In a National Mutual insurance proposal form for an income protection policy, Dr Moore claimed to be a self-employed psychiatrist earning $90,000 per year. He answered "no" to questions asking whether he had ever suffered from a mental or nervous disorder or drug dependency, and whether he had ever injected himself with any non-prescription drugs. Relying on these answers, National Mutual issued the policy.
Dr Moore later developed a major depressive illness which forced him to resign from his job. He lodged a claim with National Mutual under the policy, which was accepted, and National Mutual commenced making monthly payments. Several years later, payments were ceased on the basis that Dr Moore no longer suffered from a total disability as defined in the policy. Dr Moore sued National Mutual.
During the course of the proceeding, it was revealed that Dr Moore had a long history of pethidine abuse (he had been injecting himself with the drug since 1975). Further, Dr Moore was in fact an employed psychiatry registrar (not a self-employed psychiatrist) earning only $52,000 per year and had been having treatment for a nervous disorder for several years before the policy was issued.
National Mutual therefore sought to recover the amounts already paid to Dr Moore (nearly $500,000) on the basis that he was guilty of fraudulent misrepresentation under the Insurance Contracts Act 1984. The Court found that Dr Moore's misrepresentations (except those regarding his profession) were made fraudulently, and that National Mutual was entitled to avoid the policy.
Generally, money paid under a contract that has been avoided for misrepresentation is recoverable. However, there is High Court authority recognising a defence called 'change of position'. In order for the defence to be available, the insured must have acted differently (normally in a financial sense) as a result of receiving the payment. The defence is not available where the recipient has changed his or her position in bad faith or is a wrongdoer.
The Court found that Dr Moore had changed his position by using the money to pay living expenses which he would not otherwise have incurred, but for the payments. Normally, the defence is not available where the money has been spent on day-to-day living expenses. However, in this instance, that was really the purpose of the payments. If not for the payments, Dr Moore would have made adjustments to his life and living expenses such as applying for social security benefits and attempting to obtain some other form of employment.
In the Court's opinion, the fact that Dr Moore was guilty of fraudulent misrepresentation did not make him a wrongdoer in relation to the receipt of the payments because he did not mislead National Mutual in relation to the payment of his claim. The Court concluded that it would be unjust to make Dr Moore pay the money back.
Moore v National Mutual Life Association of Australasia [2011] NSWSC 416
The rationale for the above finding was that it would have been more unjust to make Dr Moore repay the money he had obtained pursuant to a fraud, than to prevent National Mutual from recovering any of the money which it had paid as a result of Dr Moore's fraud. Does that sound right to you?
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