McCabe v Royal & Sun Alliance Life Assurance Australia Ltd

[2003] WASCA 162

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT  :   THE FULL COURT (WA)

CITATION:   McCABE -v- ROYAL & SUN ALLIANCE LIFE ASSURANCE AUSTRALIA LTD [2003] WASCA 162

CORAM:   WALLWORK J

MURRAY J
ANDERSON J

HEARD:   12 SEPTEMBER 2002

DELIVERED          :   24 JULY 2003

FILE NO/S:   FUL 35 of 2002

BETWEEN:   ANDREW McCABE

Appellant

AND

ROYAL & SUN ALLIANCE LIFE ASSURANCE AUSTRALIA LTD
Respondent

Catchwords:

Insurance - Life insurance - Whether insurer entitled to avoid contract of insurance - Breach of obligation of insured to make disclosure relevant to risk - Obligation of insurer to establish that insurer would not have entered into contract on any terms if full disclosure made

Legislation:

Insurance Contracts Act 1984 (Cth), s 21, s 29

Result:

Appeal dismissed

Category:    B

Representation:

Counsel:

Appellant:     Mr G H Murphy

Respondent:     Mr M H Zilko SC

Solicitors:

Appellant:     Macdonald Rudder

Respondent:     Jackson McDonald

Case(s) referred to in judgment(s):

General Accident Insurance Co Australia Ltd v Kelaw Pty Ltd (1997) 9 ANZ Ins Cas 61-369

Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679

Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919

Case(s) also cited:

Australian Casualty & Life Ltd v Hall (1999) 151 FLR 360

Australian Security Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485

Delphin v Lumley General Insurance Ltd (1989) 5 ANZ Ins Cas 60-941

Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Ins Cas 60-986

Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062

Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028

1. WALLWORK J:  I agree with the reasons for judgment and the conclusions of Murray J.

2. There is nothing I wish to add.

3. MURRAY J: The appellant is the widower of Mrs McCabe. He is the executor of her estate. He sues in that capacity for an order that the respondent insurer should meet a claim made on the insurance policy taken out by his wife shortly before her death. It was a term policy of life insurance. The insured amount was the sum of $100,000. The appellant claims that amount, together with interest payable, he asserts, by virtue of s 57 of the Insurance Contracts Act1984 (Cth). That sum is said to be payable as from 1 September 1998.

4. Mrs McCabe was born in Bali on 2 August 1958.  She died at the tragically young age of 39, on 5 June 1998.  She suffered a stroke and encephalitis.  The primary cause of her death arose out of the fact that she suffered from systemic lupus erythematosis, "SLE". 

5. SLE is a chronic disease.  It may, when treated, go into remission, but the patient may relapse at any time.  It is an inflammatory disorder of connective tissue.  There may be a wide variety of symptoms, including arthritis, nerve pain, anaemia and the like.  In essence, it is thought that the auto-immune system of the body malfunctions and commences to attack the body itself.  The disease, or the infective complications that it may produce, can cause death, as it did in this case.

6. The appellant's claim was resisted by the respondent insurer on grounds which, at trial, crystallised into the propositions that the deceased had failed to disclose, prior to the insurance contract being made, that she suffered from SLE, secondly, that she failed to disclose that she had been hospitalised in relation to that disease before the formation of the contract and, thirdly, that she had failed to disclose that she had been refused life insurance by AMP Life Ltd, again before the contract with the respondent was made. 

7. The trial judge found that the deceased did not fail to disclose the disease in her application for insurance, as required, but his Honour concluded that she had not disclosed the hospitalisation and that she had not disclosed that she was refused insurance by AMP. Having regard to those failures of disclosure, the trial judge held that the respondent was entitled to avoid the insurance contract which had been made.  His Honour dismissed the appellant's claim.

