Insights

In brief - Insurer successfully appeals TPD benefit judgement

In MLC Nominees Pty Ltd v Daffy [2017] VSCA 110, the Victorian Court of Appeal has confirmed that courts will apply a "businesslike" interpretation to policies of insurance. The decision is significant because it illustrates some of the complex issues which may arise where a person's employment has been terminated. It is also a reminder that insurance policies, including their defined terms, should be clearly drafted.

Cessation of liability clause and "accrued" policy wording scrutinised by Court of Appeal

The Court of Appeal undertook a detailed analysis of the policy wording in question. Ultimately, the key issues for determination were:
  • the meaning to be given to a "cessation of liability" clause contained in the policy, and
  • whether the total and permanent disability (TPD) benefit had "accrued" at the date of injury, and prior to a termination of employment
At first instance, Daffy received judgment for a TPD benefit of $1,521,071.64, plus interest of $344,568.02. MLC Nominees Pty Ltd and MLC Limited (collectively, MLC) appealed, and the decision of the trial judge was overturned. 

Justices Beach, McLeish and Keogh gave a unanimous joint judgment for MLC on 15 May 2017.

Insured's income protection claim accepted but TPD claim rejected by MLC

Mr Daffy was general manager and a fifty per cent shareholder of Southern Star Designer Window Pty Ltd (SSDW).

On 14 October 2010, whilst lifting a large sliding door, Mr Daffy suffered a prolapsed disc at the L5/S1 level. He was hospitalised for four days and then absent from work for approximately four weeks. Mr Daffy returned to work, but his work was significantly restricted in the range of duties he could perform and the number of hours he worked. He experienced varying degrees of pain and was consuming large quantities of over-the-counter painkillers.

Mr Daffy's last day at work was 20 May 2011. On 24 May 2011, Mr Daffy's employment was terminated, for reasons unrelated to his injury or performance as general manager. After this time, Mr Daffy did not engage in any employment. At trial, MLC conceded that for a period of six months commencing in late July 2011, Mr Daffy would have been unable to attend work solely through injury.

Mr Daffy claimed an entitlement to a total and permanent disability benefit, and income protection payments, under a MLC policy which had been arranged through his superannuation. The policy holder was MLC Nominees Pty Ltd and the insurer MLC Limited. It was accepted that SSDW was a Participating Employer under the MLC policy.

Mr Daffy's claim for income protection, made in September 2011, was accepted by MLC. On 29 May 2012, Mr Daffy made a TPD claim under the policy. The claim was rejected by MLC on the basis that Mr Daffy did not meet the definition of TPD contained in the Sixth Schedule of the policy, as MLC was not satisfied that Mr Daffy had suffered a total irreversible inability to perform at least two of the "Activities of Daily Living" as defined in the Sixth Schedule of the policy.

Cessation of employment and the cessation of liability clause in insured's policy

Clause 27.1 of the policy provided:
 
27.1    Notwithstanding any other provision contained in this Policy, MLC's liability to pay any Benefits which have not already accrued in respect of a Member shall cease on the occurrence of the earlier or any of the following events:



(e)    on the date the Member ceases to be an employee of a Participating Employer, unless the Member is covered under Schedule 3 or continues to be covered under Schedule 4 of the Policy…

Principles of interpretation of insurance policies

The Court of Appeal held (at [66]):
 
…a policy of insurance is a commercial contract and should be given a businesslike interpretation. Interpreting a policy of insurance (like any other commercial document) requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure. That said, it has been recognised that, in cases of ambiguity, a 'liberal approach' will generally be adopted in the construction of insurance contracts. This does not mean, however, that a court can attribute a different meaning to the words of a policy simply because the court regards the meaning as otherwise working a hardship on one of the parties. 

The trial judge at first instance held that Mr Daffy's right to make a TPD claim and have it determined in accordance with the First Schedule was a benefit which had accrued before his employment was terminated. The Court of Appeal did not agree that clause 27.1 could be read so as to encompass the "benefit" of being able to make a claim. It considered this would do unacceptable violence to the language of clause 27.1. 

"Accrued" benefit and definition of total and permanent disability

The Court of Appeal held the TPD benefit had not accrued at the time of Mr Daffy's injury or by 24 May 2011. Mr Daffy had not been absent from his occupation for six months, as required by the TPD definition in the First and Sixth Schedules.

Mr Daffy contended that to accept a construction other than that posited by him would lead to potential results which were so unjust as to suggest an error in the reasoning that led to them. The alleged injustice arose from the more onerous definition of TPD which would apply in the First Schedule (if the relevant benefit had accrued) and the Sixth Schedule (if there was no accrued benefit).

However, the Court of Appeal held (at [82]) that:
[This], however, is not a sufficient basis upon which one might torture the language of cl 27.1 of the policy so as to hold that in a particular case of injury, a TPD benefit that might subsequently be payable (and paid) under the policy is an accrued benefit at the time of injury, and no matter what part of any such injury might ultimately be found to play in any subsequently determined disability. That would deny the requirements in the First Schedule and the Sixth Schedule that the member had been absent from an occupation for six consecutive months. While Mr Daffy pointed to ways in which that requirement could easily work unfairness, it cannot be simply ignored. 

Pursuant to the policy, MLC could exercise a discretion to pay an insured before the end of six consecutive months' absence. This, however, did not mean that in the absence of the exercise of the discretion that a TPD benefit accrued before the definition of TPD had been satisfied.

Insurers should ensure that policies are drafted clearly

Depending upon the policy wording, termination of employment can have significant consequences for a person's entitlement to TPD benefits.

Insurers can be reassured that Courts will apply a businesslike interpretation to their wordings, and uphold the contract between the parties, in accordance with the longstanding principles set out in earlier decisions such as McCann. However, they ought to give careful consideration to ensuring that their policy drafting is as clear as possible, including in relation to defined terms within the policy.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​