Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd  NSWCA 204
In Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd  NSWCA 204, the NSW Court of Appeal examined the scope of the fiduciary duties owed by superannuation trustees to members when changing over group TPD insurance policies. In the judgment, the appeal court provides guidance on the construction of TPD coverage clauses and conducts a useful analysis of the due diligence process to be followed by trustees when evaluating alternate insurance arrangements.
The respondent (the "Trustee") was the trustee of a superannuation fund (the "Fund") established for the benefit of employees of the Commonwealth Bank of Australia (the "Bank"). The Trustee annually obtained, from an insurer, a group insurance policy providing, among other things, TPD benefits for Fund members.
Prior to 30 June 2003, the group policy was provided by Hannover Life Re (the "Hannover Policy"). In 2003 the Trustee, after taking advice from its solicitors, negotiated and entered into a replacement policy with CommInsure, which took effect from 1 July 2003 (the "CommInsure Policy").
The appellant, Manglicmot, was a Bank employee and Fund member between 1998 and 2003. Manglicmot suffered injuries in 2000 that limited him to working part time from November 2002 onwards. The Bank subsequently offered redundancy, which Manglicmot accepted in August 2003.
Manglicmot sought alternative employment for a year following redundancy, without success, and in 2004 claimed TPD benefits of $120,000 under the CommInsure Policy. CommInsure refused the claim on the basis Manglicmot was not totally and permanently disabled within the meaning of the CommInsure Policy.
Manglicmot sued the Trustee, taking issue with the Trustee's substitution of the CommInsure Policy for the Hannover Policy. Manglicmot contended that the Hannover Policy provided TPD benefits in circumstances where the member was fit for part-time work, whereas the CommInsure Policy provided benefits only where the member was unfit for any work. Thus, Manglicmot argued, he would have been entitled to TPD benefits under the Hannover Policy had the Trustee not changed to the more restrictive coverage under the CommInsure Policy.
Manglicmot alleged the Trustee had breached its general law fiduciary duties to Fund members to act in their best interests, as well as similar duties inserted into the trust deed by sections 52(2)(b) and 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the "SIS Act").
The trial judge dismissed Manglicmot's claim.
The trial judge accepted that the Trustee owed a general law fiduciary duty to its members to act in the members' best interests and to exercise reasonable care. The trial judge ruled that, in obtaining substitute insurance, the Trustee had discharged its duties by exercising its discretionary power under the trust deed in good faith and by taking comprehensive legal advice during the insurance substitution to the effect that there was no material difference in coverage.
Regarding the SIS Act provisions, the trial judge accepted that the scheme of section 52 was to insert mandatory covenants into the trust deed requiring the Trustee to observe its basic fiduciary obligations. Subsection 52(2)(b) required the Trustee to exercise the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide, and Subsection 52(2)(c) required the Trustee to ensure its duties and powers were exercised in the best interests of the beneficiaries.
The trial judge ruled the SIS Act provisions did not impose a higher standard on a trustee than the general law. As the Trustee was found to have discharged its general law duties, it necessarily followed that the Trustee had complied with the trust deed covenants inserted by sections 52(2)(b) and 52(2)(c) of the SIS Act.
The trial judge regarded the construction and application of the TPD coverage terms in the Hannover and CommInsure policies as an issue of causation – Manglicmot suffered no loss unless the CommInsure Policy removed coverage previously existing under the Hannover Policy.
The Hannover and CommInsure Policies both contained typical (but substantially different) TPD coverage clauses, providing a benefit to a member who, among other things, had missed six months of work due to illness or injury and was unable to ever work again in any other occupation.
The Hannover Policy coverage clause relevantly provided that the benefit was payable only where the member was:
"incapacitated to such an extent as to render the [member] unable ever to engage in or work for reward in any occupation or work for which [he] is reasonably capable of performing by reason of education, training or experience".
In contrast, the CommInsure Policy paid a benefit where, among other things, "the member will not ever be able to resume any Occupation, whether or not for reward". "Occupation" was defined as "an occupation that the person can perform, on a full time or part time basis, based on the skills and knowledge the person has acquired through previous education training or experience".
Given Manglicmot's failure to establish liability, the trial judge did not decide whether the Hannover Policy provided TPD benefits if the fund member could engage in part-time employment.
Manglicmot's appeal was dismissed.
