Whether the primary judge erred in his approach to the task of the Court in reviewing the Insurer’s opinion that Mr Jones was not Totally and Permanently Disable.
Headnote: The Court (Gleeson JA, Macfarlan JA and Meagher JA agreeing) concluded:
- The relevant inquiry for the Court is neither a “merits review” of the Insurer’s decision based on entirely objective criteria (as Mr Jones submitted), nor is it an inquiry into whether the Insurer’s decision is unreasonable in the Wednesbury sense, that is, so unreasonable that no reasonable insurer could have so decided (as the Insurer submitted).
- Rather, the relevant inquiry is whether the opinion formed by the insurer was not open to the insurer acting reasonably and fairly in considering and determining the claim. Edwards v The Hunter Valley Co-Op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 and Hannover Life Re of Australasia v Sayseng (2005) 13 ANZ Ins Cas 90-123;  NSWCA 214 applied; Braganza v BP Shipping Ltd  4 All ER 639 and Bartlett v ANZ Banking Group Ltd (2016) 92 NSWLR 639;  NSWCA 30 referred to.
- Per Macfarlan JA, the concept of legal reasonableness is not amenable to minute and rigidly defined categorisation, and application of the two different formulations referred to above, that is, unreasonableness in the Wednesbury sense and determination of whether the opinion formed was open to an insurer acting reasonably and fairly, would lead to different results in few, if any, cases.
- The primary judge did not undertake a review on the merits of the Insurer’s decision and there was no error in his Honour’s conclusion that the Insurer had failed to take into account Mr Jones’ psychological make-up in forming its opinion.
 The relevant finding in Bartlett was that, under Mr Bartlett’s employment agreement, “the bank was obliged to act reasonably, at least in the Wednesburysense and at least so far as its process, as distinct from the result, was concerned” (at ). Thus it was held that the bank’s decision would be invalidated if its decision-making process was “so unreasonable that no reasonable [decision-maker] would ever have [adopted] it” (at  citing Braganza v BP Shipping Ltd (2015) 1 WLR 1661;  UKSC 17). As the bank’s decision was unreasonable in this sense, it was unnecessary to determine whether it might have been invalidated by a test that was more stringent from the bank’s point of view, hence the use of the words “at least” in  of the judgment. In particular, it was unnecessary in that case to determine whether the bank’s decision failed the arguably more stringent test which Gleeson JA concludes is applicable in the present case (see ): namely “whether the opinion formed by the insurer was not open to an insurer acting reasonably and fairly in the consideration of the claim”.
 …hose principles include that an insurer whose liability depends on its having formed an opinion on a matter must, in considering and determining whether it should form that opinion, address the correct question and, in doing so, act reasonably and fairly.
 If such an opinion fails to satisfy these requirements, it is not an opinion which has effect under the terms of the insurance. In that respect, its contractual efficacy is the same as that of a purported final and binding expert determination under a dispute resolution clause which is not in accordance with the contract: see, eg, Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335–336 (McHugh JA). Furthermore, the result of such an opinion being found to have no contractual effect is that the court must determine the disablement question which the contract requires be addressed: see TAL Life Ltd v Shuetrim; Metlife Insurance Ltd v Shuetrim (2016) 91 NSWLR 439;  NSWCA 68.
 I agree with Gleeson JA that there is a breach of the implied obligation of the insurer to act reasonably and fairly in forming or declining to form an opinion if that opinion was not open to an insurer acting reasonably and fairly in the consideration of the relevant claim. As is emphasised above, that is not the only ground on which the insurer’s opinion may be held to be of no contractual effect. If there is any difference of substance between that formulation and the Wednesbury standard of unreasonableness, that difference is not material in the present case. I also agree with Gleeson JA that the primary judge did not undertake a merits review of the insurer’s decision. The primary judge’s further conclusion that the insurer’s failure to take into account Mr Jones’ fear-avoidance syndrome was a breach of its implied obligation to act fairly and reasonably did not involve a merits review.
 Before the primary judge and again on appeal, both parties accepted that the principles enunciated by McLelland J (as his Honour then was) in Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 (Edwards) applied to the Insurer’s decision in the present case.