1. From that decision the appellant appeals, seeking orders for the payment of the sum of $100,000 and interest.  The grounds of appeal address the two areas of material non-disclosure found by the trial judge as follows:

   "1.The learned trial judge erred in law and/or fact in finding that for the purposes of s 21(1)(b) of the Insurance Contracts Act1984, a reasonable person in the circumstances of the deceased could have been expected to know that the fact of her previous admission to hospital for one week in relation to an existing condition was a matter relevant to the decision of the respondent whether to accept the risk and if so on what terms, when:

   (a)the judge had found in effect that the deceased had already disclosed, and believed she had already disclosed to the respondent, the fact that she was suffering from such condition and that it was a serious condition;

   (b)the uncontroverted evidence was that her treatment in hospital occurred some two months prior to the inception of insurance and was for the exacerbation of the existing condition rather than for a different condition and for any significant complication of that condition, and that the exacerbation had been successfully treated;

   (c)the respondent had sought disclosure, in the final application form given to the insured, of any material alteration to her health;

   (d)there was no evidence that there had been any material alteration to her health at or by the time the deceased made her final application for insurance and there was uncontroverted evidence to the contrary, and if and to the extent that the trial judge found that there had been such material alteration, the finding was against the evidence and the weight of the evidence.

   2.Alternatively to ground 1, if the learned judge was correct in holding that the fact of hospitalisation required disclosure by reason of s 21(1)(b) of the said Act, the learned judge erred in law and/or fact in failing to find that the respondent had not discharged the onus on it under s 29(3) of the said Act in that:

   (a)on its proper construction, s 29(3) of the Act refers to a final decision by an insurer not to insure on any terms, rather than an interim decision to defer insuring pending the pursuit of further inquiries, and the underwriting evidence led by the respondent was, at its highest, to the effect that had hospitalisation been disclosed, further inquiries would have been made and not that cover would not have been written on any terms;

   (b)in any event, there was no evidence, alternatively it was against the weight of the evidence to find, that:

   (i)the underwriting contractor called by the respondent was the officer of the respondent whose responsibility it was ultimately to decide whether to underwrite such risks;

   (ii)the respondent would not have insured the risk on any terms, given the respondent's written admission to the contrary and given that the respondent failed to adduce any evidence of its own procedure and manuals in relation to the criteria it applied in deciding whether, and if so on what terms, to underwrite life insurance.

   3.The learned trial judge erred in law and/or fact in finding that for the purposes of s 21(1) of the Insurance Contracts Act1984, the deceased knew or a reasonable person in the circumstances of the deceased could have been expected to know that the fact that AMP Life Ltd had not accepted cover for her was a matter relevant to the decision of the respondent whether to accept the risk and if so on what terms, when:

   (a)the uncontroverted evidence was that on neither application form which the respondent required the deceased to sign was there any mention that non‑acceptance of cover by another insurer was a matter which the respondent regarded as relevant;

   (b)the uncontroverted evidence was that the respondent had solicited the deceased's business by telephone marketing, and that it used language in its application forms such as "Applying is Easy" and thereby, it is to be inferred, encouraged the belief in the deceased that the respondent was positively seeking her business;

   (c)regard is had to the matters referred to in para 1(a) to (c).

   4.Alternatively to ground 4, if the learned judge was correct in holding that the fact that AMP Life Ltd had not accepted cover required disclosure by reason of s 21(1) of the said Act, the learned trial judge erred in law and/or fact in failing to find that the respondent had not discharged the onus on it under s 29(3) of the said Act:

   (a)in that on its proper construction, s29(3) of the Act refers to a final decision by an insurer not to issue on any terms rather than an interim decision to defer insuring pending the pursuit of further inquiries and the underwriting evidence led by the respondent was, at its highest, to the effect that had AMP Life Ltd's non-acceptance of cover been disclosed, further inquiries would have been made and not that cover would not have been written on any terms;

   (b)by reason of the matters in ground 2(b) above."

2. Section 21(1) of the Insurance Contracts Act is in the following terms:

   "(1)Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

   (a)the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

   (b)a reasonable person in the circumstances could be expected to know to be a matter so relevant."

