Mental illness and disability discrimination
by Stanley Drummond*
The Financial Ombudsman Service (FOS) has found a travel insurer’s claim denial by relying on a policy clause that excluded claims arising from "depression, anxiety, stress, mental or nervous conditions" was unlawful discrimination.
S24 of the Disability Discrimination Act 1992 prohibits discrimination on the grounds of a person’s "disability" and "services" includes insurance and superannuation.
The insurer’s policy excluded mental illness claims. It applied to pre-existing conditions and conditions that first presented after the policy was issued.
When the policy was issued, the insured had no prior history of depression, anxiety, stress, mental or nervous conditions. But during his trip, he developed a condition variously diagnosed as a psychotic or manic episode, bi-polar disorder and an acute psychosis.
It was described as a "first presentation" not a pre-existing mental illness.
In Vancouver, Canada, the insured suffered a manic episode and was involved in a motor vehicle accident that damaged a friend’s vehicle. He was hospitalised for a week. In hospital he broke through magnetic locked doors in the psychiatric area twice. He was kept locked in a quiet room and considered a flight risk. He also exhibited other unusual behaviour. His parents travelled to Vancouver and accompanied him home. The rest of his trip was cancelled.
The insured lodged a claim for cancellation fees, additional expenses and medical expenses. The insurer denied the claim on the basis of the mental illness exclusion. The insured complained to FOS.
The insurer’s defences
The insurer did not dispute that:
• the insured's mental illness was a “disability” under the Disability Discrimination Act
• the policy's mental illness exclusion discriminated against a person who lodged a claim for loss or damage arising from mental illness
• the mental illness exclusion offended the prohibition in s24 and was unlawful, unless an exemption applied.
The insurer sought to rely on:
• the “unjustifiable hardship” exemption
• the exemption based on actuarial or statistical data on which it is reasonable to rely
• alternatively, the exemption based on “other factors”.
FOS rejected the insurer’s defences.
The insurer argued that to require it to change its whole travel insurance business to cover pre-existing and first presentation mental illnesses, including those of a severe nature, could cause it unjustifiable hardship.
FOS said in information supplied by the insurer was of limited assistance. The insurer said coverage for mental illness would have a significant effect on its] combined operating ratio, but did not explain how that could be determined without actuarial data.
Saying it did not have sufficient in-house actuarial data or claims experience on mental illness to enable it to accurately price the additional risk contradicted its defence under s46(2) of the Act.
The insurer claimed the exclusion has been in place since 1991, but FOS said it should then have had significant experience in dealing with mental illness claims and data as to the number and value of claims rejected based on mental illness.
The insurer suggested there would be a greater number and greater complexity of claims with associated greater costs, but provided no evidence how or why. It suggested increased difficulties in verifying claims, but no medical data to back that suggestion.
There was no evidence presented that premium increases would put the insurer in an uncompetitive position and no cost of amending policy wordings. "Given policies are issued at different times for relatively short durations and regularly updated, this would not seem an extraordinary cost," FOS said.
The insurer had calculated the anticipated extra medical costs would result in a claims burden of more than $2.5 million and the anticipated extra cancellation costs an additional $1.7 million for first presentation and pre-existing conditions.
The insurer said the $4.2 million would be spread over 750,000 policies or 1.2 million insured travellers. FOS found that would be an additional $5.60 per policy or $3.50 per insured added to a premium.
FOS said the insurer did not establish unjustifiable hardship.
Actuarial or statistical data exemption
The insurer also maintained it had considered relevant statistical and actuarial data upon which it was reasonable to rely. In particular:
• each year, since at least 2011, it had considered the publically available data;
• it had prepared a briefing note in September 2011 justifying the mental illness exclusion
• it had considered ABS and Australian Institute of Health and Welfare websites, including the 2010 National Survey of People Living with Psychotic Illness,
• it had considered data on the frequency of mental illness.
FOS said its panel had considered the briefing note, but it contained no relevant actuarial or statistical data to justify the position.
Studies to which the insurer referred showed mental illness was a leading cause of disability in Australia, but did not reference the insurer’s risk; did not exist in 1991 when the exclusion was first applied; and were not accompanied by any evidence, as required by the Act, that the insurer actually relied on the data and studies in introducing and maintaining the exclusion.
No data was provided about assessing the insurance risk. The insurer suggested 7% of its insureds would potentially suffer a mental illness, but had no data to show the risk associated with pre-existing or existing mental illness and first presentation mental illness.
FOS said if the insurer’s total extra claims cost figure of $4.2 million was accurate, "it is difficult to see how the mental illness exclusion could be justified".
Other factors exemption
FOS considered the insurer’s reliance on the exemption based on "other factors".
FOS accepted an exclusion that limited cover for a pre-existing medical condition or mental illness may, in some circumstances, be reasonable given the greater likelihood of a claim. But the insurer was relying on a blanket exclusion.
The insurer had provided information on general studies into mental health and its prevalence. However, no other relevant factors it submitted justified the exclusion.
FOS found the insurer should pay the insured $8,877.37 for cancellation fees, additional expenses and medical expenses; and $1,500 compensation for non-financial loss.
In 2003, the Federal Magistrates Court decision in Bassanelli v QBE Insurance (involving metastatic breast cancer) sent shockwaves throughout the industry. That case shattered the myth that an insurer engaging in discriminatory underwriting on the basis of an individual’s disability can simply gather supporting actuarial and statistical data after the event (and only if a complaint is made).
In 2015, a similar outcome in the Victorian Civil & Administrative Tribunal in Ingram v QBE Insurance (Australia)Ltd involved depression. That case also highlighted the difficulties insurers face in relying on the unjustifiable hardship exemption.
The FOS determination above shows insurers still face difficult challenges in complying with the Disability Discrimination Act.
*Stanley Drummond is Adjunct Head of Superannuation and Wealth Management at Thomson Geer.
Footnote: Since this article was written, the Sydney Morning Herald reported two insurers, QBE and Cover-More, had announced they would no longer exclude mental illness that developed after a policy was purchased.