Court rejects SCT decision

The Federal Court has upheld an insurer's appeal from a Superannuation Complaints Tribunal (SCT) determination.

In AIA Australia Ltd v Lancaster, the court found a super fund member's income protection benefit was not to be calculated by referring to the member's actual increased salary, which had not been notified to the fund's trustee or the insurer, but by reference to the member's salary as notified to the insurer.

The trustee held an income protection policy with the insurer which provided cover for Maritime Super fund members.

The policy provided that for salary increases of more than 30%, members had to apply to the insurer to increase their cover.

Until 3 September 2012, Ronan Lancaster's annual salary was $44,849.48. That amount was notified to the insurer and recorded by the insurer as his salary. At that stage, in the event of a claim the policy would pay the member a monthly benefit of 75% of his recorded salary (subject to a maximum monthly benefit of $20,000).

On 3 September 2012, Mr Lancaster's annual salary was increased to about $97,000, due to a change in his employment category. The increase – which was more than 30% – was not notified to the insurer or the trustee by Mr Lancaster or his employer.

In July 2012, the trustee wrote to Mr Lancaster giving him an opportunity to update his salary details The letter said: "Please note that, in the event of a claim, your income protection benefit will be limited to 75% of the salary we have recorded against your account, therefore it's important you advise the fund of your correct salary."

The trustee also sent Mr Lancaster an annual statement dated 10 September 2012, showing the position at 30 June 2012. The statement noted his recorded salary was $44,849.48 and included a reminder he needed to keep his salary details up to date.

In January 2013, Mr Lancaster suffered a back injury during the course of his work, described by his doctor as "disc prolapse and degeneration of [the] lumbar spine". On 3 May 2013 he stopped work because of the injury.

In June 2013, the member told the trustee his salary had increased and completed a form to apply for increased income protection cover. His increased salary was shown on his annual statement as at 30 June 2013.

In September 2013, the member lodged a claim for income protection benefits under the policy. The insurer and the trustee accepted his claim. His benefit was calculated by reference to an annual salary of $44,489, which was the salary notified to the insurer at the date of his disablement, 3 May 2013. In November 2013 Mr Lancaster's employer notified the trustee of his salary increase.

After two reviews, the member complained to SCT about the decision not to pay him the higher amount of benefit.

SCT's determination

SCT made a determination in the member's favour.

SCT said it was reasonable for the member to assume his employer would notify the trustee of new salaries and the trustee would notify the insurer. Given the trustee and the insurer were aware, before Mr Lancaster's claim was lodged, his salary had increased, SCT considered the insurer should have made inquiries to ascertain whether the increase was effective before the date of disablement.

Because the insurer had not made inquiries, SCT said the decisions were not fair and reasonable. SCT set aside the decisions under review and substituted its own decision so the income protection benefit payable to Mr Lancaster was to be calculated based on his increased salary effective at the date of his disablement.

SCT also determined compound interest was payable on the sums withheld.

The insurer appeals

The insurer appealed to the Federal Court against the member and the trustee.

The member did not appear beyond the first case management hearing. The trustee did not appear. The matter was determined on the papers.

The court allowed the insurer's appeal.

In the 2001 decision of Retail Employees Superannuation Pty Ltd v Crocker, Justice Allsop had enunciated the principle SCT was not entitled to make a determination reflecting its view of the rights of the parties inter se, if that view was contrary to the governing rules of the super fund or the terms of the policy. In Crocker, he said: "The [SCT's] task is not to engage in ascertaining generally the rights of the parties, nor is it to engage in some form of judicial review of the decision of the trustee or insurer.

"Rather it is to form a view, from the perspective of the trustee or insurer, as to whether the decision of either was (recognising the overriding framework given by the governing rules and policy terms, respectively) unfair or unreasonable."

In AIA, the same principle applied. The policy operated so that, for a salary increase of more than 30%, increased cover was not automatic. A member had to apply to the insurer to increase the cover and the insurer had to accept the application. Those events had not occurred at the date of Mr Lancaster's disablement.

The court found SCT had erred in making a decision that was inconsistent with the terms of the policy, properly construed.

Other potential issues

The court noted in passing that, in a case such as AIA, other issues under provisions of the Insurance Contracts Act 1984 potentially arose. Eg issues under s37 (unusual terms) and s53 (unilateral variation by an insurer of a contract of insurance). However, those provisions were not the subject of submissions and it was therefore not appropriate for the court to express a view on the relevance of those provisions or the prospects of an argument based on them being successful.

The court also said interest under s57 of the Insurance Contracts Act on withheld sums under contracts of insurance was simple interest, not compound interest.

* Stanley Drummond, Adjunct Head of Superannuation and Wealth Management,
Thomson Geer – sdrummond@tglaw.com.au