3. Section 29 applies where there has been a failure to comply with the duty of disclosure, as the trial judge found had occurred in two respects in this case. By s 29(3):

   "(3)If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract."

4. The questions therefore were whether the deceased had a duty to disclose to the respondent the fact that she had been in hospital in the circumstances described and the fact that her application for insurance by AMP had been rejected, as being matters which she knew were relevant to the respondent's decision to accept the risk and, if so, on what terms, or, if she did not know that, whether a reasonable person in the circumstances could be expected to know that that was the case.  If so, the further question was whether the respondent could, as it purported to do, avoid the contract on the ground that it would not have been prepared to enter into the contract of life insurance with the insured on any terms if it had known the true facts in respect of the circumstances in which it was held that the deceased had failed to comply with the duty of disclosure.

5. The primary facts are not in dispute.  As found by the trial judge they are that in 1997 the deceased was receiving treatment from a rheumatologist, Dr Cheah, which was appropriate for SLE.  In October 1997 she received from the respondent a brochure and application form for life insurance.  She took it up, signing and dating the form 18 October 1997.  Because the deceased did not sign a relevant part of the form, it was returned to her for signature and signed and dated by her, 15 November 1997.  The accompanying brochure detailed a duty of disclosure of any matter material to the formation of the contract of insurance.  The application for insurance authorised the respondent to obtain medical information from any doctor or hospital or the like. 

6. On 21 November 1997 the respondent wrote to the deceased, saying it intended to obtain a report from Dr Tadros, the deceased's general practitioner, to whom the deceased had referred in her application for insurance.  The respondent did seek information from Dr Tadros, which was ultimately supplied in a medical report of 6 February 1998.  The report does not expressly refer to SLE, but it is in terms which the trial judge concluded complied with the duty to disclose that the deceased was suffering from SLE.  That was the conclusion of the respondent's medical officer who advised that, properly understood, the report of Dr Tadros did indeed reveal that condition.  There was no material non‑disclosure in that regard.

7. Despite the concern of her medical advisers, the deceased went to Bali for a holiday on 16 December 1997.  She returned on 13 January 1998.  She was still unwell and on 20 February, on the advice of medical practitioners, she was admitted to Joondalup Health Campus for testing and treatment.  She was discharged on 27 February 1998.

8. On 26 February 1998 the respondent wrote to the deceased, advising her that her application for insurance had been accepted at "non‑standard rates" said to have been fixed as a result of the respondent's consultation with Dr Tadros.  The monthly premium was to be increased by 75 per cent of the standard premium.  The deceased was invited to signify acceptance of that contract of insurance by returning the advice of the basis upon which the respondent would accept the insurance.  The document to that effect contained an endorsement to be signed by the insured that:

   "I hereby declare that the above information is true and correct and that since the date of the application there has not been material alteration in circumstance, including health, occupation, or hazardous pursuit, which could affect final acceptance of the risk."

9. Mrs McCabe did not return that document immediately.  Instead, on 17 March 1998 she applied for life insurance to AMP Life Ltd, disclosing her medical situation relatively completely to them and specifying that her medical practitioner was Dr Cheah rather than Dr Tadros.  In the result, AMP sought a report from Dr Cheah.  That was provided on 9 April 1998.  It revealed that the deceased had SLE.  On 22 April 1998 AMP refused the deceased's application for life insurance. 

10. The trial judge found that although Dr Cheah, her specialist, did not formally diagnose the condition of SLE until about 17 March 1998, the deceased, as a result of consultations with her medical practitioners, had, in January 1998, a clear understanding that she suffered from SLE and that she would have thought that her general practitioner, Dr Tadros, was aware that she had that condition.  Dr Tadros gave his opinion by way of a quite detailed medical report provided to the respondent on 6 February 1998.  The respondent's chief medical officer, when she was later asked about the significance of that report, said that it was clear that it disclosed polyarthritis and connective tissue disorder, features of SLE, which the medical officer therefore considered had been disclosed to the respondent, who had accordingly advised that it would accept the risk upon the payment of a substantially increased premium.  The duty to disclose SLE was therefore found to have been discharged by the provision of Dr Tadros's report, dated 6 February 1998.