 In Edwards at 77,536, McLelland J discussed the obligations of an insurer under a clause similar to the present. His Honour stated that in that case, there was an implied obligation on the insurer to consider and determine whether it should form the relevant opinion. He observed that this involved a consideration and determination of the correct question; and that, in the exercise of powers affecting the interests both of itself and the claimant, the insurer was under a duty of good faith and fair dealing, which required it to have due regard for the interests of the claimant. He went on to say that in the field of insurance, it was well established that where, under a contract of insurance, an element of the insurer’s liability is expressed in terms of the opinion of the insurer, the insurer is obliged to act reasonably in considering and determining that matter. As to the task of the court when deciding whether the insurer is entitled to form the opinion which it did, McLelland J remarked as follows:
To say that an insurer must act reasonably in forming or declining to form an opinion is not to say that a Court can substitute its own view for that of the insurer. As North J pointed out in Doyle at 529 (Doyle v City of Glasgow Life Insurance Co (1884) 53 LJ Ch 527), “reasonable persons may reasonably take different views”. Unless the view taken by the insurer can be shown to have been unreasonable on the material then before the insurer, the decision of the insurer cannot be successfully attacked on this ground.
 The statement by McLelland J in Edwards extracted above, was approved by the Full Court of the West Australian Supreme Court in Beverley v Tyndall Life Insurance Co Ltd (1999) 21 WAR 327; (1999) WASCA 198 at  (Ipp J, Malcolm CJ and Anderson J agreeing).
 In Hannover Life Re Australia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123;  NSWCA 214, this Court (Santow JA, Spigelman CJ and Tobias JA agreeing) approved Edwards and accepted (at ), without any adverse comment, the trial judge’s (Bryson J) summary of principles that he had derived from Edwards as follows:
(a) There was an implied obligation on Hannover to consider and determine whether it should form an opinion on the matter which was a condition of its own liability;
(b) That obligation involved consideration and determination of the correct question;
(c) Hannover was under a duty of good faith and fair dealing which required it to have due regard for the interest of the claimants, meaning Mr Sayseng, as well as the Trustee;
(d) Hannover was also obliged to act reasonably in considering and determining what its opinion was;
(e) If the view taken by Hannover can be shown to have been unreasonable on the material before it, its decision can be successfully attacked;
(f) If Hannover’s decision is successfully attacked, the matter upon which its opinion was required becomes one for determination by the Court;
 Hannover Life Re v Sayseng is also authority for the proposition (at ) that a court must not substitute its own view for that of the insurer, by reference to additional material not before the insurer.
 The summary of principles in Hannover Life Re v Sayseng was accepted by the Victorian Court of Appeal in Hannover Life Re of Australasia Ltd v Colella (2014) 47 VR 1;  VSCA 205 at  (Garde AJA, Ashley and Beach JJA agreeing). In TAL Life Ltd v Shuetrim at , this Court described the principles stated in Edwards as uncontroversial.
 Two further matters should be mentioned. First, there are limits to what flows from the obligation to act reasonably, and in this regard in TAL Life Ltd v Shuetrim at , Leeming JA cited the remarks of McLelland J in Edwards at 77,536 (which are set out at  above).
 Second, as Ball J noted in Ziogos v FSS Trustee Corporation as trustee of the First State Superannuation Scheme  NSWSC 1385 at -, the insurer’s duty of utmost good faith (which is sometimes described as a duty of good faith and fair dealing) in dealing with the claim – is independent of the implied term to act reasonably. Further, the duty of utmost good faith is broader than the implied term to act reasonably because the former duty applies to all aspects of the claim handling process.
 The task of the court is to determine whether the insurer breached its contractual obligation to act reasonably in considering and determining the claim. The authorities referred to above establish that the court is not to substitute its own view for that of the insurer. Plainly, the court is performing a reviewing function. However, the insurer is not entitled to refuse a claim for a reason which depends on the efficacy of an opinion in relation to the formation of which it has not acted reasonably and fairly or which does not address the correct question. And if the insurer does form and rely on such an opinion, that constitutes a breach of its contractual obligations and the court itself may determine whether on the material available to it, the claim falls within the policy: Edwards at 77-537; Hannover Life Re v Sayseng at ; TAL Life Ltd v Shuetrim at ; Beverley v Tyndall Life Insurance at ; and Hannover Life Re v Colella at .
 The remarks of McLelland J in Edwards (set out at  above), are also inconsistent with an assessment of reasonableness by reference to entirely objective criteria. Further and importantly, nor did McLelland J embrace the concept of reasonableness in the Wednesbury sense. McLelland J preferred the statement in Doyle v City of Glasgow Life Insurance Co (1884) 53 LJ Ch 527 at 529), that “unless the view taken by the insurer can be shown to have been unreasonable on the material then before the insurer, the decision of the insurer cannot be successfully attacked on this ground” (emphasis added)
 In Hannover Life Re v Sayseng, this Court approved Edwards and accepted (at ) that a court must not substitute its own view for that of the insurer, by reference to additional material not before the insurer. That statement is also inconsistent with a merits review.
