Australia: Life insurance: Original policy documents critical

Insurance update

Public Trustee v Lumley Life Ltd and Ors [2012] QSC 61

In December 1999, Davinder Dother and his wife Julie purchased a life insurance policy from Lumley. Davinder killed Julie in January 2001 and was convicted of her manslaughter in 2002.

In 2003, the Public Trustee obtained an order to administer Julie's estate. In doing so, it adopted a claim under the policy made by the couple's children as beneficiaries of the estate. It was common ground that any claim by Davinder under either the policy or the will was forfeited by reason of public policy.

Lumley asked for the production of a number of documents, including the original policy of insurance. Although the Public Trustee's records did not reveal when it obtained the policy, it is clear that the Public Trustee held the original document. However, despite a number of requests, the Trustee did not produce the policy to Lumley.

In 2006, the Public Trustee commenced proceedings against Lumley and Davinder. The proceedings as they were framed at that time sought a declaration that Davinder had forfeited any right under the policy and an order that Lumley pay the sum insured with accretions to it. The application did not include any claim for interest, either pursuant to section 57 of the Insurance Contracts Act or otherwise.

In October 2006, the Public Trustee served an affidavit to which a photocopy of the policy was attached as an exhibit. The Public Trustee did not inform Lumley that it had the original policy at that time. In fact, the original policy was not sent to Lumley until August 2008. Following receipt of the policy and a copy of the order to administer the estate, Lumley paid the claim in May 2009. However, the Public Trustee's application remained on foot.

In November 2011, the Public Trustee amended its application and for the first time made a claim for interest under section 57 of the Insurance Contracts Act, although it did not nominate a date from which it said that interest should run. The claim for interest was the only active component of the claim, the need for a declaration having been dealt with by reason of an affidavit from Davinder consenting to the Public Trustee obtaining the proceeds of the policy. There was also no longer need for an order for Lumley to pay the claim given its payment in 2009.

The Insurance Contracts Act provides that interest becomes payable on the date upon which it was unreasonable for the insurer to have withheld payment of the relevant amount. The Public Trustee submitted that the time at which it became reasonable for Lumley to have made the payment was, at the latest, the date upon which it received the affidavit attaching a photocopy of the policy. It submitted that on this date Lumley had everything which a reasonable insurer would require in order to make the payment.

The Court rejected this submission, along with the associated submission that the purpose of the requirement under the policy for the original policy document to be produced is simply to inform the insurer of the terms of the policy. Fryberg J noted that policies of life insurance of this type are valuable documents which can be assigned by endorsement and which can be used like certificates of title as deposits with financial institutions to provide security for loans. An insurance company is entitled to require production of the original policy document in order to ensure that the policy has not been assigned and that it is in the possession of the claimant and not of an equitable chargee. His Honour therefore held that it was appropriate for Lumley to refuse to make the payment, noting that this accorded with its legal rights and with ordinary commercial reason. He found instead that interest should run from October 2007, that being the date of receipt by Lumley of a letter from the Public Trustee, the response to which in 2008 was conceded by Lumley to amount to a waiver of the requirement to produce the original document.

His Honour then went on to consider the question of costs. He noted that Lumley had, since the proceedings were amended, been in a position where it knew what was claimed against it, being interest, and that it did not pay the interest nor make any offer of payment. The amended proceedings were therefore necessary and the Public Trustee should have its costs of them. However, his Honour held that the Public Trustee should pay Lumley's costs for the period prior to the amendment. At the time the application was made, the claim for payment was premature and no cause of action existed. His Honour held that the earliest date that the cause of action arose was in 2008, when the waiver was made (albeit backdated), and arguably did not arise until the original policy was delivered in August 2008. His Honour also made a number of criticisms of the Public Trustee's management of the claim, in particular its delay in amending the application and in failing to provide the original policy to Lumley in a timely manner.

The case provides a useful illustration of the factors considered by the courts when addressing claims for interest pursuant to section 57 of the Insurance Contracts Act. It also emphasises the potential significance of original policy documents in life insurance cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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