Insured’s misrepresentations to outgoing insurer live on for incoming insurer

29 March 2023

The Full Court of the Federal Court of Australia allowed an appeal of the decision in Sharma v HEST Australia Ltd [2022] FCA 536.

In doing so, the Full Court accepted the insurer’s submission that fraudulent misrepresentations made in an application for cover to an outgoing group insurer continue to apply to the incoming group insurer who takes over cover at a later time.

In issue

  • Whether fraudulent misrepresentations made to a previous insurer continue to be misrepresentations to a subsequent insurer who assumes the risk

The background

Dr Sharma, a doctor, was a member of the HEST Australian Superannuation Fund (the Fund) who held default death/terminal illness and default income protection cover prior to March 2011.

On 22 March 2011, Dr Sharma applied to the trustee of the Fund for additional death, total & permanent disability, and income protection cover. On 21 April 2011, in relation to this application, he also completed a personal statement and declaration. The group insurer at the time was OnePath Life Ltd (OnePath).

Together, the March 2011 and April 2011 forms contained three questions which asked whether Dr Sharma had been diagnosed with, had symptoms of, or sought/required treatment (including surgery) for certain cardiovascular issues.

Dr Sharma answered 'No' to all three questions. His answers were false, as he had in fact previously suffered a heart attack and in 1999 had required surgery to insert three stents in his coronary arteries.

On 11 July 2011, OnePath agreed to the additional cover for Dr Sharma.

From 1 December 2011, Colonial Mutual Life Assurance Society Ltd (CommInsure) became the group insurer of the Fund. CommInsure agreed to provide cover for the benefit of members of the Fund under the terms of the OnePath policy without members having to take additional steps. Dr Sharma was not required to provide further information.

In March 2017, Dr Sharma lodged a terminal illness claim in relation to end-stage ischemic cardiomyopathy. He died from heart failure on 21 April 2017.

In May 2017, CommInsure admitted the default cover portion of Dr Sharma’s claim and paid this amount to the Fund. However, the additional cover was avoided in August 2017 under s29(2) of the Insurance Contracts Act 1984 (Cth) (ICA).

On 14 January 2020, Dr Sharma’s widow lodged a complaint with the Australian Financial Complaints Authority (AFCA).

The AFCA decision

The AFCA panel found that Dr Sharma had fraudulently misrepresented his medical history in his application for additional cover in March 2011 and in his personal statement in April 2011. However, it determined that CommInsure could not rely on s29(2) of the ICA to avoid additional cover, as the misrepresentations were made to the previous insurer, OnePath.

Nevertheless, AFCA found that CommInsure’s decision was still fair and reasonable in the circumstances because:

  • section 33 of the ICA did not bar CommInsure from exercising rights under the general law in relation to fraudulent misrepresentations;
  • the misrepresentations had continuing effect, since CommInsure would have declined additional cover had it known of Dr Sharma’s cardiac history at the time that it took over as group insurer; and
  • the common law or equity would allow CommInsure to recover any loss it incurs from paying additional benefits obtained by Dr Sharma’s fraudulent misrepresentations, due to its detrimental reliance on them

(AFCA Decision).

The decision of the primary judge

Mrs Sharma appealed the AFCA Decision to the Court. The primary judge allowed her appeal, set aside the AFCA Decision and remitted the matter to AFCA for re-determination. In doing so, he held that:

  • AFCA was correct in finding that s29 of the ICA did not apply, as the relevant misrepresentation must be made to an identifiable insurer at an identifiable point in time – i.e., OnePath – and not a subsequent insurer; and
  • section 33 of the ICA does limit CommInsure’s rights to those in the ICA, so AFCA’s determination on fairness and reasonableness was wrong as it was based on speculations about CommInsure’s rights under general law.

The issues on appeal

AIA Australia Ltd (AIA) – to whom the business of CommInsure had been transferred on 1 April 2021 – appealed the decision of the primary judge on three grounds:

  • the primary judge erred in finding that AIA/CommInsure could not rely on s29(2) of the ICA to avoid the additional cover;
  • the primary judge ought to have found that s33 of the ICA did not limit AIA/CommInsure’s rights to those provided for in the ICA; and
  • the primary judge erred in failing to uphold AFCA’s determination that AIA/CommInsure’s decision was fair and reasonable in the circumstances.

The decision on appeal

The Full Court of the Federal Court allowed AIA’s appeal. It held that Dr Sharma’s misrepresentations were not spent by OnePath’s acceptance of his application for additional cover, and AIA/CommInsure could rely on s29(2) of the ICA.

Relevantly, the Full Court noted existing authority for the proposition that a representation in pre-contractual negotiations, even if acted on, is considered to be enduring until it is withdrawn or altered, or the contract is completed.

Applied to this case, given AFCA’s factual findings that:

  • Dr Sharma had made continuing fraudulent misrepresentations for the purpose of obtaining additional cover; and
  • AIA/CommInsure was within a class of persons who might reasonably be contemplated as relying on the misrepresentations on the basis of the common practice of trustees changing group insurers from time to time,

this meant that:

  • section 29(1)(b) of the ICA applied, as the misrepresentations were made to the insurer before the relevant contract was entered into;
  • section 29(1)(c) did not disapply s29 as a whole, as AIA/CommInsure would not have agreed to the additional cover had it known of Dr Sharma’s cardiac history; and
  • therefore, AIA/CommInsure could rely on s29(2) to avoid additional cover.

The Full Court dismissed Mrs Sharma’s appeal against the AFCA Decision as the outcome was the same despite the differences in reasoning. As AIA’s first ground of appeal succeeded, there was no need to consider the remaining grounds.

Implications for you

This decision should provide some comfort to subsequent insurers that in the event an insured is found to have made misrepresentations prior to them coming on risk, they will still be able to rely on s29 of the ICA.

It is also a general reminder that a representation, once made in the course of a negotiation for a contact, prima facie continues in force until it is withdrawn or altered, or the contract is completed.

AIA Australia Ltd v Sharma [2023] FCAFC 42

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