Federal Court goes back to basics on policy interpretation and section 54

Background

This case concerned a claim for Total and Permanent Disablement (TPD) benefits by the life insured, Ms Buckland, under a group life insurance policy held by her superannuation fund Australian Retirement Trust Pty Ltd (Superannuation Fund), with ART Life Insurance Ltd (Insurer).

Various provisions of the life insurance policy rested on the defined Date of Disablement, including eligibility, and the calculation of the amount of the TPD benefit. Date of Disablement in the context of a TPD benefit, was defined in the policy as follows: 

The life insured ceased work on 17 September 2021 due to an illness. In September 2022 she lodged a claim for TPD benefits, supported by a doctor’s statement completed by her treating psychiatrist dated 22 August 2022 (Psychiatrist Statement).

The Insurer accepted the Psychiatrist Statement as the first medical report certifying the life insured as permanently unable to work again due to her illness. The TPD claim was accepted and she was paid a TPD benefit commensurate with her sum insured as at 22 August 2022.

On 2 February 2023 the life insured’s treating psychiatrist provided another medical report to the Insurer in support of a request on the Insurer to recalculate the TPD benefit payable to the life insured under the Policy (Psychiatrist Certificate). The Psychiatrist’s certificate stated the life insured had been incapacitated since she ceased working on 21 September 2021. No further determination was made by the Insurer in response to the request for review.

A complaint was made by the life insured on these terms to AFCA, which determined the date from which the life insured was said to have first satisfied the definition of TPD was 21 September 2021, and the life insured was entitled to rely on section 54 of the Insurance Contracts Act 1984 to prevent the Insurer from relying on the later date of certification “to partly refuse payment” of the TPD claim.

The AFCA decision was appealed by the Insurer and the Superannuation Trustee to the Federal Court.

Key Issues

The primary issues in dispute before the Federal Court were,

1. whether the failure by the life insured to obtain, prior to 22 August 2022, a medical certificate certifying her as permanently unable to work again due to injury or illness was an “act or omission” within the scope of s 54? and
2. whether AFCA’s approach to determining the relevant Date of Disablement to be a date other than 22 August 2022 was open to it having regard to the scope and operation of s 54?

The Court was also required to consider the correct meaning of Date of Disablement under the policy. It was submitted by the life insured, in the alternative, that the Date of Disablement was not the date on which a doctor writes the certificate, but the date on which the doctor first believes a life insured is TPD.

Findings

The Court ultimately set aside AFCA’s determination, finding it was contrary to law and the contract of insurance.

The Policy Construction Issue

The Court rejected the life insured’s submissions on policy construction, finding that her submissions that the certification in a medical certificate could be backdated was not in accordance with the natural meaning of the terms of the Policy.

In doing so the Court had regard to the temporal language of the Date of Disablement definition, which conveyed a view that the provision of certification by a Medical Practitioner was intended to refer to a singular point in time or instance. Further, the definition specified the medical certificate was intended to certify whether an insured member is and not was relevantly incapacitated.

The Court also had regard to which approach would provide a coherent and congruent operation of the Policy. Particular reference was made to the fact the policy provided for a structured regime of benefits, each of which was payable at various times and in differing circumstances, and the life insured’s interpretation of the policy would mean she would have bene entitled to both TPD and temporary disablement benefits across the same period of time. Adopting a commercial approach to interpretation of the policy, the Court determined it was not likely that the policy would have provided for payment of two different types of benefits in respect of the same period of time.

The Section 54 Discussion

The Court ultimately found that section 54 did not apply to the circumstances of the life insured’s TPD claim.

1. reliance was sought on section 54 to backdate a claim that had been “in fact made”;
2. the failure to obtain certification from a Medical Practitioner from the earlier point in time was not an “omission” for the purposes of section 54, and there is no suggestion any earlier diagnosis could have been made;
3. the certification requirement was a restriction or limitation inherent in the cover and an essential character of the policy. Therefore section 54 did not operate to extend cover under the Policy to provide benefits in respect of the period prior to the life insured satisfying the terms of the definition of Date of Disablement; and
4. the temporal elements underlying the benefits payable were fundamental aspects of the cover provided, particularly having regard to the sequential nature of the available benefits under the policy.

The Court again noted if section 54 applied in the manner alleged, a life insured would be eligible to dual benefits across the same period and “… that is objectively not how sensible, commercial parties would have intended the Policy to operate and it underscores the inapplicability of s 54 in the present circumstances.”

Take Away

This case provides a comforting reminder to insurers that the Courts won’t be afraid to fall back on the basic principles of policy interpretation, preferring a common sense interpretation that affords the contract commercial purpose and efficacy, over creative interpretations that lend themselves to unintended approaches. A key take away for insurers is to be wary of the use of temporal language in policy wording, and to ensure the language reflects the specific intentions of underwriters.

Insurers should also be buoyed by the Court’s reluctance to further obfuscate the application of section 54, taking a black letter law approach and reaffirming the requirement that it has no application to a restriction or limitation that is an essential character of the policy.