TPD – a primer May 22, 2020
Applicable Legal Principles – Duties and Procedures of Decision-Makers
- The law defining the scope of the duties of decision-makers dealing with claims by members of superannuation funds for whom the trustee has obtained TPD insurance cover is well established. That law and the corresponding rights of members against the funds and against the insurers providing TPD cover may be shortly stated.
- The Member’s Standing to Sue. A member of a superannuation fund for whom the trustee has obtained insurance cover has standing to seek an order that the insurer pay the trustee the amount due to the trustee under the insurance contract: Erzurumlu v Kellogg Superannuation Pty Ltd  NSWSC 1115 (“Erzurumlu”) at . The member has standing to bring a claim both under the Deed against the trustee and under the Policy against the insurer: Wyllie v National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324 (“Wyllie”), at 337 to 338.
- The Trustee’s Decision-Making Duties. FSS’s decision-making as trustee is not challenged in this case. But some of the duties that lie upon it are relevant. In making its determination, a trustee has a duty to apply a trust fund, such as the Fund, in accordance with the trust deed, in this case the Deed: Finch v Telstra Super Pty Ltd  HCA 36; (2008) 242 CLR 254 (“Finch”) at  ff. It is also required to act in good faith, on a real and genuine consideration of the material before it, for the purpose for which it was conferred, for sound reasons where the trustee has disclosed reasons, although the trustee is not obliged to give reasons for its decision: Hannover Life Re of Australasia Ltd v Sayseng  13 ANZ Ins Cas 90-123 (“Sayseng”) at  ff (per Santow JA).
- The general rule where a trustee has failed to discharge its duties in considering a member’s claim is to refer the matter back to the trustee for reconsideration: Sayseng at . But if the Court vitiates an insurer’s decision upon breach of an insurer’s duty of utmost good faith and embarks on a second stage inquiry, and on that inquiry finds that the plaintiff is TPD within the policy definition, there may be no further work for the trustee to perform and no need to remit the matter to the trustee for further consideration and it can be dealt with by the Court: Jones v United Super Pty Ltd  ANZ Ins Cas 62-126 (“Jones v United Super Pty Ltd”) at .
- This statement of applicable principles now deals with the duties on insurers in the position of MetLife.
- The Insurer’s Duty of Utmost Good Faith. An insurer dealing with a claim against it owes an insured a duty of utmost good faith, sometimes also described as a duty of good faith and fair dealing: Sayseng at . The duty of utmost good faith does not impose obligations in the abstract; it depends on the contractual rights and obligations of the parties in relation to the claim; and it imposes an obligation on the insurer to exercise its rights and discharge its obligations as conferred by the contract of insurance with the utmost good faith: Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme  NSWSC 1385 (“Ziogos”) at .
- The insurer’s obligation of utmost good faith is contractual not fiduciary. Conduct which would not be permissible in a fiduciary relationship will not necessarily infringe the duties of good faith and fair dealing, as the fiduciary relationship is one in which the parties are not free to pursue their separate interests: JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, 2014, LexisNexis Butterworths) (“Meagher, Gummow & Lehane”) at [5-005].
- Some common practical examples of the discharge of the obligation of good faith and fair dealing assist in understanding its scope. The obligation may, in appropriate circumstances, require an obvious enquiry to be made: Halloran v Hardwood Nominees Pty Ltd  NSWSC 913 (“Halloran”) at . It is important to correlate the activities that an insured is capable of undertaking, as for example activities that are demonstrated in video surveillance material, to the activities the insured is required to undertake in employment: Ziogos at .
- The Duty to Form an Opinion. Under a contract for insurance, if an element of insurance 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: Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 (“Edwards”) and Sayseng at . In Edwards (at 77,536) McLelland J stated with respect to clauses such as that in issue in this case, that there was an implied obligation on the insurer to consider and determine whether it should form the relevant opinion, which involved a consideration and determination of the correct question; and in the exercise of powers affecting the interest of both itself and the claimant the insurer was under a duty of good faith and fair dealing requiring it to have due regard to the interest of the claimant. McLelland J’s statement of the law was, once more, adopted with approval by the Court of Appeal in Hannover Life Re of Australasia Ltd v Jones  19 ANZ Ins Cas 62-149 (“Jones”).
