Continuing misrepresentations: Full Federal Court confirms an incoming insurer's right to avoid cover

Implications for group life insurers and superannuation trustees 5 min read

In a welcome move for insurers writing group life policies for superannuation funds, the Full Federal Court in AIA v Sharma¹ overturned the first instance decision and held that a fraudulent misrepresentation made by an insured member to an outgoing group life insurer could have continuing effect and could be used by an incoming insurer to avoid the member's cover.

In this Insight, we explore the findings of the Full Federal Court in AIA v Sharma and its implications for group life insurers and superannuation trustees.

Key takeaways 

• Earlier decisions of AFCA and the Federal Court had held that, where fraudulent misrepresentations had been made to an insurer, a subsequent insurer that took over provision of cover would not be permitted to rely on section 29 of the Insurance Contracts Act 1984 (Cth) (ICA) to avoid the contract of insurance based on those earlier misrepresentations. This was on the basis that only the outgoing insurer to whom the misrepresentations were made could avoid the contract in these circumstances.
• In AIA v Sharma, the Full Federal Court set aside the Federal Court's earlier decision and confirmed that an insured member's fraudulent misrepresentation to an outgoing insurer may be treated as a continuing fraudulent misrepresentation to the subsequent insurer that assumes the risk, and the subsequent insurer could deny cover for this reason under s29 of the ICA. This was on the basis of factual findings that the replacement insurer was within the class of persons who might reasonably be contemplated as relying on any misrepresentation, and that the replacement insurer would have denied cover had the fraudulent misrepresentation not been made.
• Superannuation trustees and group life insurers may want to ensure that communications to members highlight that any insurer that replaces an existing insurer may be able to rely on misrepresentations made to the outgoing insurer to deny cover.

Background

It is common practice for trustees of superannuation funds to change group life insurers from time to time, or for an insurer to take over the provision of insurance cover to members transferred between superannuation funds as part of a successor fund transfer. When this occurs, the new group insurer typically provides cover for the benefit of members of the fund without re-underwriting or further assessment of the risk of insured members.

In AIA v Sharma, the Full Federal Court considered the circumstances in which Colonial Mutual Life Assurance Society Ltd (CommInsure) became the group life and group income protection insurer of the H.E.S.T. Australia Superannuation Fund (the Fund), replacing the Fund's then insurer, OnePath Life Ltd (OnePath).

At the time of CommInsure's takeover of the Fund's group insurance arrangements, Dr Sharma held default death, total and permanent disablement and income protection cover under the Fund's group life insurance policy with OnePath. He also held additional death, total and permanent disability and income protection cover (Additional Cover). The original OnePath application form for the Additional Cover asked Dr Sharma whether he had ever been diagnosed with, or sought medical treatment for, heart problems. Despite previously suffering a heart attack and having had heart surgery, Dr Sharma answered 'no', knowing that his answer was false. Having assessed his application, OnePath accepted Dr Sharma's application for additional cover on the basis of his false answers in July 2011.

The trustee of the Fund, H.E.S.T. Australia Pty Ltd (HESTA), decided to change insurers and, with effect from December 2011, CommInsure agreed to provide group life cover for the benefit of Fund members under the terms of the OnePath policy, with some minor amendments. The cover was provided under a new insurance policy issued by CommInsure, the terms of which provided that the cover in force under the OnePath policy continued without the member having to opt-in, pay additional premiums or fees, or take additional steps. CommInsure did not require members with additional voluntary cover, such as Dr Sharma, to go through underwriting again and did not reassess the risk of such insured members. The life insurance business of CommInsure was transferred to AIA Australia Limited (AIA) in 2021.

In March 2017, Dr Sharma lodged a terminal illness claim, and in April 2017, Dr Sharma died from heart failure. CommInsure accepted the default cover portion of Dr Sharma's terminal illness claim and paid the relevant amount to HESTA. However, on 16 August 2017, CommInsure made a decision to avoid the Additional Cover under s29(2) of the ICA² (as it applied at the time) on the basis of Dr Sharma's fraudulent misrepresentations in obtaining that cover. HESTA agreed that CommInsure's decision to avoid the Additional Cover was fair and reasonable.

AFCA's decision

On 14 January 2020, Dr Sharma's widow lodged a complaint with the Australian Financial Complaints Authority Ltd (AFCA) challenging CommInsure's and HESTA's decisions.

AFCA found that Dr Sharma fraudulently misrepresented his medical history in obtaining the additional insurance cover, but that CommInsure was not entitled to rely on s29(2) of the ICA to avoid the Additional Cover because an insurer can only rely on that remedy if the misrepresentation in question was made to that insurer. AFCA could not find any clear evidence that a misrepresentation had been made directly to CommInsure. Even if such evidence could be found, AFCA 'could not be satisfied' that s29(1)(c) of the ICA³ (as it then was) did not apply because it could not be satisfied that OnePath—as the original insurer—would not have entered into the contract even if the insured had not failed to comply with the duty of disclosure. Therefore, AFCA could not be satisfied that CommInsure was able to exercise the remedy in s29(2).

