In a positive development for the life insurance industry, the Full Court of the Federal Court of Australia has held that an incoming group life insurer can exercise the remedies available under section 29 of Insurance Contracts Act 1984 (Cth) (ICA) in respect of misrepresentations made by a life insured to a prior group life insurer.
On 17 March 2023, the Full Court of the Federal Court handed down its decision in AIA Australia Ltd v Sharma [2023] FCAFC 42, finding that fraudulent misrepresentations made for the purposes of obtaining insurance cover amounted to ‘continuing representations’ and that an incoming group life insurer is ‘a member of a class of persons who could be expected to act (again) on the misrepresentations’.
This overturned the decision of the Federal Court at first instance that had concerned the life insurance and superannuation industries.
Background
Dr Sharma, a medical practitioner, was a member of the HEST Australia Superannuation Fund (HESTA). Prior to March 2011, Dr Sharma held default death (including terminal illness) cover and default income protection cover as a member of HESTA.
On 22 March 2011, Dr Sharma applied for additional underwritten insurance cover. At the time, a group life insurance policy was provided by OnePath Life Ltd (OnePath) to the HESTA trustee to cover HESTA members. The application form asked, ‘Have you ever been diagnosed with, had symptoms or signs of, or sought (or intend to seek) medical advice, treatment or investigations for… heart trouble, murmur, chest pain, palpitations?’ to which Dr Sharma answered ‘No’. He made similar representations to OnePath in a personal statement and declaration on 21 April 2011. In fact, Dr Sharma had previously suffered a myocardial infarction (a heart attack) and undergone major heart surgery.
The Federal Court acknowledged that ‘The answers to the questions… were false to the knowledge of Dr Sharma’.
On 1 December 2011, Colonia Mutual Life Assurance Society (CommInsure) became the group life insurer for members of HESTA, largely on the terms of the OnePath policy. Existing insured members continued to be covered without having to opt-in, or take additional steps. Insured members were notified of the change, and given the opportunity to opt out. However, Dr Sharma did not opt out, nor did he advise CommInsure of his earlier false representations.
In early March 2017, Dr Sharma lodged a terminal illness claim with the HESTA trustee in relation to end-stage ischemic cardiomyopathy. Tragically, Dr Sharma died from heart failure on 21 April 2017.
In mid May 2017, CommInsure admitted the default cover portion of the terminal illness claim.
However, on 16 August 2017, CommInsure decided to avoid the additional cover on the basis of the fraudulent misrepresentations made by Dr Sharma when he applied for the additional cover, relying on CommInsure’s rights under section 29 of the ICA, which provide remedies if a life insured ‘made a misrepresentation to the insurer before the contract was entered into’.
On 14 January 2020, Dr Sharma’s widow lodged a complaint with the Australian Financial Complaints Authority Ltd (AFCA), challenging the decision. AFCA determined that CommInsure was not entitled to rely on section 29 of the ICA to avoid the additional cover. Referring to CommInsure’s rights in common law and equity, AFCA upheld CommInsure’s decision on the basis that it was fair and reasonable in the circumstances. In particular, the misrepresentation made by Dr Sharma to OnePath had continuing effect because CommInsure was within the class of persons who might reasonably be contemplated as relying, and did in fact rely, on that misrepresentation to its detriment.
Mrs Sharma appealed AFCA’s determination to the Federal Court. The primary judge allowed the appeal. [1] In summary, the primary judge found that section 33 of the ICA operates to codify an insurer’s remedies for misrepresentation. As such, CommInsure had no rights in common law or equity.
On 1 April 2021, HESTA’s group life insurance cover was transferred from CommInsure to AIA Australia Ltd (AIA).
Appeal to the full Federal Court
AIA appealed the decision on three grounds. However, it was only necessary for the Full Court of the Federal Court to consider the first of those grounds, being that the primary judge erred in finding that AIA or CommInsure could not rely on section 29(2) of the ICA to avoid the additional cover provided to Dr Sharma.
The full Federal Court noted that ‘in order for an insurer to be able to avoid a policy under s29(2) by reason of a misrepresentation, the misrepresentation must have been made to the insurer seeking to exercise the remedy’.
However, the Court went on to note:
‘It is well established that for a fraudulent misrepresentation to be actionable it is not necessary that it should be made to a particular person; it can be made to a group to which the plaintiff belongs so that the plaintiff is one of those intended to be deceived: Commercial Banking Co of Sydney Ltd v RH Brown & Co [1972] HCA 24; 126 CLR 337 at 343 per Menzies J, Barwick CJ agreeing. See also at 346 per Gibbs J, McTiernan J agreeing, where Swift v Winterbotham (1873) LR 8 QB 244 at 253 is quoted with approval: “[I]t is sufficient if the representation is made to a third person to be communicated to the plaintiff, or to be communicated to a class of persons of whom the plaintiff is one, or even if it is made to the public generally with a view to its being acted on, and the plaintiff as one of the public acts on it and suffers damage thereby.’
The Court found:
‘Dr Sharma made continuing misrepresentations to CommInsure as a member of a class of persons who could be expected to act on the misrepresentations. Those misrepresentations were made, in a continuing sense, by the life insured “during the negotiations for a contract of life insurance [and] before it was entered into” (the ICA, s 25), the relevant contract being the new cover between HESTA as insured and CommInsure as insurer with effect from 1 December 2011.’
This decision should provide comfort to life insurers that issue group life cover for superannuation fund members and superannuation trustees in matters such as assessing claims and pricing the cover.
Sharma v H.E.S.T. Australia Ltd [2022] FCA 536.