- Jones also approved (at  – ) Brereton J’s statement at first instance in Jones v United Super Pty Ltd at  that the insurer’s decision will also be liable to be reviewed and avoided by the Court if in forming an opinion (about a claimant’s disability) the insurer: (1) misdirects itself in law, that is to say asks itself the wrong question; or (2) takes into account an irrelevant consideration or fails to take into account a relevant consideration.
- And Jones explains how concepts of reasonableness are to be applied in forming an opinion about a claimant’s level of disability. Analogies exist between the judicial review cases, in which unreasonableness is assessed in the sense described in Associated Provincial Picture Houses Ltd v WednesburyCorporation 1 KB 223 (“Wednesbury”) at 234, and the implied term of reasonableness in contracts of insurance, where the formation of the insurer’s opinion is a condition of the insurer’s liability. But the analogy is not so close as to require the adoption of the stringent test of unreasonableness in the Wednesbury sense in the insurance contract cases: Jones at . Rather the criterion of reasonableness of an insurer’s decision is “whether the opinion formed by the insurer was not open to an insurer’s acting reasonably and fairly in consideration of the claim”: Jones at . And the insurer’s assessment of reasonableness is not made by reference to entirely objective criteria but must be unreasonable on the material then before the insurer: Jones at . Nor does the assessment of reasonableness require the Court to undertake a review of the merits of the insurer’s decision: Jones at  and .
- In Jones (at ) the Court of Appeal adopted McLelland J’s remarks in Edwards, as to the Court’s task in deciding whether the insurer was entitled to form the opinion which it did:
“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, ‘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.”
- If the view taken by the insurer is shown to have been unreasonable on the material before it, then the decision can be successfully attacked: Sayseng (at ) and Jones (at  and ). The Court must not substitute its own view for that of the insurer by reference to additional material not before the insurer: Sayseng (at ) and Jones (at ).
- The insurer’s duty of utmost good faith in dealing with a claim and the duty to act reasonably in forming an opinion may be compared and contrasted. The duty of utmost good faith: (a) is broader than the implied term obliging the insurer to act reasonably and applies to all aspects of the claims handling process: Ziogos at  and Jones at ; (b) does not imply a higher or stricter standard than the implied term requiring the insurer to act reasonably in considering and determining the matter: Ziogos at ; (c) is not to be equated with the implied obligation to act reasonably in forming an opinion concerning or being satisfied about a particular matter; nor are the two standards the same: Ziogos at , commenting on CGU Insurance Ltd v AMP Financial Planning Pty Ltd  HCA 36; (2007) 235 CLR 1; and (d) requires the insurer to form the opinion itself and to act with the utmost good faith in doing so and it is not sufficient that some other insurer acting reasonably could have reached the conclusion that it did: Ziogos at .
- And there is a distinction between acting reasonably in the formation of an opinion and the formation of a reasonable opinion. As Gleeson JA explained inMetLife Insurance Ltd v MX  NSWCA 228 (“MX”), at :
“The distinction is between the process of consideration and the outcome itself”.
- This was further explained in MetLife Insurance Ltd v Hellessey  NSWCA 307 at  (Meagher JA, McColl and White JJA agreeing):
“Thus, an insurer’s decision may be set aside if it is shown to be unreasonable on the material before the insurer. It will not answer that description merely because the Court would or could have reached a different opinion on that material, because “reasonable persons may reasonably take different views”: Edwards at 77,536. In addition, however, a decision may be set aside if the process of consideration underlying it was not undertaken reasonably and fairly, even if the outcome itself is not also shown to have been unreasonable on the material before the insurer. Again, more than one reasonable process of consideration may be open in the circumstances, but the process adopted by an insurer would not cease to be unreasonable simply because another, and reasonable, process to the same conclusion happened to exist.”
