In March, AIA Australia successfully appealed1 a court decision that would have had widespread implications for group insurance takeovers, risk, and pricing.
A super fund member with default cover had applied to his fund for additional underwritten cover. The application documents he completed asked several questions related to any history of heart problems, to which the member replied “no”. These answers were false, as the member had previously suffered a heart attack and had three stents inserted.
The fund’s insurer at the time accepted the application. Subsequently, CommInsure became the group life insurer of the fund, and took on the risk of the existing members without requiring any additional declarations or reassessments.
Several years later, the member lodged a terminal illness claim and ultimately died from heart failure.
CommInsure admitted the default cover portion of the claim but avoided the underwritten cover under s29(2) of the Insurance Contracts Act 1984 (Cth) (ICA) due to the member’s fraudulent misrepresentations identified during the claim process. The fund agreed with this decision.
The beneficiary lodged a complaint with AFCA which determined CommInsure could not rely on s29 of the ICA, as the fraudulent misrepresentations had been made to the outgoing insurer, not to CommInsure. Nonetheless, AFCA upheld the avoidance on the basis that it was fair and reasonable.
The beneficiary then appealed to the Federal Court, which allowed the appeal. This decision had the effect of meaning an incoming group insurer could not avoid cover entered into by a life insured with the outgoing group insurer, even if the life insured had made fraudulent misrepresentations to that outgoing insurer.
AIA appealed the Federal Court decision to the Full Court of the Federal Court, which accepted AIA’s arguments. The judgment set out a pathway for incoming group insurers, holding a risk inherited from an outgoing insurer which involves misrepresentation, to action a s29 remedy on the basis of the concept of a continuing misrepresentation.
The decision will be a welcome development for the industry and for group insurance sustainability. It will support trustees continuing to offer affordable cover, as well as the efficient and effective transfer of group schemes between insurers.
The full judgment can be found here: