In brief - The date from which it becomes unreasonable for an insurer to withhold payment is crucial
Recent judgments have indicated that insurers should have a reasonable period to investigate their position before interest begins to accrue. A reasonable period is typically three months, although it can be as little as seven days or greater than four months.
Events occur after insured takes out income protection insurance
In March this year, in Summers v The National Life Association of Australasia (No 2) [2012] TASSC 9, the Supreme Court of Tasmania had reason to look beyond the usual "plus interest plus costs" stamp that traditionally follows a judgment with damages, with particular reference to section 57 of the Insurance Contracts Act 1984 (ICA).
Mr Summers was a tavern owner in Tasmania. On 11 November 1993 he took out income protection insurance with Australian Casualty & Life (AC&L). Within 11 days of arranging the policy, Mr Summers allegedly slipped at work and suffered an injury to his right shoulder.
While he claimed to have suffered "total disability" as defined under the policy, he omitted to lodge a claim (only placing a quick call to his broker) and failed to appreciate that at the time he was subject to an interim policy. (Justice Tennet later stated in her judgment that she could find no obligation that would have compelled AC&L to make these payments.)
However, quite unfortunately, AC&L also did not appreciate the status of the policy and therefore its limited cover. While the insurer initially disputed cover (with good reason), Mr Summers had a shoulder operation in 1995 and following this, AC&L commenced paying benefits to him and continued to do so for two years (the maximum period of payments if the disability was not permanent).
However, while the shoulder payments were being made, the policy with AC&L continued to remain on foot. In January 1997 Mr Summers allegedly fell and hurt his knee, claiming again for total disability under the policy, albeit he waited until he had finished his holiday before notifying his broker and then it seems he became confused as to which knee was injured, as did his treating doctor.
In a similar vein and again for unclear reasons (according to the court), the insurer commenced making payments to Mr Summer in 1998, again for a period of two years.
Insured appeals decision to Financial Industry Complaints Service (FICS)
Not content with two years of payments, Mr Summers appealed the insurer's decision to cease payments to the Financial Industry Complaints Service, which ultimately held that following 20 January 2000, no further benefits were payable to him. Accordingly, under the policy, premiums were automatically to become payable again following cessation of benefits payable under a claim.
In 2003, Mr Summers suffered a third injury, this time to his back. In completing a form required by AC&L during the claims process, Mr Summers stated that the injury occurred when his 7-year-old son unexpectedly jumped on him while he was sitting in a lounge chair.
However, he also made reference to his work history and his other injuries. Importantly, he stated that he had ceased all work on 8 June 1995.
Insurer terminates policy as insured is no longer employed
AC&L seized upon this information and wrote to Mr Summers to terminate his policy on the basis of the Termination provision under the policy which stated:
The Policy will terminate when you die, retire or cease to be engaged in any gainful employment other than whilst in receipt of a benefit under this policy and subject to Part 2.7 "Leave without pay benefit"… If a claim continues to be paid under the policy after the termination date, the provisions will remain in force for the purpose of payment and administration of that claim only and will immediately terminate as soon as payment of that claim ceases.
In a letter to Mr Summer, AC&L stated:
As your correspondence of 4 June 2003 was the first time our office was made aware that you have not been employed since 1995, we can now confirm that in accordance with your policy, your policy terminated effective 20 January 2000. This is the date that you were last paid benefits to under your previous claim. It is also the date that the Financial Industry Complaints Service determined in their finding that no further benefits were payable under that claim as AC&L had met their maximum liability payable under that claim.
Insured claims insurer should have continued to pay benefits for life
Over the course of Mr Summer's proceeding, originally issued in 2003, his solicitors filed six Statements of Claim variously disputing AC&L's decision to cease payments with respect to the three injuries. It was not until 2012 that the matter actually proceeded to hearing.
At the trial, Summers v The National Mutual Life Association of Australasia [2011] TASSC 69, Mr Summers was required to satisfy the court that he remained entitled to a total disability benefit as at late January 2000, and that AC&L should have continued to pay benefits for life. He needed to satisfy the court that, at that point in time:
- he was continuously unable as a result of injury or sickness to perform any gainful occupation for which he was reasonably suited by education, training or experience;
- he was under the regular care and attendance of a doctor for that injury or sickness, and
- he was not engaging in any occupation. If the plaintiff satisfies the court as to these matters, then the defendant had an obligation to continue to pay him benefits from January 2000, which it failed to do.
While it seems Mr Summers' credit was squarely in issue, being labeled by Justice Tennet as "not an impressive witness" and "at pains to minimise his abilities and present himself as an uneducated person, and one with no talent to do anything other than basic physical work", one of the key issues in the case was about the termination of the policy.
While AC&L asserted (through the correct entity National Life Association of Australasia) that the policy terminated automatically as at January 2000 because the plaintiff had, by then, ceased to be engaged in any gainful employment otherwise than while in receipt of benefits, Her Honour noted during the trial that the argument would fail if Mr Summers was unemployed by reason of his disability, as he should have been in receipt of payments.
Termination of policy by insurer held to be ineffective
After hearing extensive medical evidence, the court concluded that in all the circumstances Mr Summers was, as at 20 January 2000, totally disabled such as to have been entitled to have benefits continue to be paid beyond January 2000. Accordingly, the termination of the policy was deemed to be ineffective and judgment was ordered for the plaintiff.
The court held that the defendant had an obligation to pay benefits to the plaintiff for the periods January 2000 through to 7 March 2006, after which the court held Mr Summers was performing a gainful occupation. Her Honour left the parties to complete the calculations, which subsequently led to the figure of $187,578.
The court then turned to the question of interest. Interestingly, counsel for both parties conceded interest would be applicable, but counsel for Mr Summers articulated no basis upon which it could be said his client was entitled to interest.
Counsel for the insurer made written submissions that if the Court awarded interest, it should be confined to simple interest, there being no evidence or legislative provision that would allow otherwise. However, neither counsel actually referred to the impact of section 57 of the Insurance Contracts Act.
Given the lack of submissions, the court left the parties to attempt to settle the issues of interest and costs. However, the parties were unable to agree on either interest or costs and accordingly they returned to Justice Tennet once more.
Second judgment examines section 57 of the Insurance Contracts Act
Section 57 of the ICA regulates when and at what rate interest is payable upon monies due under a contract of insurance. In short, it provides that interest is only payable from the date upon which it was unreasonable for the insurer to have withheld payment until the date the monies are paid.
Section 57(2) states:
(1) Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.
(2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days:
(a) the day on which the payment is made;
(b) the day on which the payment is sent by post to the person to whom it is payable.
Date on which entitlement to interest should commence
In returning to the court the parties had agreed that interest was payable and that the applicable rate of interest was 8.5%. However, they could not agree the date upon which any entitlement to interest should commence and at which point the defendant’s withholding of payments after 20 January 2000 became unreasonable.
Counsel for Mr Summers contended that interest should run from the date upon which AC&L stopped payments in January 2000, that being the commencement of the period over which the court found the defendant should have paid benefits, while counsel for AC&L conceded that there is an obligation to pay interest but submitted that it was not unreasonable for the defendant to have ceased the payment of benefits when it did.
In essence, AC&L sought to justify its decision to cease payments on the basis that Mr Summers had not been employed (as required) and the FICS decision held that after 20 January 2000 no further benefits were payable and that it was reasonable to rely on this.
The court held that it was not an unreasonable step for the insurer to rely on the FICS decision initially, but turned to consider for what period after that determination did it remain reasonable for the insurer to continue to refuse to pay benefits. Importantly, AC&L acknowledged that in April 2000 it received a "progress claim" from Mr Summers which related to a claim that FICS had disallowed.