- Some authorities have used other words to describe the obligation to act reasonably in forming an opinion. Nicholas J’s description of the obligation is useful: as one which requires the decision-maker to give an objective even-handed and realistic consideration to the whole of the evidence, uninfluenced by personal beliefs, prejudice, suspicion, or speculation: Savelberg v United Super Pty Ltd  NSWSC 1482 at . In accordance with authority, “objective” in Nicholas J’s formulation should be taken to mean “unbiased from the perspective of the decision-maker” and not to invite an assessment of a hypothetical claimant or a decision divorced from the actual material before the decision-maker.
- The Duty to Give Reasons. It follows from the requirement that the insurer must itself form an opinion acting in accordance with its duty of utmost good faith, that the insurer should give reasons for its decision. As Ball J explained in Ziogos at :
“ In my opinion, it follows from the previous paragraph that MetLife was also required by its duty of utmost good faith to give reasons for its decision. It is only by examining those reasons that it is possible to determine whether it acted with the utmost good faith in forming the opinion it was required to form. To put the point another way, where an insured person’s rights depend not on the objective fact (whether or not the insured suffered from TPD) but on the insurer’s opinion concerning that question, the requirement of utmost good faith requires the insurer to explain how it reached the decision it did so that the insured person can be satisfied that the decision itself was reached in the utmost good faith.”
- But an insurer is not required to undertake the detailed consideration of a claim required at a court hearing: Chammas v Harwood Nominees (1993) 7 ANZ Ins Cas 61-175 (“Chammas”) and Weber v Tiss Pty Ltd  NSWSC 67 at , (“Weber”). An insurer’s statement of reasons for declining a claim should be understood as a practical document intended to inform the claimant of the basis of the decision rather than providing detailed reasons with reference to the evidence being relied upon, comparable to a judgment of a court or tribunal: Weber at .
- In MX at  – , Gleeson JA considered that there may be little difference between the statement in Ziogos (at ) and the statement of Parker J in Newling v FSS Trustee Corporation (No 2)  NSWSC 1405 to the effect that there should be an explanation of “the actual path of reasoning” by which the conclusion was arrived at. Gleeson JA also observed in MX (at ), “the insurer’s reasons had evidentiary significance as to whether the insurer’s process of consideration of the respondent’s claim was undertaken fairly and reasonably”.
- The Use of Expert Evidence. Expert evidence was deployed on both sides in this case. Some of it was before MetLife at the time of its decision. This circumstance adds additional content to the applicable duties in the consideration and determination of this claim. The following additional statements of principle are relevant where experts are involved. If the insurer seeks an opinion from an expert, it must provide the expert with all the information relevant to the expert’s opinion; the expert must be asked the right questions; but asking the right questions of the expert does not require the insurer to ask the expert to address specific provisions in the policy, as the insurer is making the ultimate decision and not delegating it: Lazarevic v United Super Pty Ltd  18 ANZ Ins Cas 62-039 (“Lazarevic”) at . Experts and the insurers who rely upon them should attend to evidence relating to the individual insured and the insured’s characteristics rather than to general statements of hope or expectation about the circumstances or conduct of anyone suffering from the condition in question: Ziogos at . Where an expert’s opinion about an insured’s circumstances or capacity for employment depends upon an assumption, it may be impermissible for the insurer to rely upon the expert’s opinion as to that matter unless the assumption is verified: see for exampleZiogos at .
- The Consequences of Non-Compliance. If the insurer does not comply with its duty of utmost good faith the Court may itself determine the question whether the insured suffered from TPD: Sayseng at (e), Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Ltd  NSWLR 412 at  and Jones at .
- But the reasonableness of MetLife’s decision here depends in part upon the operation of the ETE clause in the two policies. The authorities on that topic are considered next.