Court allows appeal on misrepresentations

By Stanley Drummmond*

The Full Federal Court has allowed an insurer’s appeal from a decision it could not rely on the remedy afforded life insurers by s29 of the Insurance Contracts Act 1984 because misrepresentations by a superannuation fund member had not been made to it, but to the fund’s previous insurer.

The Full Federal Court held that the member’s misrepresentations to the prior insurer OnePath were “continuing misrepresentations to [the subsequent insurer] CommInsure as a member of a class of persons who could be expected to act on the misrepresentations”.

Background

On 22 March 2011, superannuation fund member Dr Sharma applied for additional death, total and permanent disablement, and income protection cover.

At the time, the fund’s insurer was OnePath. In his application, Dr Sharma gave negative answers to questions about his health which the Australian Financial Complaints Authority (AFCA) later determined were false and fraudulent.

On 1 December 2011, CommInsure took over from OnePath as the fund’s insurer and, in 2021, CommInsure’s life insurance business was transferred to AIA Australia Ltd.
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Dr Sharma died in 2017. Later that year CommInsure purported to avoid the additional cover and declined to pay the additional benefits.

In 2019, Dr Sharma’s widow and the administrator of his estate complained to the fund’s trustee. In 2020 she complained to AFCA, which in 2021 decided in AIA’s and the trustee’s favour.

The AFCA determination

AFCA reasoned that s29 of the Insurance Contracts Act did not apply to the 1 December 2011 contract between CommInsure and the trustee because, in AFCA’s view, Dr Sharma had not made a false statement to CommInsure.

In AFCA’s view (and uncontroversially), “only the insurer to which a misrepresentation was made can rely on it to enliven the remedy to avoid”, as provided for in s29.

In AFCA’s view, given “the Act does not contemplate a change of group insurers” and AIA could recover the additional benefits because of Dr Sharma’s fraudulent misrepresentation, AIA’s and the trustee’s decision not to pay the additional benefits was “fair and reasonable”.

Dr Sharma’s widow appealed to the Federal Court.

The Federal Court decision

Federal Court Justice McElwaine allowed Mrs Sharma’s appeal and remitted the matter to AFCA to be determined again.

Justice McElwaine said the focus of the duty of disclosure and the effect of making a misrepresentation was on “an identifiable insurer at an identifiable point in time, and not a subsequent insurer which assumes the risk later”.

He agreed with AFCA that s29 of the Act did not apply because the insurer to which Dr Sharma had made the misrepresentations was OnePath, not CommInsure or AIA.

However, AFCA had erred in not concluding that “s33 [of the Act] operates a code, the effect of which was to limit the rights of AIA to those provided for in the Act”. In other words, AIA had no remedies outside the Act.

The Full Federal Court appeal

AIA appealed to the Full Federal Court, which allowed the appeal, saying CommInsure/AIA could rely on s29 of the Act.

The Full Court found Dr Sharma’s misrepresentations to OnePath were “continuing misrepresentations to CommInsure as a member of a class of persons who could be expected to act on the misrepresentations”.

CommInsure/AIA argued two misrepresentations had been made to CommInsure. First, there was Dr Sharma’s continuing misrepresentation by not correcting the false representations he made to fund’s trustee and OnePath in March 2011. Those misrepresentations were not corrected when members were told of the change of insurer in December 2011.

Second, Dr Sharma made a further misrepresentation to CommInsure by silence when he failed to correct his fraudulent misrepresentation before 1 December 2011.

Dr Sharma’s widow unsuccessfully submitted that any relevant misrepresentation made to OnePath was “spent” when the insurance contract was made between the trustee and OnePath and it could not be “revivified” by making a new contract between the trustee and CommInsure.

The Full Federal Court said CommInsure/AIA was not seeking to rely on misrepresentations made to OnePath, but ones made to CommInsure.

The court held that CommInsure/AIA could rely on section 29(2) to avoid the additional cover provided to Dr Sharma.

Take away points

The case confirms two points.

First, the remedies for misrepresentation and non-disclosure – and, by extension, for failure to take reasonable care not to make a misrepresentation – which the Insurance Contracts Act confers on an insurer are only conferred on the insurer (or insurers) to whom the misrepresentation or non-disclosure was made. Those remedies are not conferred on any other insurer.

Second, depending on the circumstances, where one insurer replaces another insurer, a misrepresentation to the first insurer may constitute a “continuing representation” to the subsequent insurer, for which the subsequent insurer has a remedy under the Act.

By analogy, a failure to take reasonable care not to make a misrepresentation to the first insurer may constitute a continuing failure to take reasonable care not to make a misrepresentation to the subsequent insurer.

AIA Australia Ltd v Sharma [2023] FCAFC 42

*Stanley Drummond is a partner with Thomson Geer in Sydney.