11. Shortly after AMP refused the deceased's application for insurance, on 28 April 1998, the deceased signed the declaration on the final proposal of insurance which had been sent to her on 26 February, and returned it to the respondent.  It was received on 5 May and on 11 May 1998 a policy of life insurance issued.  As I have said, Mrs McCabe died on 5 June 1998 and the claim on the policy made on behalf of her estate was refused by the respondent.  For present purposes it is sufficient to note that that refusal was in part grounded upon the failure to disclose the admission to hospital at Joondalup on 20 February 1998 where she was detained, receiving treatment for SLE, until 27 February 1998, and the failure to disclose that AMP had refused her application for insurance, as the deceased had been told on 22 April 1998.

12. The trial judge found that both of these matters were matters which a reasonable person in Mrs McCabe's position could be expected to know would be relevant to the respondent's decision whether to accept the risk and, if so, on what terms. In each case, therefore, his Honour concluded that there had been a breach of the duty of disclosure imposed by s 21(1) of the Act upon Mrs McCabe. Each material non‑disclosure was found by his Honour to create an entitlement in the respondent to avoid the contract. In one case, his Honour mentioned s 29(3) of the Act, in the other case he did not, but it is abundantly clear that in each case it was that provision which his Honour had in mind and so his expression of his conclusion in the brief terms contained in his judgment must be taken, in my opinion, as a finding that the respondent would not have been prepared to enter into a contract of life insurance with Mrs McCabe on any terms if the duty of disclosure had been complied with in respect of her hospitalisation and/or in respect of the rejection of her application by AMP.  In neither case did his Honour base that conclusion upon detailed findings of fact.  

13. It will have been noticed that his Honour, the trial judge expressed his conclusion of breach of the duty of disclosure effectively in terms of s 21(1)(b) of the Act.  That is the primary focus of his Honour's judgment in each case, although it should be mentioned that the trial judge did find, in relation to the refusal of her application by AMP, that:

    "The only inference reasonably open on the evidence from these facts is that the deceased must have known that she was refused insurance because of perceived problems with her health, making her not just a risk to be insured at a higher premium, but a risk not to be undertaken at all."

14. It has been held that the insurer with which s 21(1) is concerned is the particular insurer confronted with the decision whether or not to accept the application for insurance and, if so, on what terms: Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679 per Handley JA at 686-687 [31] – [36]. As to the insured and the knowledge required by s 21(1)(a), it has been held that what is required is actual knowledge, by which is meant that which is believed to be true: Permanent Trustee v FAI per Handley JA at 688 [45] and 690 [54].

15. Turning to 21(1)(b), the question it raises is an objective one.  The test is what a reasonable person, an ordinary person, should know, in the circumstances as they were presented to the insured, ie:  the external or extrinsic circumstances surrounding the application for insurance and the matter which it is contended ought to have been disclosed as being material to or relevant to the insurer's decision whether to accept the risk and, if so, on what terms:  Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 per Brooking J at 925. Of course, it would follow from the reasoning adopted in Permanent Trustee v FAI that the question is what a reasonable person in the circumstances could be expected to actually know or believe . 

16. Finally, as to the position of the insurer and the need to look at the question of disclosure from the point of view of the insurer to which the application for insurance is in fact made, the decision in Permanent Trustee v FAI is, I think, in line with that of this Court in General Accident Insurance Co Australia Ltd v Kelaw Pty Ltd (1997) 9 ANZ Ins Cas 61-369 at 77,049 per Parker J, with whom I agreed.

