The hidden price when providing incorrect information for life insurance

Catriona Smith v OnePath Life Limited [2020] NSWSC 1185 (Smith) presents another reminder that persons seeking insurance cover must reasonably adhere to their disclosure obligations owed to their insurer when incepting an insurance policy. 

Notwithstanding the traumatic circumstances that gave rise to the claim for a death benefit, the Court in Smith upheld the insurer’s right to avoid the policy where it found that an insured had made fraudulent representations to his insurer.

Smith highlights the distressing reality and risks faced by the beneficiaries of a life insurance policy infected by the conduct of the insured. In this case, in addition to the personal and financial costs of protracted litigation (between 2017 and 2020) taken on by the beneficiary, by reason of the failed litigation, the beneficiary was also ordered to paylegal costs.

Background

In or about November 2014, Mr Larcombe (the insured) incepted a life insurance policy (life insurance) with OnePath Life Limited (insurer).

While applying for his life insurance after being specifically informed of his duty of disclosure under the Insurance Contracts Act 1984 (Cth) (the Act) and specifically asked by his insurer, the insured denied (statements) that:

a. he smoked tobacco or any other substance in the preceding 12 months;

b. he had ever taken drugs or any medications on a regular or ongoing basis; and

c. he had ever used or injected any drugs not prescribed by a medical attendant, or received advice, counselling or treatment for drug dependence.

On 19 August 2016, the insured committed suicide. After the insured’s death, his partner made a claim on his life insurance. The claim was denied on the basis that the statements were false and had the insured made statements that were factually correct, the insurer would have not issued the life insurance policy.

Issues

The insurer defended the proceedings commenced by the partner on the basis that the insured:

a. failed to comply with his duty of disclosure under section 21 of the Act by disclosing the matters relevant to the decision of the insurer (regarding his use of illicit drugs) before the life insurance policy was issued.

b. breached section 26 of the Act in circumstances where the statements made by the insured amount to misrepresentations as the insured or a reasonable person in the circumstances could be expected to have known, that the statements would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

c. the statements or misrepresentations of the insured were fraudulent and the insurer is entitled to avoid the life insurance policy under section 29 of the Act.

Findings and Orders

At the hearing, the Court received evidence from the insured’s partner; doctors consulted by the insured; and an underwriter for the insurer.

Relevantly, the Court noted, among other matters, that the insured:

a. was observed taking cocaine by his partner including on a number of occasions including between late 2011 and late 2014.

b. the insured informed his treating GP that he regularly used cocaine and binged on cocaine and ice in September 2014, which prompted a referral for a blood test and other treatment.

c. reported to a medical registrar, in June 2015, as having a binging issue with cocaine, base (amphetamine), ice and pills, having taken drugs 3 years ago every day for 18 months and was sober for 3 months, and

found that the insured’s illicit drug use was serious and regular. The Court went on to find that the insured was an educated and sophisticated man who was apparently unimpaired by his drug use and such, it is inconceivable that he did not:

a. know that he was, and for a long time had been, a non-trivial illicit drug user;

b. know and understand the question asked of him as being whether he was taking or had previously taken or used or injected illicit drugs;

c. know and understand that his illicit drug use was relevant to the insurer’s decision whether to accept the risk and, if so, on what terms. In any event, a reasonable person in his circumstances could be expected to know this.

The Court also accepted the unchallenged evidence that the insurer would not have issued the life insurance policy had it known of the insured’s drug use. The Court dismissed the proceedings and provisionally ordered costs in the insurer’s favour.