Trustee's Review Process
The trial judge's rulings regarding the existence and scope of the Trustee's general law fiduciary duties were not challenged on appeal, with argument focusing instead on the breach or discharge of the duty.
The appeal court found the Trustee had intended benefits under the CommInsure Policy to match or better those provided under the Hannover Policy, and that the Trustee believed it had obtained equivalence. The Trustee's policy review process was carefully examined and found to have discharged the Trustee's duties, with the following factors deemed determinative:
- The catalyst for the policy substitution was the poor performance of the Hannover fund, with the insurer insisting on a 130 per cent premium increase effective at renewal. A quote was obtained from CommInsure offering a significantly lower premium.
- A draft of CommInsure's proposed replacement policy was reviewed by the Trustee's in-house legal counsel for compliance with the trust deed obligations and equivalency with the Hannover Policy.
- Coverage gap advice was obtained from external solicitors to the effect there was no material gap in TPD benefits, however it was not clear whether the advice was obtained before or after execution of the policy.
Scope of the Implied SIS Covenants
The appeal court reviewed the legislative history and intent of section 52, concluding the section was enacted to preserve the general law rules by preventing superannuation trustees from abrogating general law fiduciary duties through provisions in the trust deed.
Thus, the appeal court affirmed the trial judge's finding that sections 52(2)(b) and 52(2)(c) did not impose a more onerous duty than the general law:
Section 52(2)(b) does not in my opinion materially add to breach by the respondent of its general law duty to exercise reasonable care...The respondent was obliged to exercise the care, skill and diligence in insuring pursuant to the powers in [the trust deed] and obtaining insurance on terms and conditions acceptable to it under [the relevant trust deed rule]. The former were acknowledged as discretionary powers, the latter was of the same kind. The exercise of a discretionary power is approached through the s 52(2)(b) covenant in no different way from its exercise in accordance with the respondent's general law obligation.
Nor in my opinion does s 52(2)(c) materially add to breach by the respondent of its general law duty to act in the best interests of members of the Fund. The respondent's general law obligation could be expressed, in the language of s 52(2)(c), as an obligation to perform and exercise its duties and powers in the best interests of the beneficiaries. The words "to ensure" add nothing; an obligation is an obligation. Again, the respondent was exercising a discretionary power, and "to ensure" does not turn the question of exercise of a discretionary power into one of strict liability. There is liability if the discretionary power is exercised improperly, but otherwise there is not.
The appeal court gave detailed consideration to whether the TPD coverage clause in the Hannover Policy contemplated the payment of benefits where the member was still capable of working part-time. The court applied the rule of construction from Chammas v. Harwood Nominees Pty. Ltd. (1993) 7 ANZ Ins Ca 61-175 and related cases, namely, when interpreting a TPD coverage clause making incapacitation for further employment a precondition for payment of a benefit, a reasonable construction of "employment" must be given, having regard to the wording of the clause and the circumstances of the case.
In ruling that the Hannover Policy TPD coverage clause did not provide benefits to injured members capable of part-time employment, the court stated:
"The Hannover TPD clause defines total and permanent disablement. It is quite emphatic: the member must be unable ever to engage in or work for reward in any occupation or work. As further context, the member must have been absent from work for six months. Introduction of full time employment or part time employment into the wording, notions which themselves carry uncertainty (what is the standard for full time employment?) is in my view not warranted. The clause requires unfitness to work, without distinction between full time work and part time work other than by regard to the work which the member is reasonably capable of performing by reason of education, training or experience.
There is nothing inherently unfair or unreasonable in the Hannover TPD clause as so construed. A member who can not work even part time has a need; a member who can work part time has a different need, and one which will vary according to the work the member can perform. The premium will be struck according to the need to be met, and that is found in the terms of the policy of insurance."
As there was found to be no material change in coverage due to the policy substitution, the court found causation was not made out.
The appeal court further noted that Manglicmot was not entitled to benefits under the either policy because he ceased work due to redundancy and not due to injury, so causation was negated on this second basis also.
- Trustees – the covenants incorporated into the governing rules of a superannuation fund by virtue of section 52(2)(b) and (c) of the SIS Act do not materially extend the general law fiduciary duties owed by a trustee to fund members;
- Insurers – TPD coverage clauses should be interpreted strictly. In the absence of clear language to the contrary, when construing a TPD clause that has similar terms to the Hannover policy, a claimant who is able to work part-time is unlikely to satisfy the definition of TPD.
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