The common law right to cancel a contract of life insurance for the making of fraudulent claims

AIA Australia Ltd v Richards (No3) [2017] FCA 1069

1. Section 59A of the Insurance Contracts Act 1984 (Cth) (“the Act”) allows a life insurer to cancel a contract of life insurance entered into after 28 June 2013, if the insured has made a fraudulent claim.¹

2. There was uncertainty, however, as to what basis an insurer has to cancel a contract of life insurance for the making of fraudulent claims where that contract was entered into prior to 28 June 2013. This uncertainty has been resolved by His Honour Chief Justice Allsop in the Federal Court decision AIA Australia Ltd V Richards (No 3) [2017] FCA 1069.

3. The Chief Justice confirmed that, at common law, an insurer has a right to cancel a contract, including a contract of life insurance, prospectively upon the basis of a breach of contract of such a serious nature as fraud against the insurer,² including the making of a fraudulent claim.³ The Chief Justice confirmed that nothing in the Act abrogated that right.⁴

4. In reaching this conclusion, the Chief Justice respectfully disagreed with the conclusion of Einstein J in Alexander Raymond Walton v The Colonial Mutual Life Assurance Society Ltd [2004] NSWSC 616.

5. Paragraphs 65 to 68 of the Chief Justice’s decision warrant detailed consideration, and are reproduced below:

Relief

65.  At common law an insurer has the right to cancel a contract prospectively upon the basis of a breach of contract of such a serious nature as the commission of a fraud against the insurer: Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] UKHL 1; [2003] 1 AC 469 at 498-499 [61]. See also Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45; [2017] AC 1 at 10 [8].

66.  Nothing in the Insurance Contracts Act 1984 (Cth) abrogated that right. Section 56(1) of the Insurance Contracts Act states:

(1) Where a claim under a contract of insurance, or a claim made under this Act against an insurer by a person who is not the insured under a contract of insurance, is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim.

67.  Avoidance ab initio is prohibited: see also s 11. The ability to avoid had been uncertain: Manifest Shipping [2003] 1 AC at 501 [66]; Britton v Royal Insurance Co (1866) 4 F&F 905; 176 ER 843 at 909; and AXA General Insurance Ltd v Gottlieb [2005] EWCA Civ 112; Lloyd’s Rep IR 369 at 374-375 [17]-[22]. The Explanatory Memorandum to the Insurance Contracts Amendment Bill 2013 (Cth) dealing with the new provision for cancelling life contracts to insure, s 59A, also supports this construction.

68.  This availability of the right to terminate or cancel the policy in futuro for the making of a fraudulent claim was denied by Einstein J by his Honour’s construction of s 56(1) in Alexander Raymond Walton v The Colonial Mutual Life Assurance Society Ltd [2004] NSWSC 616 esp at [49] to [51]. With respect, I cannot agree. “Avoidance” is not termination in futuro. There is no basis, in my view, to consider that that common law contractual right has been statutorily abolished.

6. In AIA v Richards, the Federal Court had before it objective evidence, to the Briginshaw⁵ standard, that Mr Richards:

(a)  since at least January 2016, was intending to perform acupuncture upon patients in Latvia and Sweden;

(b)  from at least August 2016, had actually been performing acupuncture in Latvia and Sweden; and

(c)   when confronted with these allegations, Mr Richards made various admissions.

7. The Chief Justice found that the evidence, linked together, showed that Mr Richards was capable of performing his usual occupation over the relevant period and intending to perform, or performing, the duties of another occupation. This was despite Mr Richards having made representations when submitting claims under an income protection policy to the effect that he was totally disabled. The Chief Justice found that the relevant claims were in fact fraudulent.

8. Importantly, the Chief Justice also found that the investigation costs that took place because of suspicions about claims that were in fact fraudulent are also recoverable by the insurer. The Chief Justice held, at [70]:

“The insurer also claims its investigation costs. At one level, these might be seen as part of its cost of doing business, and therefore part of its overheads. That is the better analysis for the investigations commenced before February 2016. It is not, however, the correct analysis for investigations carried out after February 2016. The investigation took place because of suspicion about claims that were in fact fraudulent. These costs fall within an orthodox application of Hadley v Baxendale …”

9. Following detailed consideration, the Chief Justice made an order for damages (being for claim payments and investigations made due to fraud), as well as declaring that:

(a)  AIA validly refused to pay claims made by Mr Richards pursuant to s 56(1) of the Act; and

(b)  the contract of insurance between AIA and Mr Richards was validly cancelled by AIA.

10. This is a significant decision for the life insurance industry as it clarifies the recourse a life insurer has when fraudulent claims are lodged, particularly with respect to pre 28 June 2013 contracts. The decision highlights that a life insurer, when dealing with a fraudulent claim, should not just refuse payment of the claim under section 56 of the Insurance Contracts Act, but should also, in appropriate circumstances and if the evidence so establishes, cancel the contract of life insurance for the making of the fraudulent claim(s).

11. William Roberts Lawyers acted for AIA Australia Ltd in:

(a)  AIA Australia Ltd v Richards [2017] FCA 84;

(b)  AIA Australia Ltd v Richards (No 2) [2017] FCA 539;

(c)   AIA Australia Ltd v Richards (No 3) [2017] FCA 1069; and

(d)  AIA Australia Limited v Richards (No 4) [2017] FCA 1100.