Insurance: No place for broken promises

If life insurance policies fail to meet the client’s – and adviser’s – expectations, certain questions must be answered, Col Fullagar writes.

No doubt everyone has their fair share of stories about broken promises and even if the stories are not personally-based, there are plenty from Government that can be borrowed.

The cruelty of broken promises is that the initial promise raises hopes and expectations to a higher level than that which previously existed but when the promise is broken, the subsequent depth of disappointment may well be lower than would otherwise have been the case.

Life insurance contracts are sometimes described as a “Promise to Pay” and people purchase life insurance so they can rest easy, confident in the knowledge that if the unexpected happens, they and/or their loved ones will be financially protected.

People know that the policy terms and conditions need to be satisfied and the diligent may even go so far as to check the wording to ensure it is in line with their understanding. 

“Their understanding” will, however, be indicatively-based so that if a policy provides for payment in a particular circumstance and this unfortunate occurrence happens, they expect the policy to respond accordingly.

Further, people expect the policy to respond with a minimum of fuss; it should not be necessary for a full legal review to be undertaken or for the policy to be tested in court to ensure it will deliver; they trust and rely on their adviser’s recommendation.

At the same time, in making the recommendation there will be an element of trust that the policy will do what the adviser expects.

Sadly, if trust is not factually based, it may be misdirected leading not only to the perception of broken promises but also the reality of broken hearts and lives when an insured and sometimes their adviser as well, find out too late that the policy will not pay in the way they thought.

A recent court case highlights the problem.

Background

Mr C was 38 years old. He worked as an installer of sprinkler systems.

In November 2006 he started to suffer back problems whilst working but he continued to work.

In February 2007, whilst lifting some machinery, Mr C twisted and suffered significant pain in his lower back. He continued to attend the workplace but did not work.

In March 2007 Mr C suffered a third accident which caused him to cease work and he has not worked since.

The date of disablement was deemed to be March 2007.

Mr C had total and permanent disability (“TPD”) insurance inside his superannuation.

The definition of TPD under the policy was:

“The insured person is unable to follow their usual occupation by reason of accident or illness for six consecutive months and in our opinion, after consideration of medical evidence satisfactory to us, is unlikely ever to be able to engage in any Regular Remunerative Work for which the insured person is reasonably fitted by education, training or experience.

“An Insured Person is engaged in Regular Remunerative Work if they are doing work in any employment, business or occupation. They must be doing it for reward – or the hope of reward – of any type.”

Mr C lodged a claim but the insurer rejected it. The trustee supported the insurer’s decision. Legal action was commenced.

Subsequent to the hearing of evidence, but prior to delivering his verdict, the judge made it clear that:

“If the Court takes a different view of the facts, it does not substitute its view for that of the Trustee; the decision of the Trustee must be examined to see whether it complies with the duties it owed to (Mr C).”

The judge then continued:

“I pass now to the second question…namely that in the opinion of the insurer (Mr C) is ‘unlikely ever to be able to engage in any Regular Remunerative Work for which (Mr C) is reasonably fitted by education, training or experience.’”

To assist in the interpretation of “regular remunerative work” the judge cited two previous rulings:

“The clause requires unfitness to work, without distinction between full time and part time work other than by regard to the work which the member is reasonably capable of performing by reason of education, training or experience.”

(Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd (2011) NSWCA 204)

“…there does not seem to be anything unreasonable in construing the contract as providing that a person who is capable of undertaking regular part-time work is not totally and permanently disabled.”

And “the onus is on the plaintiff to show that he is not able to do any part-time work…” 

But “the work must be regular work not casual”

(Hannover Life Re of Australasia v Dargan (2013).

The Dargan case also ruled on the issue of “retraining and further education”, i.e. “there is no bar to the finding that work is within the plaintiff’s education, training or experience that a short qualifying course of training or retraining may be required.”

In summary:

• An ability to be able to undertake regular, part-time as distinct from casual work; or
• An ability to be able to easily retrain to another occupation, could preclude an eligibility for a claim payment under the particular definition.

The next issue had to do with timing; the judge ruled that Mr C had to be able to demonstrate he met the requirements of the definition as at the date of disablement i.e. 3 March 2007.

“… the definition in the relevant policy is an extremely hard one to satisfy, so much so that one wonders sometimes whether people taking out total and permanent disability insurance realise that it is only a very narrow range of cases where they may recover under the policy. This is despite attempts by the court to read down the most extreme clauses to bring some realism back into play.

“To succeed, an injured person must satisfy the insurer…that they are disabled to such an extent that they are rendered unlikely ever again to resume work in an occupation for which they are reasonably suited by education, training or experience. That must be proved as at the date of disablement. Very often other circumstances may intervene so that it is very difficult indeed to make the assessment as at the date of disablement, yet if it cannot be done then the insured’s claim is likely to fail.”

Moving on from the interpretation of the definition, the judge considered the medical reports tendered as evidence.

“…It is fair to remark that some of the doctors retained by the insurer seem to be a bit too optimistic as to (Mr C’s) chances of obtaining even part-time employment. Whether this remark is accurate or not, the fact that the insurer has had such advice from well-qualified medical experts means that it was entitled to act upon such advice.”

