The Australian Securities and Investments Commission (ASIC) has filed court proceedings seeking financial penalties against an insurer for allegedly breaching its duty to act with utmost good faith during claims handling.

The legal action against OnePath Life alleges the insurer “failed” in a number of areas when it decided not to pay out an income protection (IP) policy on the basis that the insured had acted fraudulently.

Its list of failures includes not informing the insured she had the right to appeal through OnePath Life’s internal dispute resolution process or by filing a complaint with the Australian Financial Complaints Authority, ASIC says in a statement today.

ASIC has previously taken action against insurers for claims handling failures but the proceedings in the Federal Court seeking financial penalties are its first since new provisions were introduced in March 2019.

The provisions allow the regulator to pursue “harsher civil penalties and criminal sanctions” under ASIC-administered legislation, including the Insurance Contracts Act, ASIC says in a statement today.

“Insurers play an important role in providing financial security to consumers, particularly in times of crisis,” ASIC Deputy Chair Sarah Court said.

“Consumers need to be confident that their insurer will act in good faith and provide procedural fairness when handling their claims.

“Now more than ever, Australian insurers need to focus on their claims handling procedures and ensure they are meeting their legal obligations.”

According to ASIC, the insured acquired the IP and life insurance policy in 2016 through an ANZ financial adviser. At that time, OnePath Life was owned by the bank until May 2019, when Zurich acquired the business.

The insured submitted an IP claim in November 2018 for a shoulder injury she had sustained in February 2017, which OnePath accepted and began paying the benefits accruing from June that year.

But the insurer then commenced a “non-disclosure investigation” into an earlier injury, also on the shoulder, that the insured had before she bought the OnePath policy. OnePath did not inform the insured about this investigation.

The concise statement from ASIC says OnePath Life subsequently sought more information from the insured about the earlier shoulder injury and medical records from her GP and orthopaedic specialist.

OnePath Life obtained a statement of claims from the insured’s previous health fund containing references to admissions to hospital between May 2001 and November 2005.

Records that OnePath Life obtained from the hospital showed six admissions during the period 2001 to 2005 "variously referred to as being for suicidal ideations, overdose and self-harm”, the concise statement says.

OnePath Life later sought a retrospective underwriting opinion that concluded had the insurer been aware of the hospital admissions, it would have declined the insured’s request for IP and life insurance cover at standard rates.

“Ultimately, OnePath Life decided not to pay out the policy on the basis that the customer has acted fraudulently by failing to disclose the hospitalisation,” ASIC says.

The ASIC concise statement says OnePath failed to make clear to the customer it was concerned that the lack of disclosure was fraudulent and failed to fully investigate her explanation for the non-disclosure, including failing to speak to the ANZ adviser about the completion of the application for the insurance.

“If an insurer is concerned a customer has engaged in fraudulent non-disclosure, they must make their concerns explicit, give the customer the opportunity to respond and make proper inquiries into any explanation given by the customer before concluding that fraud has occurred,” Ms Court said.

Zurich says it acknowledges the court proceedings and is “considering the matters raised by ASIC in its concise statement and is committed to working constructively through the court process”.

“Zurich will not be providing further comment given the matter is now before the court,” the insurer says.

Click here for the concise statement.