 Hannover Life Re v Colella adopted a similar approach. There Garde AJA (at ) rejected the insurer’s submission that the correct test is whether “the decision of the insurer was so unreasonable that a reasonable person in that situation could [not] have made it”. (The word “not”, between the words “could” and “have”, does not appear in either the medium neutral version or the reported version of the judgment in Colella, but its absence seems to be a typographical error.) Ashley and Beach JJA agreed with the reasons for Garde AJA.
 Beach JA added the following remarks at  (emphasis added):
… like Garde AJA, I see no error in the approach of the trial judge to what has been called the second limb of the total and permanent disablement clause. The judge did not substitute, or purport to substitute, his opinion for the opinion of the appellant. The judge conducted a detailed analysis that led him to the conclusion that the appellant had ‘cherry-picked’ that part of the material that supported a denial of the respondent’s claim. In my view, the judge was correct, for the reasons he gave, to so characterise the formation of the appellant’s opinion. Further, the judge was correct to conclude from his analysis that the appellant had not acted reasonably and fairly in considering the respondent’s claim. As the judge concluded, and as Garde AJA has shown, the opinion formed by the appellant was not open to an insurer acting reasonably and fairly in the consideration of the respondent’s claim. That said, whether it might one day be decided that the duty of an insurer in forming an opinion of the present type is a duty to form a fair and reasonable opinion, or even a duty to form a correct opinion, will have to wait for another day.
 I agree with Beach JA’s statement of the criterion of reasonableness in cases such as the present.
Rejection of Wednesbury unreasonableness
- In the present case, cl 1.3.1 of the policy specifies how the issue of Total and Permanent Disablement is to be determined. The Insurer is required to form the relevant opinion as to disablement, after consideration of medical evidence that is satisfactory to the Insurer. In forming that opinion, the Insurer is subject to an implied obligation to act reasonably.
- A reasonableness term is implied in contracts of insurance where the formation of the insurer’s opinion is a condition of its liability, because it is necessary to do so for the reasonable and effective operation of the contract. Relevantly, the insurer’s opinion has the ability to seriously affect the interests of the claimant. As McLelland J explained in Edwards at 77,536:
“….. in the field of insurance, it is well established that where under a contract of insurance an element of the insurer’s liability is expressed in terms of the satisfaction or opinion of the insurer, the insurer is obliged to act reasonably in considering and determining that matter (see Moore v Woolsey (1854) 4 E1 and B1 243, 119 ER 93, Braunstein v Accidental Death Insurance Co (1861) 1 B and s782, 121 ER 904, London Guarantie Co v Fearnley (1880) 5 App Cas 911 at 916, 921, Doyle v City of Glasgow Life Insurance Co (1884) 53 LJ Ch 527, Harvey v Ocean Accident and Guarantee Co (1905) 2 IR 1, Butcher v Port (1985) 1 NZLR 491, cf Teur v London Life Insurance Co (1936) 1 DLR 161).”
See also Hannover Life Re v Sayseng at  – 
- Although commonly described as implication in fact, such terms have also been called implications “ad hoc”. They are based on the presumed or imputed intention of the parties: Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422 (Brennan CJ, Dawson and Toohey JJ), 440 (McHugh and Gummow JJ). See also: Cromwell Property Securities Ltd v Financial Services Ombudsman Service Ltd and Ors (2014) 288 FLR 374;  VSCA 179 at . By contrast terms implied by law are, in general, implied as a matter of necessity as a legal incident of a particular class of contract: Byrne v Australian Airlines Ltd at 448. Neither party suggested that the reasonableness term in the present case might also be implied under the policy as a matter of law. It is not necessary to address that question.
- The Insurer submitted that this passage disclosed error because his Honour encroached on the Insurer’s decision-making discretion. I do not agree. As observed in Hannover Life Re v Collela at , to which his Honour referred, it is unrealistic to isolate some aspects of work (for which the insured may have some individual skills) in the face of significant injury that deprives a person of the capacity to perform work in other respects. Here his Honour found (at ):
….. but the communication skills which he may have as a roofing supervisor – with the other workers – are quite different from those required of a person dealing with customers (whether as a salesperson, a console operator, or a customer service adviser).
- That finding did not involve, as the Insurer suggested, his Honour “substituting his own idiosyncratic view of the world based on no evidence” as to the work to which a roof plumber was fitted by his training, education and experience. The finding was based on the material before the Insurer at the time of its decisions, which plainly demonstrated that Mr Jones’ vocational history revealed no experience or aptitude for customer service. As the vocational report recorded, Mr Jones told the author of that report that he was a “hands on person”: at .
- In my view, no error has been demonstrated in his Honour’s application of the ETE clause at the first stage of the inquiry. The Insurer’s challenge to his Honour’s application of the ETE clause at the second stage of the inquiry is addressed at  –  below. That challenge should be rejected for the reasons there given.