Notwithstanding the finding that CommInsure was not able to rely on s29(2) to avoid the additional cover, AFCA determined that CommInsure's decision to avoid the cover was fair and reasonable in the circumstances. This was on the basis that the ICA does not contemplate a change in group insurer and the common law or equity would allow CommInsure to recover the benefits paid as a result of Dr Sharma's fraudulent misrepresentation because it would not have provided the additional cover had Dr Sharma's cardiac history been correctly represented. This was despite section 33 of the ICA which excludes other remedies at law for misrepresentations by an insured. In doing so, AFCA affirmed CommInsure's decision to avoid Dr Sharma’s Additional Cover (AFCA Decision).

Federal Court decision

Mrs Sharma appealed the AFCA Decision to the Federal Court. The primary judge set aside the AFCA Decision.⁴

The judge agreed with AFCA that s29 of the ICA did not apply to give CommInsure a right to cancel the cover, because only the insurer who is the recipient of the relevant misrepresentation can rely on the section, and not a subsequent insurer which assumes the risk at a later point in time (ie CommInsure in this case).⁵ However, the judge ultimately concluded that AFCA materially misdirected itself as to the meaning and effect of s33 of the ICA, so that its final conclusion that CommInsure's decision was fair and reasonable was incorrect.⁶

Appeal to the Full Federal Court

AIA appealed the Federal Court decision to the Full Federal Court. The court found that, as a matter of law, Dr Sharma's misrepresentations made to OnePath could also be regarded as having been made to CommInsure. Citing High Court authority, the court noted that:

'[i]t 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'.⁷

The court also referred to previous UK and Australian cases which found that a representation made in the course of a negotiation for a contract is deemed to be repeated at each successive moment and continues in force until it is withdrawn, altered or the contract is complete.⁸

The court noted that Dr Sharma's misrepresentations were not 'spent' when acted upon by OnePath (by accepting the application for Additional Cover) because of AFCA's factual finding that CommInsure was a member of a class of persons who could be expected to act (again) on the misrepresentations.⁹ Their Honours presumed that AFCA's factual finding was based on the fact that it is common practice for trustees to change group insurers from time to time, and a new group insurer that assumes cover from another insurer in a superannuation context typically does not re-underwrite or reassess the risk.

Importantly then, because of the continuing representations made to it, CommInsure was permitted to rely on s29(2) of the ICA to avoid the contract of insurance relating to Dr Sharma's Additional Cover. In the critical passage, their Honours held:

… 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, s25), the relevant contract being the new cover between HESTA as insured and CommInsure as insurer with effect from 1 December 2011. Therefore, s29(1)(b), when read with s27A, was satisfied in that the misrepresentations were made to the insurer before the relevant “unbundled” contract was entered into. Also, s29 was not disapplied by s29(1)(c) because, on AFCA’s finding, CommInsure would not have entered into the contract in respect of Dr Sharma’s additional cover had Dr Sharma not misrepresented his relevant cardiac history. On that basis, CommInsure could rely on s29(2) directly to avoid the contract of insurance insofar as it related to Dr Sharma’s additional cover in reliance on the fraudulent misrepresentations made to it.¹⁰

The Full Federal Court set aside the primary judge's decision and ordered that the appeal against AFCA's determination be dismissed, with the court noting that, although AFCA decided in the insurer’s favour on a different basis, the outcome before AFCA would have been the same based on the Full Federal Court's reasoning.

Implications for group life insurers and superannuation trustees

The Full Federal Court's finding in AIA v Sharma will bring welcome comfort to group life insurers that provide cover in a superannuation context.

Insurers that take over the provision of cover from another insurer in the superannuation context should be able to rely on s29 of the ICA to avoid cover in the event of fraudulent misrepresentations made to the previous insurer, unless the incoming insurer would have entered into the contract even if the failure had not occurred. If insurers could not rely on s29 in these circumstances, the takeover of such cover (ie without underwriting) would have increased risks for incoming insurers, which could result in increased insurance costs and changes to processes, including re-underwriting of voluntary cover on takeover.

However, it should be noted that the Full Federal Court decision was ultimately based on key factual findings by AFCA—that CommInsure as the replacement insurer was within the class of persons who might reasonably be contemplated as relying on any misrepresentation, and that CommInsure would have denied cover had the fraudulent misrepresentation not been made. The ability of incoming insurers to rely on s29(2) to deny cover will depend on similar factual circumstances being present.

Trustees and insurers should also consider the member experience when group insurers change. Our recent Insight highlighted ASIC's latest findings in relation to insurance in superannuation. ASIC has urged trustees to ensure they have good communication practices associated with group insurance arrangements, and that they proactively and prominently communicate with their members about key terms and conditions in the insurance policy in a way that helps members make informed decisions.

In that context, it would be prudent for trustees and insurers to ensure that communications to members detailing a change in insurer include a reminder of an insured member's duty of disclosure and flag that an incoming insurer could deny cover on the basis of misrepresentations made.