect of a profession which Dr Moore was unable to practice.
The court found that Dr Moore was guilty of fraudulent misrepresentation because he failed to disclose his prior medical history, his true occupation and his true income. A misrepresentation is fraudulent if it is made with the intention of being acted on, and is either known by the representor to be false, or is made not caring whether it is true or false. Dr Moore knew that his answers on the application form would be relied upon by the insurer.
Election
Dr Moore argued that the insurer had affirmed the insurance contract. Affirmation is an unequivocal election between inconsistent rights, which must be communicated, and which must be made with knowledge of the relevant facts. An election does not have to be made immediately, and an insurer has a reasonable time from the time that it discovers the true facts to make an election. In the meantime, it must continue to comply with its obligations under the contract. In order to give rise to a binding election, the insurer must know all facts that a reasonable person in its position would consider relevant. Constructive knowledge is, in most cases, not enough.
The fact that the insurer made payments under the policy itself did not amount to an election between inconsistent rights. However, the insurer also required Dr Moore to have his treating doctor complete monthly claim forms, and it also organised a medical examination pursuant to the policy.
The investigation of a claim cannot continue indefinitely, and the court held that the insurer's conduct over the years amounted to an election.
However, it was found that the insurer did not make the election with knowledge of all relevant facts. Although the insurer did have some information which suggested that further investigation should have been completed, there was no evidence that the insurer's decision to not complete further investigations was deliberate.
Hence, the insurer was held not to have affirmed the contract of insurance.
Restitution
Monies paid under a contract that has been avoided for misrepresentation are recoverable. A defence of change of position is available if the recipient of monies changed his or her position on the 'faith of the receipt' such that restitution would be inequitable. The defence is not available where the recipient acted in bad faith or is a wrongdoer. Merely spending the monies on ordinary living expenses does not normally amount to a change of position. And although the standard case involves a situation where the recipient disburses the funds received, the defence can extend to cases where the change of position arises from a foregone opportunity.
The court held that whilst Dr Moore was guilty of fraudulent misrepresentation, that did not make him a wrongdoer in relation to the receipt of payments. In particular the insurer only became entitled to a refund when it elected to avoid the policy, and Dr Moore did not know that that would happen.
The purpose of the policy was to permit Dr Moore to continue to pay for living expenses. Thus, the principle that the change of position defence cannot be relied on when the recipient disburses funds on ordinary living expenses could not be applied in this case.
Dr Moore was found to have changed his position, and in the circumstances, the court held it would be unjust to require him to repay the monies received.
Comment
The insurer had the burden of proving that it would not have entered into a contract of insurance if Dr Moore had disclosed all relevant facts. In order to be able to avoid a policy on the grounds of non-disclosure or misrepresentation, underwriting guidelines should clearly spell out the relevant considerations upon which an insurer decides to accept or decline certain risks, and on what terms.
If an insurer becomes aware of circumstances which suggest nondisclosure or misrepresentation by an insured, then the insurer will have a reasonable, but not indefinite, time to make inquiries and to decide whether to decline cover. Merely making payments under a policy does not amount to affirmation.
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