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Focus: Fraudulent misrepresentation: the doctor who took his own medicine

31 May 2011

In brief: The Supreme Court of New South Wales recently allowed an insurer to avoid a policy for fraudulent misrepresentation. Partner Dean Carrigan and Law Graduate Ishwar Singh look at a case that is a useful guide to the operation of section 29 of the Insurance Contracts Act 1984 (Cth).

How does it affect you?

  • This case concerns a claim for damages for the wrongful repudiation of a life insurance contract and a defence claiming fraudulent misrepresentation.
  • It addresses the elements that must be satisfied in order to legitimately avoid a contract of life insurance under section 29 of the Insurance Contracts Act 1984 (Cth).
  • It also serves as a useful guide to insurers on whether to affirm or avoid a contract of insurance.

Background

The case – Dr Gregory Moore v The National Mutual Life Association of Australasia Limited [2011] NSWSC 416 – involved a claim for damages made by the plaintiff, Dr Moore, for wrongful repudiation of an income protection and business expense policy by the defendant, National Mutual. The policy was issued by Australian Casualty & Life Limited. However, the rights and liabilities of that company were subsequently taken over by National Mutual under the terms of a court-approved insurance portfolio scheme.

In late 1993, Dr Moore took up a position as a psychiatric registrar at Launceston General Hospital. Shortly afterward, he met with Mr Peter Lowe of Australian Casualty & Life, for the purpose of taking out income protection insurance. He signed an insurance application form, part of which was completed by Mr Lowe in Dr Moore's presence. The form relevantly stated that Dr Moore:

  • had been a self-employed psychiatrist for 21 years;
  • had a net income in the previous financial year of $90,000;
  • had never received advice or treatment for a mental or nervous disorder (including depression) or drug or alcohol dependency; and
  • had never used or injected himself with any drug not prescribed by a doctor.

Australian Casualty & Life issued Dr Moore with an income protection policy on or about 14 December 1993. The policy provided that in the event of total disability, a total disability benefit would be paid monthly. Dr Moore suffered total disability under the policy if he were unable to perform one or more of the duties of his occupation and was not engaged in any occupation.

In late 1994, Dr Moore started to develop a major depressive illness that led him to formally resign from his position at Launceston General Hospital on 28 March 1995. On 3 May 1995, he made a claim from Australian Casualty & Life. On 19 November 2002, Australian Casualty & Life ceased paying any benefits to Dr Moore.

From 1975 onward, Dr Moore had developed an uncontrollable addiction to pethidine, a strong pain relief drug, which had various personal and professional consequences, including:

  • being caught and charged with a number of offences relating to drug use;
  • being prohibited from possessing or prescribing drugs of addiction, including pethidine; and
  • being removed from the register of medical practitioners in both Tasmania and Victoria.

Dr Moore started to use pethidine again in 1994, when he developed the depressive illness that led to his resignation from Launceston General Hospital.

The decision

Dr Moore commenced these proceedings in 2008. In its defence, National Mutual claimed that it avoided the policy for fraudulent misrepresentation and non-disclosure.

Section 29 of the Insurance Contracts Act allows an insurer to avoid a contract of insurance if:

  • an insured failed to comply with the duty of disclosure; or
  • made a misrepresentation to the insurer before the contract was entered into; and
  • the insurer would not have entered into the contract if there was compliance with the duty of disclosure or if the misrepresentation had not been made.

If the non-compliance or misrepresentation was fraudulent, the insurer has an immediate right to avoid the contract. If there was no fraud, the insurer may avoid the contract within three years after the contract was entered into.

The court held that Dr Moore had not been in a position to return to medical practice since 2002, but had made each of the misrepresentations relied on by National Mutual, namely that:

  • he had been a self-employed psychiatrist for 21 years, whereas in fact he was a psychiatric registrar employed by the Launceston General Hospital;
  • his net income was $90,000 per annum, whereas his actual income was $52,000; and
  • he never had, nor received advice or treatment for, a mental or nervous disorder (including stress or depression) or drug dependency, whereas in fact he had.

It was no excuse for Dr Moore to rely on the fact that Mr Lowe had completed part of the application form. When Dr Moore signed the form, he adopted the answers it contained.

The court also found that Australian Casualty & Life would not have entered into the contract of insurance if the questions in the application form were answered accurately. This was because the policy provided for the payment of a fixed amount in the event that Dr Moore suffered a total disability. That fixed amount was determined with reference to the $90,000 net income incorrectly disclosed in the application form, not Dr Moore's actual income of $52,000. Further, Dr Moore had a history of pethidine abuse that prevented him from engaging in clinical practice. It was clear to the court that an insurer would want to know that information before providing income protection in respect of a profession of which clinical practice formed an integral part.

The court also held that the representations concerning Dr Moore's income and medical history were made fraudulently. 'A representation is fraudulent if it was made with the intention of being acted on and was known by the representee to be false at the time it was made'. The court was of the opinion that Dr Moore knew that Australian Casualty & Life would rely on the answers in the application form.

Dr Moore argued that, notwithstanding the fraudulent misrepresentations, Australian Casualty & Life elected to affirm the contract and National Mutual were therefore bound by it. An affirmation has three elements:

  • an unequivocal election between inconsistent rights;
  • a communication of that election to the person against whom the rights are exercisable; and
  • knowledge of the relevant facts.

The court held that an election between a right to avoid a contract of insurance or to affirm it does not have to be made immediately. 'An insurer has a reasonable time from the time that it discovers the true facts to make an election' and 'it must continue to comply with its obligations under the contract in the meantime.' The court also found that 'a person faced with a choice between inconsistent rights must know all the facts that a reasonable person in that position would consider relevant to the choice to be made.' The court found that Australian Casualty & Life elected to affirm the contract, not merely because it made payments under the policy, but because it also sent Dr Moore monthly claims forms and required him to see doctors on certain occasions. However, the court also found that Australian Casualty & Life did so without knowledge of the relevant facts. Although Australian Casualty & Life learned that Dr Moore had been treated for anxiety and depression and had previously used pethidine, they did not know the seriousness of these problems nor the extended period over which they persisted.

Generally, money paid under a contract that is avoided for misrepresentation is recoverable. However, there is a defence of change of position. Spending money on 'ordinary living expenses' does not usually amount to a change of position. In this case, however, the purpose of the payments was to enable Dr Moore to meet living expenses. Had the payments not been made, Dr Moore would have reduced his living expenses or taken other steps to meet them. In these circumstances, the court found that it would be unjust to require Dr Moore to refund the payments.

Conclusion

This case provides useful guidance to insurers on the steps to be taken on learning of an insured's misrepresentations. It confirms that insurers have a reasonable, but not indefinite, time in which to make enquiries and ultimately decide whether to affirm or avoid a contract of insurance. It also confirms that merely making payments under a policy does not amount to affirmation. Finally, it makes clear that an insurer must have knowledge of the relevant facts in order to be bound by its decision to affirm a contract.

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