superannuation alert Insurance, disclosure and claims the good, the bad and the ugly for super funds

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1 superannuation alert Insurance, disclosure and claims the good, the bad and the ugly for super funds 8 May 2014 A recent Superannuation Complaints Tribunal (SCT) determination and some comments made in a recent superannuation discussion forum identify certain issues that superannuation fund trustees and their insurers may wish to consider in order to reduce any exposures to the threat of complaint by members to the SCT or determinations setting aside trustee decisions. SCT Determination D13-14\090 Determination Summary A Complainant argued that a Trustee s and Insurer s decision (Decision) to deny payment of the insured component of a Deceased Member s death benefit (Insured Benefit) was unfair or unreasonable because relevant exclusions contained in the Fund s insurance policy (Policy) were not drawn to the Deceased Member s attention. The SCT set aside the Decision and determined that the Trustee (via the Insurer) pay the Deceased Member s insured Benefit. The Facts The Deceased Member was born in New Zealand and moved to Australia, where he worked as a truck driver and became a default superannuation fund member in The Deceased Member held a Special Category Visa. As part of his membership he was provided with automatic life insurance cover. In May 2007 the Trustee wrote to the Deceased Member noting that it had been advised that he had recently changed employers and advising him that his account had been transferred to the Personal Member Division. Attached to this letter was a document certifying the details of his life insurance and confirming his cover of $250,000. The Deceased Member continued to work for his employer until November 2008 before returning to New Zealand to live until his death in January No facts were disclosed about the Deceased Member s health, in the SCT s determination. However we assume that he was eligible to hold insurance cover at the time of his death (aside from the specific exclusion referred to below). The Insurer denied the Complainant s claim for the Insured Benefit on the basis that the Deceased Member, who died overseas, was not a permanent Australian resident as required by the Policy, and therefore was excluded under the Policy s worldwide cover provisions (WWC Exclusion).

2 The Complainant argued that: the Policy failed to define the term permanent Australian Resident ; the WWC Exclusion was not drawn to the Deceased Member s attention; and the Policy was sold to the Deceased Member by the Trustee which had the obligation to point out the effects of such exclusions. In response, the Trustee argued that: the Deceased Member was provided with a Product Disclosure Statement (PDS) covering the product including insurance, upon joining the Fund; it had no reasonable basis to believe that the Deceased Member needed to be made aware of the WWC Exclusion; it did inform the Deceased Member of the need to obtain approval in writing before proceeding overseas in order for his insurance cover to continue (there is no detail of how this was achieved); and the insurance cover was not sold to the Deceased Member but rather it was automatically provided as an additional benefit of Fund membership. The SCT, in forming its determination: noted that the Policy excluded cover to persons who are not permanent Australian residents, upon leaving Australia, unless otherwise agreed in writing with the Insurer beforehand; considered what the definition of permanent Australian resident meant, and how it applied to the Deceased Member. The SCT was satisfied that it was fair and reasonable of the Trustee and Insurer to conclude that the Deceased Member was not a permanent Australian resident and therefore did not meet the requirements for cover by the WWC Exclusion, by virtue of him holding a Special Category Visa; concluded that the Trustee s disclosure of the Policy s exclusions was inadequate. In the context, the Deceased Member s employment was categorised as manual or heavy (unskilled) and he would have had little experience in reading and understanding large complex documents. The SCT noted that: - the 77 page PDS, published in 2006, contained 3 columns of small print on each page; - the WWC Exclusion was referred to on page 60 stating that insurance cover is not available if you are not a permanent Australian resident unless the Insurer agrees in writing before you leave Australia ; - the insurance exclusions contained in the PDS were not highlighted and therefore difficult to locate; The SCT also stated that it should have been apparent to the Insurer and Trustee that there may be a not insignificant number of employee members

3 who were not permanent Australian residents who would be affected by the exclusion clause. As at 30 June 2013 there were 1,666,890 temporary residents in Australia including 640,770 New Zealanders under Special Category Visas. In other words, the WWC Exclusion was likely to be highly relevant to many Fund members. noted that in September 2007 the Trustee and Insurer agreed to: - provide cover to 950 Fund members who had overseas addresses despite the WWC Exclusion (2007 Waiver); but - that going forward a Policy upgrade would prevent non-permanent Australian residents from retaining cover when transferring to the Fund s personal division; and concluded that the 2007 Waiver was poorly drafted (of which the Trustee and Insurer agreed) whilst being retrospective and wide in its application and should have applied in respect of the Deceased Member because he was a member at the time. The SCT therefore considered that the Decision to reject the claim for payment of the Insured Benefit was not fair and reasonable in the circumstances and therefore determined to set aside the Decision and substitute its own decision that the Insurer pay the insured amount to the Trustee together with interest. Thomson Geer Comment We confirm that we have not reviewed the relevant PDS or Policy, and cannot confirm the degree of legal diligence and review undertaken by the Trustee and Insurer. Our comments are based solely on the SCT s report, and are designed to be exemplary and not as commentary in respect of the Trustee or Insurer that were the subject of the Determination. There are probably four steps that a trustee in similar circumstances could initially take to avoid a similar claim, and these steps apply to other claims (not merely questions of residency): the Trustee should have (and may have) had the Policy legally reviewed and considered whether certain terms (in this case, the definition of permanent Australian resident ) were clearly drafted or should have been amended. The reality, in this case was that the SCT agreed with the Trustee and Insurer that the Deceased Member was not a permanent Australian resident ), so amending this particular definition in the circumstances may have been of limited value. As difficult as it may seem, the terms of an insurance policy should be spelt out clearly, and any ambiguities need to be redrafted. In our experience insurers and trustees often verbally agree (or agree by ) that certain ambiguous provisions have a particular meaning that may be difficult to discern from reading the actual policy. The risk here is that informal agreements may not provide adequate evidence in the event of a future dispute (especially where there has been ample opportunity to amend a policy to better reflect such agreements, over time) - memories can become hazy or those who made the verbal agreement move elsewhere and no longer be contactable.

