On 9 September 2007, Mr Hitchens, (the plaintiff) sustained substantial injuries to his right hand, whilst using a power saw at his home (the accident). Following the accident, the plaintiff made claims under two life insurance policies issued by Zurich Australia Limited (Zurich).
Zurich made payments to the plaintiff under the policy providing income protection cover (income policy) up until May 2008. However, in August 2010, Zurich sought to avoid payments under both policies due to non-disclosure and misrepresentations on the part of the plaintiff. Consequently, the plaintiff brought proceedings against Zurich for damages, in excess of $4 million, to compensate him for the amounts he claimed were payable under both policies.
Insured’s Duty to Disclose
The plaintiff had an extensive medical history involving physical injuries and psychological conditions.
Pursuant to s 21 of the Insurance Contracts Act 1984 (Cth) (the Act), an insured’s duty of disclosure is limited to facts which the insured knew, or a reasonable person in the circumstances would have known, to be relevant to the insurer’s assessment of the risk. In this particular case, the court had to determine whether the plaintiff, in taking out the Zurich policies, had made sufficient disclosure of his extensive medical history.
Insurance proposal form
In August 2004, following a consultation with a financial planner, the plaintiff submitted applications for insurance with Zurich. In examining the proposal form, the court found the plaintiff’s responses, which were brief or in some instances intentionally left blank, were “substantially false“.
Counsel for the plaintiff submitted that such answers had nonetheless put Zurich on notice of the plaintiff’s health issues, and by failing to make further enquiries, it had waived the duty of disclosure (s 21(1)(d) of the Act).
What is meant by ‘waiver’ of an insured’s duty of disclosure was considered at length by his Honour White J. His Honour recognised that principles of waiver in insurance law stem from the decision in Carter v Boehm and are part of an “overall scheme of fairness between assured and insurer”. Quoting WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA his Honour explained:
“Ultimately, it seems, the question is: has the insurer been put fairly on inquiry about the existence of other material facts, which such inquiry would necessarily have revealed? The test has to be applied by reference to a reasonably careful insurer rather than the actual insurer, and not merely by reference to what such an insurer is told in the assured’s actual presentation but also by reference to what he knows or ought to know… Overriding all, however, is the notion of fairness, and that applies mutually to both parties, even if the presentation starts with the would-be assured.”
It was held that the plaintiff did not make a fair presentation of the risk and Zurich was not put on notice that there were material matters relevant to its decision whether or not to accept the risk. Zurich was found not to have waived the duty to disclose in the circumstances.
Finding on non-disclosure and misrepresentations
The court found the plaintiff made misrepresentations to Zurich and failed to comply with his duty of disclosure.
Counsel for the plaintiff conceded there had been some failures to disclose, or misrepresentations, however, submitted they did not entitle Zurich to avoid the policies because the plaintiff had not done so fraudulently.
An insurer may not avoid a policy on the grounds of non-disclosure or misrepresentation unless the non-disclosure or misrepresentation was fraudulent. His Honour was satisfied that in completing the proposal form, the plaintiff had done so falsely, and held “the only explanation for Mr Hitchens’ making knowingly false representations or deliberately concealing material facts was to seek to induce Zurich to offer cover”.
Consequently, Zurich was entitled to avoid the policies on the grounds of fraudulent misrepresentation and fraudulent non-disclosure.
Allegation of repudiation by Zurich
The plaintiff submitted that by failing to make any further payments under the income policy after May 2008, Zurich had repudiated the contract of insurance. The plaintiff also submitted that he accepted repudiation and terminated the contract, thereby removing Zurich’s ability to avoid the contract. It was held that Zurich’s actions, at the time, in assessing the plaintiff’s claim did not amount to a repudiation of the contract of insurance. However, his Honour noted that had there been repudiation and termination, this would have only discharged the parties’ future obligations, and that Zurich could avoid the contract from its inception on discovering the grounds that entitled it to assert fraudulent misrepresentation and non-disclosure.
The court ordered Zurich was entitled to avoid the policies from their inception which entitled it to recover payments made to the plaintiff under the income policy, where they exceeded the premiums paid.
An insurer may avoid a policy on the grounds of non-disclosure or misrepresentation where the non-disclosure or misrepresentation was fraudulent.
There are instances where sufficient information is provided by an insured to provoke a prudent insurer to make further enquiries. However, this case did not fall into that category.