May 28, 2014
In this legal case study, Richard Swansson (plaintiff) successfully sued the adviser, Russell Harrison, and his licensee (Synchron) for damages of nearly $1.5 million because an act of non-disclosure left him uninsured. Mr Harrison has subsequently made changes to his client disclosure processes, and shares these below.
At a Glance
Source: Judge’s decision notes, with commentary by Russell Harrison
Topics covered: insurance replacement advice, duty of disclosure
In 2004, Mr Swansson took out a life insurance policy with AXA, with the help of Mr Harrison. In 2012, after receiving his renewal notice which indicated his premium would rise by around $800, Mr Swansson approached Mr Harrison to look for an alternative, less expensive option.
Mr Swansson met with his adviser, Mr Harrison, on 7 March 2012, where it was decided a replacement life insurance policy would be sought from AIA Australia. During the application process, Mr Swansson noted he had seen his GP two days prior for a stomach complaint, for which he was prescribed treatment for giardia. The application form reflected that this issue was ‘resolved’.
At this appointment, Mr Harrison also asked Mr Swansson to pre-sign a letter to be sent to the previous insurer, advising of his desire to cancel his old policy. The letter was signed by Mr Swansson, and retained by Mr Harrison to be forwarded to AXA after the new policy was inforce.
Mr Swansson’s application was submitted to AIA Australia shortly thereafter, but the policy was not issued until 23 March. During the intervening period, Mr Swansson sought additional medical attention for his stomach complaint, undergoing an ultrasound and MRCP scan.
During this period, AIA Australia requested further information from Mr Swansson via his financial adviser. When filling out the application form, Mr Harrison had inadvertently omitted to complete the question relating to the details of Mr Swansson’s usual alcohol consumption. On or around 20 March, an employee of Mr Harrison’s firm telephoned Mr Swansson to obtain the information requested by AIA Australia. At no time during this conversation did Mr Swansson advise the employee of his medical condition, nor did the employee enquire about it.
On 28 March, five days after the new policy was issued by AIA Australia, Mr Harrison forwarded the letter which had been pre-signed by the client to AXA, expressing the client’s decision to cancel the old policy.
On 3 May 2012, Mr Swansson was diagnosed with pancreatic cancer. He underwent treatment, however, a routine CT scan in mid-2013 revealed the cancer had metastasised into the liver and lungs. On 17 July 2013 Mr Swansson was provided with a terminal illness diagnosis.
On 30 July 2013 Mr Harrison lodged a claim with AIA Australia on Mr Swansson’s behalf. The claim was denied by AIA Australia on the grounds that Mr Swansson had misrepresented the nature of his visit to the GP on 5 March 2012, and failed to comply with his ongoing duty of disclosure by not advising AIA of his ongoing symptoms, consultations and investigations before the policy commenced. After considering a response from Mr Swansson’s lawyers, AIA Australian confirmed its decision to decline the claim.
Independently, Mr Swansson attempted to make a claim with his previous insurer, AXA, which was declined on the basis he had cancelled his cover with them prior to diagnosis.
Insurance Contracts Act
Section 29 (3) of the Insurance Contracts Act 1984 permits an insurer to avoid a contract of life insurance for breach of the duty of disclosure or for misrepresentation before entry into the contract, providing no more than 3 years have elapsed since that date. One of the effects of entering a new contract of life insurance was to re-expose Mr Swansson to the risk of his policy being avoided for innocent non-disclosure. By contrast, that risk had long since passed in relation to the AXA policy. Mr Harrison said that he gave advice on this topic at the 7 March meeting; Mr Swansson denied that this was the case.
Mr Swansson brought the case against Mr Harrison on the grounds that he negligently failed to exercise the skill and care reasonably to be expected of an insurance adviser (or broker) professing skill in that field, by failing to inform Mr Swansson of his duty of disclosure.
At trial, the grounds of negligence were distilled into four specific complaints. They were that Mr Harrison:
- Failed to explain the continuing nature of the duty to disclose material facts
- Trivialised the significance of Mr Swansson’s stomach complaint to justify inserting the word ‘resolved’ in the application
- Failed to explain the value of S29 (3) of the Insurance Contracts Act and the immunity from the loss of the policy through innocent misrepresentation that provision guarantees
- Failed to check with Mr Swansson about his medical condition before finally cancelling the AXA policy.
Much of the case centred on what occurred during the 7 March meeting between Mr Swansson and Mr Harrison, and whether Mr Harrison had appropriately advised Mr Swansson of his duty of disclosure.
In providing evidence to the court, Mr Swansson argued that Mr Harrison led him to believe that his stomach soreness was of no real interest to the insurer. Further, he said he did not understand he had any further obligation to tell the insurer (by reporting to Mr Harrison) what transpired with his medical condition after 7 March because he believed he had done all he needed to do at that meeting.
Mr Swansson also maintained that at no point during the meeting on 7 March did Mr Harrison give him any advice about an ongoing duty to disclose material facts concerning his health. In contrast, Mr Harrison gave evidence saying he had provided such advice on three different occasions, while taking his client through the AIA application form. According to the Judge’s decision notes, Mr Harrison said his practice when completing an insurance application was to point to the duty of disclosure contained in the application form and to explain it to the client in his own words.