4 If the Trustee had ensured the Policy was legally reviewed, the term permanent Australian resident could have been clarified, or alternative wording could have been drafted, to provide certainty that certain members would be excluded from cover in certain circumstances. Further, it may have made the WWC Exclusion more identifiable and easier to disclose (or justify disclosing) in the PDS. the PDS should have adequately and clearly spelt out the exclusions. It would be difficult for any product issuer who fails to adequately disclose conditions or exclusions in respect of any financial product to defend itself against a claim that it owes a liability to a retail client, despite the existence of such a condition or exclusion. It is arguable that such failures could lead to claims of breaches of the various consumer protections laws under the Corporations and ASIC Acts. The drafting of conditions and exclusions into a PDS usually is a relatively straight forward exercise (it often simply involves listing the exclusions, and this can be understood by anyone). The Corporations Regulations now explicitly requires superannuation fund PDS to bring insurance exclusions to the attention of members, and prior to the short form PDS rules, it was heavily implied that such disclosure was required. Using this case as an example, there has to be a degree of pragmatism. Disclosure has to be effective, so listing every conceivable form of residency or visa-type to explain the WWC Exclusion may not be feasible. However, at the very least exclusions (and eligibility terms) should be highlighted in a PDS so they are easily identifiable, and the trustee should offer a reader the opportunity to request a copy of the relevant insurance policy; the fact that insurance cover may be automatically provided to members (as opposed to being sold ) is likely to be an irrelevant argument in justifying a lower level of disclosure. A member pays insurance premiums through his or her superannuation fund and therefore for all intents and purposes has been sold the default insurance policy as part of the issue of the wider superannuation fund package. Trustees must disclose the fact that insurance may be provided by default and how members can opt-out of cover. Further, Trustees have a fiduciary and legislated duty to act in members best interests - keeping members fully informed implicitly falls into this duty; in situations where trustees and insurers make special offers in respect of pre-existing insurance policies (for example the 2007 waiver) such terms and conditions, whether inserted into an insurance administration agreement or an endorsement to a pre-existing insurance policy, should be legally reviewed if for no other reason than to determine: - that the agreement is legally binding (especially on the insurer); - the correct class of insured members is covered by the agreement in order to avoid uncertainty as to who is covered and who is not (for example, pre-existing members who have been covered for a certain period of time only);

5 - the relevant periods of time such offers are made available; and - whether a covered member who successfully applies to increase or change cover (or who becomes subject to underwriting for some reason) would still retain the benefit of the offer; and finally where a special offer is made, trustees should always issue a significant event notice in respect of that offer. Further, and as a final word of warning, section 64 of the Superannuation (Resolution of Complaints) Act 1993 requires that the SCT Chairman must notify ASIC or APRA of any breaches of the relevant law that the relevant regulator regulates, whilst also retaining the discretion to also notify the other regulator. In the case above, it would seem that (assuming that the claim was in respect of a period occurring on or after Stronger Super), the SCT Chairman would have been required to notify ASIC of breaches of the Corporations Act disclosure rules and APRA of breaches of the section 52(2) trustee covenants. Written by: Mark Abramovich Partner mabramovich@tglaw.com.au Luke Hooper Senior Associate lhooper@tglaw.com.au For further information, please click here to contact our national Superannuation team or contact our office directly: Sydney Level 25 1 O Connell Street Sydney NSW Melbourne Level 39 Rialto South Tower 525 Collins Street Melbourne VIC Melbourne Level Bourke Street Melbourne VIC Brisbane Level 16 Waterfront Place, 1 Eagle Street Brisbane QLD Adelaide Level 7 19 Gouger Street Adelaide SA This Alert is produced by Thomson Geer. It is intended to provide general information in summary form on legal topics, current at the time of publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters. Liability limited by a scheme approved under Professional Standards Legislation.