Consideration of existing authority
In Diosdado Sayseng v Kellogg Superannuation Pty Ltd & Anor [2007] NSWSC 857, the insurer argued that interest should not run until the date on which it was informed of the totality of the evidence that was relevant to the total and permanent disablement, being during the hearing.
Sayseng followed Bankstown Football Club v CIC Insurance Limited (unreported, NSWSC, Cole J, 17 December 1993) in which it was held:
In my view s 57 is directed to a determination of the point of time at which empirically it can be stated that it was unreasonable to decline to make a payment. The decision is not to be determined simply by a determination of whether or not there was a bona fide dispute regarding the entitlement to payment. It is rather to be determined by a finding as to whether or not there was liability.
If there was liability found and the insurer to pay, then the presumption must be that the insurer ought be deemed to know of that obligation as ultimately determined, even though it may bona fide have held a different view at all times prior to determination, at least at the first instance level, in relation to the question of liability.
A reasonable period is to be given to the insurer to investigate and determine its position. But if it adopts an incorrect position in relation to its obligation to pay under the policy, that, in my view, does not mean that simply because that incorrect position is adopted on a bona fide basis, it becomes reasonable for the insurer to decline to pay the sums otherwise due.
Insurers must not be advantaged by obtaining bad legal or loss adjusting advice
The court in Summers noted that the justification for the rejection of any bona fide belief as the insurer's defence to a policy holder's claim was clearly set out in Max Hams and Others v CGU Insurance Limited [2002] NSWSC 273:
To hold otherwise would put a premium on erroneous advice. Taken to its logical extreme, an insurer which relied upon incorrect legal advice or an inadequate report of a loss adjuster to form a belief as to the possibility of its successfully defending a policyholder's claim would be advantaged by having obtained bad legal or loss adjusting advice. The successful policyholder would be correspondingly disadvantaged by the same irrelevant circumstance.
Three months deemed a reasonable period to investigate a claim
The court in Summers also noted that previous judgments seemed to have selected an arbitrary period of three months as a reasonable period during which the insurer was held to be entitled to investigate a claim, subject to the type of case and probable issues to be investigated. (See for instance VL Credits v Switzerland General Insurance [1990] VR 938.)
In relation to determining the point at which it was unreasonable not to pay Mr Summers' claim, the court held that the insurer ought to have realised when Mr Summers submitted his progress claim that he had not accepted FICS' decision and not chosen simply to ignore this. Accordingly the court held:
Allowing a reasonable time to investigate of, say, three months (while the time frame is arbitrary it was considered reasonable in Sayseng's case), I conclude that at the expiration of that three month period from 13 April 2000, it was unreasonable for the defendant to withhold benefits.
The effect of this was that over $100,000 in interest was awarded to Mr Summers in addition to his judgment of $187,578.
Insurers' arguments continue to be rejected by the courts
It seems that insurers will continue to try to argue that in determining whether a decision to withhold payment under a policy was "unreasonable", the court ought to take into account the merits of its grounds for denying liability. However, these arguments continue to be rejected by the courts on the basis that to permit such would put a premium on erroneous advice or opinion and for obvious reasons, a court would prefer not to delve into how "erroneous" any advice/opinion was.
Much is left to a court's discretion concerning the amount of time that an insurer ought reasonably be allowed to conduct its investigations, together with some flexibility on when time starts running for the investigation. In the case of Mr Summers, a three month period was permitted. Other periods have ranged from seven days (in Diosdado Sayseng v Kellogg Superannuation) to four months (in McConnell Dowell Middle East Llc v Royal & Sun Alliance Insurance plc (No 2) [2009] VSC 49).
Snapshot of section 57 of the Insurance Contracts Act
- Interest runs after the day from which it is unreasonable for the insurer to withhold payment.
- The day in question is a question of fact to be determined having regard to all the circumstances of the case.
- Ignore bona fide beliefs concerning (no) liability under the policy.
- Reliance on legal advice, whether good or bad, will not assist.
- Generally insurers have three months to investigate before entitlement to interest commences.