17. As to ground 1, and the question whether the deceased was under a duty to disclose that she had been hospitalised with SLE, it is noteworthy that, as the trial judge found, the deceased "was clearly exceptionally unwell" at the time of her admission.  She required treatment, fortunately only for the SLE and not, in addition, for any other infection to which the disease may have made her susceptible, a situation which was feared by her medical advisers at the time.  She had specialist treatment in hospital.  It was successful. 

1. She had suffered an exacerbation of her disease which had been treated successfully, but it is to be recalled that SLE is a life-threatening illness and there is a significant mortality, according to the evidence, initially from the disease itself or an infective complication of its treatment.  If it was the case that Mrs McCabe had had the disease for some time then there is a recognised long‑term mortality associated with premature vascular disease which may be a consequence of SLE.  Prior to Mrs McCabe's admission to hospital she had been in a declining state of health.  She had a fever.  She herself felt so unwell she thought she might die.

2. The trial judge did not find that Mrs McCabe knew her hospitalisation to be a matter relevant to the respondent's decision about acceptance of the risk in relation to her application, but in my opinion the evidence was very strongly supportive of his Honour's conclusion that a reasonable person in Mrs McCabe's situation should have known that her hospitalisation was such a matter.  She knew the nature of her disease and, that it had so worsened as to require hospitalisation as a result of the concern her condition generated in treating medical practitioners, should have told her that her hospitalisation would provide an indication of how unwell she was at that time and she ought reasonably to have realised that the respondent would want to know, in relation to its evaluation of the risk, that her disease was in such a state that it could produce a crisis of this kind.  To my  mind, the finding of the trial judge to that effect was well open and I would not uphold ground 1.

3. I turn to ground 3 and the question of the refusal of her application for insurance by AMP. Certainly there was nothing specific in the document of application, or otherwise in the accompanying material, which inquired of Mrs McCabe whether she had ever been refused insurance of this kind, but the primary facts seem to me to be strongly supportive of the trial judge's conclusion that this was, in terms of s 21(1), a material non-disclosure.

4. She had made the application when she was effectively fully aware of the seriousness of her condition of SLE.  She had been treated for it in hospital and discharged.  She was under the care, again, of Dr Cheah, her rheumatologist, and she gave Dr Cheah has her doctor.  She had in fact seen him for a check‑up on the day before she made her application, and that she realised the significance of all that is shown by the fact that she disclosed it on the application to AMP.  She had not been completely open with AMP in relation to giving details of her recent hospitalisation, but her SLE was the significant medical condition disclosed in her application to AMP.

5. I respectfully agree with the trial judge that when she was advised by AMP that her application for insurance was refused she must have understood that it was as a result of her disease of SLE that that decision had been taken.  She knew that the respondent had, on incomplete information, offered her cover, for a greatly increased premium.  She must have known that it would be relevant to the respondent's decision whether or not to proceed with the offer of insurance, that she had just been refused insurance entirely by AMP. 

6. The timing of her final acceptance of the proposal of the respondent indicates that, rather than advise the respondent of these obviously material alterations to her circumstances which could affect final acceptance of the risk, as she was asked to do, she thought it prudent to take up the offer of insurance, even at the greatly increased premium which was to be applied.  I respectfully agree with the trial judge that if she did not know that the AMP refusal was a relevant matter to the decision of the insurer, in all the circumstances, she ought reasonably to have known that to be the case.  To my mind ground 3 is not made out.

7. This leaves the question raised by grounds 2 and 4, whether the respondent proved that it would not have been prepared to enter into a contract of life insurance with Mrs McCabe on any terms if the duty of disclosure had been complied with in the relevant respects, so as to permit the respondent to avoid the contract.  I have mentioned the brief reference to this issue by the trial judge.

8. Although the submission was unsupported by authority, I am inclined to accept as correct the proposition expressed in grounds 2(a) and 4(a), that the application of s 29(3) in this case, should be considered against the background that there was material non‑disclosure in the two respects which I have discussed. The question then is, would the respondent have refused to enter into a contract of life insurance with the insured on any terms if it had been told that there had been such an exacerbation of Mrs McCabe's SLE as to require her hospitalisation and if it had been told that shortly afterwards she had applied for insurance to AMP and had been refused upon grounds which no doubt related to the seriousness of her condition?

