Fraudulent misrepresentations about drug use entitle insurer to avoid policy

23 September 2020

Life Insurer entitled to avoid policy for Insured’s misrepresentations and failure to comply with duty of disclosure regarding illicit drug use.

In Issue

  • Whether the Insured fraudulently failed to comply with his duty of disclosure and made fraudulent misrepresentations to the Insurer in not disclosing illicit drug use and smoking when applying for life insurance. Whether the Insurer was entitled to avoid the Policy.

The background

On 21 November 2014, Peter Larcombe (Insured) took out a life insurance policy (Policy) with the defendant, OnePath Life Limited (Insurer). The plaintiff was married to the Insured and was the nominated beneficiary under the Policy.

On 30 October 2014, the Insured signed an application form for the Policy (Application), which he lodged with the Insurer on 6 November 2014. The Insured falsely answered “No” to the following questions in the Application:

“During the past 12 months, have you smoked tobacco or any other substance?” (Question 3).
“Do you take, or have you ever taken drugs or any medications on a regular or ongoing basis?” (Question 30).
“Have you ever used or injected any drugs not prescribed for you by a medical attendant, or have you ever received advice, counselling or treatment for drug dependence?” (Question 31).

The Insured died on 19 August 2016 and the plaintiff claimed under the Policy. The Insurer declined cover, stating that it had avoided the Policy because the Insured had fraudulently failed to comply with his duty of disclosure and made misrepresentations about his smoking and drug use.

The decision at trial

The plaintiff gave evidence regarding the Insured’s drug use, which included ecstasy use at parties in 2008 and 2009 and cocaine use at parties on numerous occasions from 2009 to 2014. She gave evidence that the Insured smoked occasionally.

The Insured’s general practitioner gave evidence that the Insured had visited him in September 2014 after “bingeing on cocaine and ice”. His clinical notes recorded that the Insured was a moderate smoker, regularly drank alcohol and regularly used cocaine. In June 2015, the Insured attended the Sydney Clinic (a clinic for drug and alcohol dependence). The presenting complaint in his admission notes was “I have a bingeing issue…I have a problem with cocaine, base (amphetamine), ice and pills”.

The Insurer’s Principal Underwriter gave uncontested evidence that, had he been aware that the Insured had taken any cocaine or amphetamines in the 3 years before 21 November 2014, he would have declined to offer cover on any terms.

The plaintiff’s argument was that the Insured’s use of cocaine was recreational, occasional, irregular and sporadic. She argued that the Insured did not know (and a reasonable person in his position would not have known) that occasional social use of cocaine was relevant to the decision of the Insurer, in circumstances where he was “relatively young, of good health, self-employed in the finance business, earning a good income and in a de-facto relationship with one young child”. She argued that the structure of the Application conveyed that the Insurer was not materially interested in a proponent’s recreational drug use or the occasional cigarette.

The Insurer argued that the answers to Questions 3, 30 and 31 were not true because the Insured had smoked tobacco during the last 12 months, was taking and had taken drugs (cocaine) on a regular and ongoing basis, had used drugs not prescribed to him and had received advice and treatment connected with drug dependence. The Insurer argued that these were matters which the Insured knew were relevant to the Insurer’s decision to insure and on what terms. It argued that both the failure to disclose and the misrepresentations were fraudulent.

Hammerschlag J found that the Insurer was entitled to avoid the Policy. In reaching this decision, it was determined that the Insured’s use of cocaine was serious, regular and much heavier than the plaintiff’s evidence revealed. Questions 30 and 31 were “clearly and obviously” directed to the use of illicit drugs. The Insured knew that he was (and for a long time had been) a non-trivial drug user. His answers to Questions 30 and 31 were deliberately false, a misrepresentation and fraudulent. The Insured knew and understood that his illicit drug use was relevant to the Insurer’s decision to accept the risk. In any event, a reasonable person in his circumstances could be expected to know this. The unchallenged evidence was that the Insurer would not have issued the Policy had it known of the Insured’s drug use.

Implications for you

This case highlights the importance of the Insured’s duty of disclosure and demonstrates circumstances in which an Insured’s misrepresentations as to illicit drug use were found to be fraudulent, entitling the Insurer to avoid the life insurance policy.

Catriona Smith v OnePath Life Limited [2020] NSWSC 1185

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