A recent Federal Court decision highlights the importance of full disclosure in the context of life insurance even when the precise terminology used to describe the insured's medical condition is unknown by them. The court considered the 'knowledge' required to be disclosed by an insured and whether a breach of disclosure requirements also constituted a misrepresentation. It also considered when an insurer waived the duty of disclosure by its conduct and the operation of s29 of the Insurance Contracts Act (1984) (Act) where an insurer reduces the amount payable under the policy rather than avoiding the policy altogether.
In 1997, the insured was diagnosed with a number of problems with his oesophagus - including a condition known as Barrett's oesophagus. This condition was known to increase the risk of oesophageal cancer. Gastroscopic investigations revealed Barrett's oesophagus on three separate occasions, the last of which was in 2001. There was no sign of pre-malignant or malignant changes in his oesophagus.
In October 2002, the insured applied for a life insurance policy with ING. The insured crossed out the sections of the form labelled "Personal Health Statement", "Family History" and "Health History" and instead underwent a medical examination as provided for in the form. The insured then answered questions asked by the health evaluation officer but did not mention Barrett's oesophagus.
In the following year, the insured developed a malignant oesophageal ulcer and later died of oesophageal cancer.
The applicant, the insured's wife, made a claim under the policy. The insurer responded that the insured had failed to disclose that he had Barrett's oesophagus and that he had undergone various consultations and investigations. As a result the insurer reduced the sum insured in proportion [to] the premium... that should have been paid pursuant to s29(4) of the Act.
The applicant commenced an application in the Federal Court claiming the difference between the reduced amount paid out by the insurer and the full amount that she claimed was payable.
What did the insured know?
The applicant argued that the insured had forgotten the technical term for his condition (Barrett's oesophagus) and therefore it was not a matter 'known' by him requiring disclosure.
The court considered whether the insured had the requisite 'knowledge' under s21 of the Act. The court held that even if the name of the condition was forgotten, the insured still had an awareness of the existence of his condition and the increased risk that it posed as a matter relevant to the insurer's decision whether to accept the risk and the terms on which to accept it.
His honour took into account that the insured was prepared to take measures, including taking daily medication and undergoing regular intrusive procedures, to reduce the risk. As to the applicant's contention that the insured was a very fit man, The court held that this did not affect the fact that the condition existed.
Consequently, the court found that the insured had breached the duty of disclosure under s21(1) of the Act.
Was there a misrepresentation?
The court found that the insured had given an incomplete answer in failing to disclose that he was required to undergo an investigative procedure and that he had Barrett's oesophagus. This incomplete answer was held to be a misrepresentation in accordance with Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd  NSWCA 20.
Failing to disclose a further investigative procedure ... in the near future was held not to be a misrepresentation. The phrase in the near future was vague and it was open to the insured to form the view that the further investigative procedure more than a year after the health evaluation interview was not in the near future.
The applicant also argued that no misrepresentation was made because Barrett's oesophagus was a 'condition' as opposed to an 'illness' or 'injury'. The court did not accept this narrow construction, holding that the applicable standard was that of a reasonable person.
Was there a waiver of compliance with the duty of disclosure?
The applicant alleged that there had been a waiver arising from the process of obtaining the health and medical history of an applicant for insurance; as well as the insurer's conduct in accepting the crossed out sections of the application form and the absence of specific questions about Barrett's oesophagus.
The court held that there was no waiver of compliance with the duty of disclosure.
In my view, the respondent did not waive compliance with the duty of disclosure by providing for two alternative ways for an insurance applicant to provide information about his or her medical history – one, by completing the questions in the application form; and another, by attending an appointment for the completion of a paramedical report. This is because it was standard practice at the Lifescreen paramedical interview for an applicant for insurance to be advised of the duty of disclosure under s21 of the Act. The health evaluation form used at the interview contained a description of the duty of disclosure... The health evaluation form discloses [the insured's] signature beneath the statement setting out the duty of disclosure. It follows that the respondent made it clear that there was a duty of disclosure in respect of the inquiry process concluded by the Lifescreen interviewer.
The following factors were also important in coming to that conclusion:
- the application form as a whole was to be construed as requiring information relating to any matter which might affect the life expectancy of the applicant for insurance rather than only the medical conditions referred to by name in the health evaluation form
- the health evaluation utilised broad language which referred to "every matter" which the insured knew to be relevant to the decision of the insurer.
Reducing the amount payable
The court accepted ING's evidence that had the insured disclosed Barrett's oesophagus, it would still have entered the contract of insurance but would have increased the premium by 50%. In coming to this conclusion, the court considered the evidence of the state underwriting manager at the time as well as the principal underwriter of the insurer as to what a reasonable and competent underwriter employed by the respondent insurer would have done.
The notice required under s29(4) of the Act of the variation of the sum insured was held to have been given notwithstanding that the notice had been given to a personal representative of the late insured.
Lessons for Insureds and Insurers
This decision provides a timely reminder that insureds must ensure full disclosure of all matters that are known to be relevant to an insurer's decision even if the precise details (e.g. the technical name of a condition) have been forgotten.
Whilst affirming the practice of utilising external health information gatherers, insurers should ensure that their practices do not involve conduct that may waive or narrow the duty of disclosure. Good practice would seemingly require:
- ensuring that life insurance application documents, when read as a whole, are sufficiently broad so as to be construed as enquiring about any matters which might affect the life expectancy of the applicant even if specific conditions are mentioned
- ensuring that terms have sufficient clarity (e.g. "within 24 months" rather than "In the near future"
- ensuring that external providers minimise risks by clearly advising the insured of the continuing duty of disclosure and ensuring that answers are accurately recorded.
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