9. In relation to this question the respondent depended upon the evidence of  Mr Kennedy (to whose evidence the trial judge did briefly refer) which evidence was effectively unchallenged.  Mr Kennedy had a history of 43 years involvement in the life and disability insurance industry.  He was an underwriter and he worked in latter years, including the period when Mrs McCabe's application was under consideration, as a consultant underwriter for the respondent, among a number of insurers, prior to his retirement as a result of ill health in 1999.

10. He had assessed Mrs McCabe's application.  His role was "to perform the final underwriting step which made the decision" by the respondent, upon his advice, to accept the proposal on terms of an increased premium.  Mr Kennedy explained the basis of the decision.  It is clear that he did not understand that the deceased was suffering from SLE, although he knew the disease was a serious disease which would have a profound impact on the success of the application for insurance.  If the disease had been recently diagnosed, within the last 2 years before the application, it would not have been accepted. 

11. Of course, as the trial judge found, the respondent had been told that Mrs McCabe did in fact have SLE prior to Mr Kennedy's final decision as to the acceptance of risk and the advice he gave to the respondent, which it clearly accepted. But Mr Kennedy, acting on behalf of the respondent, did not understand the full implications of the information that had been provided and it is against that background that it is necessary to consider the application of s 29(3) in relation to disclosure of the deceased's hospitalisation and the rejection of her application for insurance by AMP. Mr Kennedy's evidence was clear:

    "Now, it's now known that the deceased was hospitalised from 20 to 27 February 1998 at one of the suburban hospitals here in Perth.  It has been said by her specialist that she was hospitalised for the exacerbation of her SLE or lupus condition.  If you had known when you assessed this that she had been hospitalised, what would your view have been, and how do you treat hospitalisation in terms of your assessment of these matters?---Well, being hospitalised, of course, no-one goes to

hospital without suffering from some form of serious complaint so we need to determine the reason why this person was hospitalised.  So we would then have to go back to one of the specialists to determine why she was hospitalised and to seek all the details and treatment received while she was there. 

All right.  Would you have accepted the risk prior to making those inquiries?---No.

If you had then gone back to those people that had been treating her and found out that she had been admitted to hospital for 7 days because she had an exacerbation of a condition that you hadn't previously seen, that is SLE or lupus, would you have accepted the risk on any terms?---No, I would not."

1. As to the refusal of the application by AMP, if that had been disclosed Mr Kennedy said that he would have made contact with AMP to determine the reasons for declining the application.  He was certain that AMP would have provided their cooperation.  He would have perused the deceased's application to AMP and he would have seen Dr Cheah's report to AMP and the clear diagnosis.  Having discerned the reason why AMP declined the risk, Mr Kennedy said he would not have accepted the risk under any terms.

2. In grounds 2(b) and 4(b), the appellant complains that there was no or insufficient evidence to enable it to be found that Mr Kennedy was the officer of the respondent whose responsibility it was ultimately to decide whether the respondent should accept risks of this kind, but in my opinion Mr Kennedy's evidence was clear on that point.  The formal process involved him giving advice to the respondent and making a recommendation, but it is abundantly clear that if he recommended against acceptance of the risk, the respondent would not act against that recommendation.  As has been seen, when Mr Kennedy recommended acceptance of the risk, subject to the increased premium rate, that was the decision conveyed by the respondent by letter dated 26 February 1998

under the hand of Mr Burrows, its managing director, to Mrs McCabe.  In my view, the question grounds 2 and 4 raise was a matter of little controversy at the trial.  As I have said, Mr Kennedy's evidence does not appear to have been challenged.

1. I would dismiss the appeal.

2. ANDERSON J:  I agree with Murray J.