Duty of disclosure
Under the Insurance Contracts Act, before a contract of insurance is entered into, the insurer must clearly inform a consumer, in writing of the general nature and effect of the duty of disclosure, including the consequences of non-disclosure.
Typically, the duty of disclosure wording is included on the application form (either paper or electronically), and often the insurer requires the client to sign against this wording to confirm they understand and have followed this duty.
The wording can vary depending on the individual insurer’s interpretation of the Act, however typically the duty of disclosure reads as follows:
Before you enter into an insurance contract with the insurer, you and any person whose life is to be insured, have a duty under the Insurance Contracts Act 1984 (the Act) to disclose every matter that you know, or could reasonably be expected to know, is relevant to the insurer’s decision whether or not to accept the risk of the insurance and if so, on what terms.
You must answer all of the insurer’s questions honestly and completely. You must tell the insurer everything you know and everything that a reasonable person in the circumstances could be expected to know is relevant to our decision whether to insurer you and whether any special conditions need to apply to the Policy.
You don’t need to tell the insurer about any matter that diminishes the risk, is common knowledge, that it knows or should know as an insurer, or that it tells you it does not need to know.
If you have not disclosed all relevant matters to us and the insurer would not have entered into all or part of the Policy on any terms had the insurer known about those matters, the insurer may avoid all or part of the Policy within three years of the commencement date. If your non-disclosure or misrepresentation is fraudulent and the insurer would not have entered into the Policy on the same terms had the insurer known about these matters, the insurer may avoid all or part of the Policy at any time.
Your Duty of Disclosure continues until the contract of life insurance has been approved by the insurer and a policy is issued.
Judge Macaulay, who presided over the case in Victoria’s Supreme Court, found that:
“…Mr Harrison gave Mr Swansson advice, on one if not more occasions while completing the application, about his ongoing duty to disclose material facts to the insurer. He also explained the consequences of not doing so, including that within the first three years the insurer could avoid the policy for non-disclosure or misrepresentation that was not fraudulent. I accept that he gave advice, in substance, in conformity with his habitual practice as he explained in evidence.”
However, Judge Macaulay determined that both the client and the adviser were jointly negligent in their duties when it came to the cancellation of the AXA policy, for failing to ask (in the case of the adviser) or disclose (in the case of the client) anything further about the previously identified stomach condition and the additional medical treatment.
According to the Judge, a number of factors led him to believe it reasonable that a skilled adviser in Mr Harrison’s position would have made ongoing inquiries after Mr Swansson’s health. They were that:
- Mr Harrison knew of the special value of the AXA policy, compared to the AIA policy, in that it could no longer be avoided for innocent non-disclosure
- Mr Harrison was aware that Mr Swansson had been to a doctor only two days before the interview on 7 March, a very short space of time in which to be sure of his recovery
- Mr Harrison himself expressed concern that the kind of condition from which Mr Swansson suffered was one that could take some time to clear, mentioning his own wife’s experience
- By the time he was poised to implement the cancellation of the policy, Mr Harrison was aware that three weeks had elapsed since he last heard from Mr Swansson meaning that the last information he had about his client’s stomach was by then out of date
- It was a relatively easy thing to make an inquiry of Mr Swansson about his current medical status – he merely had to make a telephone call
Judge Macaulay therefore awarded the plaintiff damages in the sum of $738,727.35 (half of the claim benefit Mr Swansson would have received if his insurance was in place).
Mr Harrison spoke to riskinfo about the case, and expressed his sympathy for the client and his family, especially as they had to deal with the proceedings while the client was extremely ill.
He highlighted that the case had led to further changes within his own practice:
“We have actually included the duty of disclosure in full in our Statement of Advice (SoA) and that page requires separate signatures from the clients. So our SoAs now require two signatures – once against the duty of disclosure, to confirm that the client has read it, understood it and that we’ve discussed it – and the other one is the normal Authority to Proceed,” Mr Harrison explained.
In addition, his practice now sends an email to the client prior to the cancellation of an existing policy, telling the client they’re covered with another policy and warning that if there are any changes or anything they want to let the advice practice (and insurer) know, they have 48 hours to do so before the policy is cancelled.
“We have always been (and remain) confident in our processes. This court case has highlighted that the demands on practice have evolved and, naturally, we will continue to evolve to meet these demands.”
The Judge also highlighted in his own findings that he did not believe Mr Harrison’s overall business practices were slack or sloppy.
“Mr Harrison’s methods and paperwork seemed to be systematised and purposefully designed. He presented well in the witness box as a person who was keen to ensure that his business was well run and quite proud that (he thought) it was.”
Mr Harrison had the following advice for other advisers:
“Meticulously keep notes. Ensure that all discussions and comments to clients and prospective clients are documented. Ensure that everything is signed off and there is a paper trail for everything.”
To view the Judge’s decision notes, click here.