“In view of all of this, it would be quite reasonable for (a trustee) to come to the view that (Mr C) was not totally and permanently disabled.”

In summary:

“I am not the person who decides whether the plaintiff is totally and permanently disabled….The Court must focus on whether the decision of the insurer or the Trustee or both was so unreasonable that a reasonable person in that situation could not have made it.”

“I cannot be satisfied that the plaintiff has established that the Trustee’s decision or the Insurer’s decision were unreasonable. There was medical evidence both ways. Although some of the comments made by the (insurers) doctors seem to be a bit optimistic as to the plaintiff’s chances of obtaining even part-time employment.”

The ruling:

“I do not consider that the plaintiff has demonstrated that the Trustee failed in its duty to deal with the claim appropriately…… the plaintiff’s case must be dismissed with costs.”

(Source: Chapman v United Super Pty Ltd (2013), NSWSC 592 (22 May 2013).

Considerations arising

A number of interesting and somewhat challenging considerations arise out of this case. Some are listed below but there are no doubt many others.

(i) Part-time (v) full-time (v) casual

Most people working within an occupation on a full-time basis consider their own occupation to be that of a full-time accountant, full-time medical practitioner, etc.

Further, many occupations simply do not lend themselves to part-time work. There are not too many part-time CEOs or partner solicitors, for example.

Thus if a benefit entitlement was denied because the insured was capable of working “part-time” this may be seen as a broken promise with the position being further exacerbated when it is appreciated that the hours of part-time work are not made clear, i.e. it simply needs to be “regular.”

(ii) Retraining 

The general belief is that the phrase “suited by training, education and experience” refers to the insured’s “past”.

It may come as an unwelcome surprise if payment is not made because the insurer deems the insured capable of undertaking a “short qualifying course of training or retraining” that would render them capable of working in another occupation on a full or part-time basis.

(iii) Date of disablement

The ruling indicated that the insured was required to prove that their medical condition satisfied the criteria within the definition “on the date of disablement.”

The date of disablement may or may not be defined within the policy but it is not uncommon for an insurer to deem the date of disablement as either the date the insured ceased work or the end of the TPD waiting period.

An insured proving their medical condition satisfies the definition on either of the above dates may not be as simple as it sounds:

• The medical condition may not be stable leading to difficulties in arriving at a view as to permanence;
• Optimal treatment may not have been established, again creating difficulties as to a view of permanence;
• There may be a short period of remission or an early but unsustained response to treatment; or
• The insured may have changed doctors and the new doctor is still unsure as to the future.

Then, of course, there is the complication of a protracted period of claim assessment which, not uncommonly can take several months.

(iv) Intervening illness and/or injury

It is well known that people suffering from an injury and/or illness are more prone to suffering another illness and/or injury.

It is thus quite possible that an insured, during the assessment process, may suffer from a subsequent, unrelated illness or incur an injury that significantly complicates the assessment process.

(v) Lack of diagnosis

It is similarly not uncommon that someone may be suffering significantly disabling symptoms, albeit with fluctuating severity, well ahead of a diagnosis being made.

The insurer may take the position that, in the absence of a clear diagnosis there cannot be certainty about the suitability of treatment and thus the likelihood of permanence.

(vi) Medical advice

A pragmatic complication may be that medical advice is at odds with the legal interpretation of contractual entitlement.

An insured might be diagnosed with a chronic, debilitating condition in response to which the treating physician suggests that a slowing of the progression of the disease would be assisted by early retirement or a change in occupation.

If this triggers a “date of disablement” ahead of an ability to meet the definition requirements, the insured may be faced with an unenviable decision; to keep working and compromise medical well-being or retire and compromise financial well-being.

(vii) Independent medical examinations

“…it is fair to remark that some of the doctors retained by the insurer seem to be a bit too optimistic as to (Mr C’s) chances of obtaining even part-time employment.

Optimism on the part of the treating medical practitioner can play an important role in keeping up the spirits of the insured and maintaining their medical well-being.

Optimism on the part of the insurer appointed independent medical examiner leading to a claim being denied can dash the spirits of the insured and threaten their financial well-being. 

Summary

Advisers are told again and again that all risk insurance policies are much the same these days. There are, of course, some subtle twists to this statement:

Is it the case that all policy wordings are much the same;

Does this mean that each insurer or a court will interpret the “much the same” policy wording in “much the same” way; and

Will the “much the same” interpretation survive a change in management or a subsequent court ruling?

If these subtle twists exist, which it appears they do, and they can lead to not so subtle differences in policy interpretation, which it appears they can, there is both a challenge and an opportunity for advisers.

In an environment where “advice” is increasingly coming under scrutiny, the challenge for the adviser is how to avoid the obvious problems that can arise both for them and the client if promises are made and not kept.

In an environment where the value-add of “advice” is also increasingly coming under scrutiny, the opportunity for the adviser is overcoming the challenges and trusting in procedures that will ensure there is no place for broken promises in their advice process.

Col Fullagar is the principal of Integrity Resolutions Pty Ltd. 

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