Reviewing an insurer's decision

Contributed by Paul Bingham and Graham Young and current to 1 September 2005

Some funds provide insured benefits to members. Members are only entitled to receive such total and permanent disability benefits if the insurer determines that the member is unlikely to return to employment. In these cases, the trustee has no power to determine whether a member is entitled to the insured total and permanent disability benefit.

If the insurer’s decision is challenged in court, the court must decide whether the insurer, in deciding whether a member is entitled to total and permanent disability benefit, has acted reasonably, in good faith, and with due regard for the interests of the member. If the insurer has so acted, the court cannot set aside the decision of the insurer even if it considers that, if the court were to make the decision, it would have found that the member was entitled to disability benefits. On the other hand, if the insurance contract provides for benefits to be paid if the member is unlikely to return to employment (and not only if the insurer “considers” or “is satisfied” that the member is unlikely to return to employment) then the court can set aside the decision of the insurer if it considers that the member was entitled to disability benefits.

The trustee is under an obligation to consider whether an insurer which has rejected a claim has acted properly and, if it has not, to take action, including suing the insurer, if necessary, in order to protect the rights of the member. In practice, trustees rarely, if ever, sue insurers.

The member may sue the insurer on the ground that it has failed to act in good faith, reasonably and with due regard to the interests of the member or, if the insurance contract does not require the payment of benefits only if the insurer “considers” or “is satisfied” that benefits ought to be paid, on the simple ground that the member is disabled as defined in the insurance contract. The member can do this, even though not a party to the contract of insurance, because the trustee (which is a party) holds its rights under the contract on trust for the members. It is also necessary for the trustee to be party to the legal action. The trustee may agree to join the member in suing the insurer or, more usually, may be sued by the member for failing to act against the insurer to protect the member’s rights.

The member can also rely on the principle that a person who is intended to benefit from an insurance contract can sue to enforce it, even if not a party to it (see Trident General Insurance Co. Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 62 ALJR 508). Failure by the insurer to disclose, during the assessment process, medical reports it obtained may be unreasonable and unfair (Beverley v Tyndall Life Insurance Co. Ltd (1999) 10 ANZ Ins Cas 61-453).

If the court decides the insurer breached its duty to act honestly and reasonably, it will not allow the insurer to make the decision again, but will substitute the court’s decision.

Alternatively, the member can complain to the Superannuation Complaints Tribunal about the insurer’s decision. The Tribunal has the same powers to review the decisions of insurers concerning payment of disability benefits under superannuation trusts as it has to review the decisions of trustees. In particular, the Tribunal is not limited to looking at the process whereby the insurer made its decision, and can look at whether the decision was fair and reasonable. The restrictions in sections 14(6A) and 14(6B) of the Act discussed above apply to claims against insurers as well as to claims against trustees.

The member may also complain about the decisions of life insurers to the Financial Industry Complaints Service.