An Australian Financial Complaints Authority (AFCA) panel has told an insurer to review its decision to knock back income protection (IP) cover for a policyholder, saying it was not “fair and reasonable”. 

The policyholder lodged a claim for IP benefits on August 22, 2017, for “depression, anxiety, high blood pressure and stress” saying the illnesses first manifested in November 2016. 

She received IP benefits from August 31, 2017, but the payments were paused at the end of 2017 subject to a review of her medical history. 

The AFCA hearing was told the insurer, called Insurer 1 in the ruling, believed she failed to comply with her duty of disclosure and/or made a misrepresentation to it about material health history relating to her mental health, heart, blood pressure and back. 

The woman applied for an increase in her IP cover in 2015 which was provided to her through policy x091. 

It took effect on February 20, 2015, and the earlier policy x622, which provided lower IP cover and was originally taken out in 2010, was cancelled. 

Policy x091 provided monthly IP cover of $3653. Policy x622 provided monthly IP cover of $2471.  

On February 7, 2018, insurer 1 told trustee OnePath Custodians Pty Limited it would avoid the cover provided by policy x091 and reinstate policy x622. 

Since insurer 1’s decision, its life insurance business has been transferred to insurer 2, Zurich Australia Ltd, under a scheme of arrangement. Zurich reviewed the decision of insurer 1 and agreed. 

Trustee OnePath disagreed with the decision, as adopted by Zurich, on the basis the evidence does not support insurer 1’s decision to avoid cover. 

The woman says she has limited English literacy and answered the form to the best of her ability. 

The AFCA panel, comprising an Ombudsman, a consumer medical representative and an industry representative, ruled it was satisfied that the “complainant failed to comply with her duty of disclosure and/or made a misrepresentation to insurer 1 when she applied for the increase in IP cover in 2015”.  

But it says insurer 1 was not entitled to avoid x091 under section 29 of the Insurance Contracts Act 1984.  

“This would, in essence, be giving the insurer the benefit of hindsight to re-write the terms on which it would accept risk (once the risk has crystalised) contrary to its own practices evidenced in the underwriting guidelines at the time. 

“The panel also noted the complainant’s circumstances, such as her limited English literacy, would add to the unfairness and unreasonableness of insurer 2 exercising section 29(3) of the ICA in this manner. 

“The panel is not satisfied the decision, as adopted by insurer 2, to avoid policy x091 is, in its operation in relation to the complainant, fair and reasonable in all the circumstances.” 

“This is because the evidence does not show that insurer 1 would not have entered into the contract even if the complainant had not failed to comply with the duty of disclosure or had not made a misrepresentation before policy x091 was entered into.” 

The AFCA determination requires Zurich to reconsider the claim. It affirmed the decision of the trustee. 

Click here to read the full ruling.