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Australia – TPD Or Not TPD? A Trustee’s Duty To Pursue Insurance Claims.

14 November, 2013  


 

Summary

 

In September last year, the Superannuation Legislation Trustee Obligations and Prudential Standards Act 2012 introduced some significant changes to SIS. The amended trustee covenants in section 52 of SIS will by now be familiar to most in the industry. However, many of the new provisions are yet to be tested.

 

One aspect that is likely to present practical challenges is the scope of a trustee’s duties where a beneficiary makes a claim for insured benefits available through the super fund. In this article, we consider the scope of a trustee’s duties and how this may impact the management of insurance arrangements.  


The Obligations

 

Under the new section 52(7) of SIS, a trustee covenants to (among other things):

 

‘do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success.’’ 

 

Lack Of Guidance

 

Interestingly, the wording of the provision was accompanied by only limited guidance in the Explanatory Memorandum. The covenant raises the questions:

 
  • what steps might be included in doing ‘everything that is reasonable to pursue an insurance claim’? and
  • when might a claim be considered to have ‘reasonable prospects of success’?   
 

A Trustee’s Duty To Independently Consider A Claim

 

Despite the lack of specific guidance on the above questions, implicit in section 52(7) is an expectation that a trustee will make its own assessment of a member’s insurance claim and the likelihood that the claim will be admitted under the relevant insurance policy. This has been recognised as part of a super trustee’s obligations at general law in relevant cases. However, the introduction of a statutory obligation focusses attention on the practical issues for trustees, who will rely on insurers for:

 
  • claims-handling processes generally, and
  • identification and analysis of information required to support a member’s claim (at least at first instance).
 

The new insurance covenants, together with APRA’s Prudential Standard SPS 250 – Insurance in Superannuation (SPS 250), make it clear that a trustee must have its own policies and procedures in relation to claims assessment, ‘regardless of who is responsible for handling claims’. These policies are to form part of the overall ‘insurance strategy’ implemented by the trustee.


Doing ‘Everything That Is Reasonable’

 

The cases on insurance claims made by super fund members have focused on the need for a trustee to give genuine consideration to whether a member’s claim satisfies the relevant conditions. This has generally arisen in the context of members’ claims for total and permanent disablement (TPD) benefits. If an insurer’s decision to deny such a claim is not taken reasonably, and the trustee has not taken steps to assist the member, it generally follows that the trustee will have breached its obligations.1

 

Whether the trustee itself is required under the fund rules to form an opinion on the member’s condition, or whether the relevant opinion is that of the insurer, the analysis to be undertaken by the trustee will be essentially the same. As established in cases such as  Finch v Telstra Super Pty Ltd2 and Alcoa of Australia Retirement Plan Pty Ltd v Frost3, in undertaking an analysis of the member’s claim, the trustee must:  

  • give real and genuine (that is, ‘properly informed’) consideration to a member’s claim for entitlements; and
  • make inquiries, where it appears that conflicting or insufficient information is available (which is really a consequence of the above duty).
 

Limits Of The Trustee’s Duties

 

The Courts have emphasised that a trustee’s duty to properly inform itself of the matters relevant to a claim for entitlements is ‘more intense’ in the superannuation context than in others,4 given the importance of the entitlements and the members’ financial contributions towards them.   However, there are limits to these duties, and these limits are echoed in the explanatory guidance supporting section 52(7) of SIS. This states that a trustee must consider the likely costs and benefits for all beneficiaries when making ongoing inquiries or querying an insurer’s decision on a particular claim.   In the words of the Victorian Supreme Court, a trustee is not required to ‘go on endlessly in pursuit of perfect information in order to make a perfect decision. The reality of finite resources and the trustee’s responsibility to preserve the fund for the benefit of all beneficiaries according to the terms of the deed means that there must be a limit’.5   Unfortunately, this provides only limited assistance in understanding what may be involved in doing ‘everything that is reasonable to pursue an insurance claim’. No doubt, this will depend on the specific facts of each case, but some key take-aways are set out below.  


Reasonable Prospects Of Success


So when does a fund member’s claim for insured benefits have a ‘reasonable prospect of success’? Some judicial consideration of this concept, though not in the superannuation context, indicates that this would mean a claim that (for example):  


  • is likely to be fairly arguable, or
  • is supported by evidence which may reasonably be believed would entitle the claim to succeed.
 

In the case of a TPD claim, this could include circumstances where at least some of the medical evidence indicates that the member would meet the relevant conditions, at the relevant time, required to trigger an entitlement to a benefit. Reaching a conclusion on this would require a trustee to:  

  • understand the terms of the policy (i.e. when a claim will be admitted or denied),
  • understand the member’s claim, and
  • make further inquiries of the insurer or the member (as appropriate) where any evidence is inconclusive or conflicting on key points.  
 

Take-Aways

 

Compliance with the new insurance covenants will require super trustees to consider the following steps:

 

  • A clear foundation: Take steps to ensure that the arrangement includes clearly defined conditions under which claims will be admitted or denied by the insurer. Unclear or complex clauses in an insurance policy may increase the likelihood of disputed claims.  
  • Robust claims management: Include in the fund’s claims handling policies processes to communicate with the insurer, request further information and escalate issues in the event of a disagreement about the likely outcome of a claim.
  • No obligation to double-up: While the trustee must bring its own consideration to bear on a beneficiary’s claim for insured benefits, it will not be expected to duplicate all of the policies and processes that an insurer has in place to manage the claim process. However, the trustee must have an understanding of the insurer’s processes and be ready to make inquiries where appropriate.
  • Conflicting or missing information: Be alert to discrepancies or apparent gaps in any information supplied by the insurer in support of a decision on a claim. Seek further information where required.
  • Request reasons: It will be important for the trustee to understand the insurer’s reasons for denying a claim. This will enable consideration of what further steps, if any, would be reasonable.
  • Consider the insurer’s ‘claims philosophy’: As APRA indicates in its guidance, trustees should consider their insurer’s overall approach to claims and how this is likely to serve the interests of members generally (and those with genuine claims in particular).

 

Endnotes

 
  1. See Newey v First Superannuation Pty Ltd [2009] NSWSC 1100
  2. [2010] HCA 36
  3. [2012] VSCA 238
  4. For example, under a traditional family or discretionary trust where benefits may be distributed according to the benevolence of the settlor. 
  5. Alcoa of Australia Retirement Plan Pty Ltd v  Frost [2012] VSCA 238, at paragraph 60.

herbert smith Freehills  


For further information, please contact:  

  

Michael Vrisakis, Partner, Herbert Smith Freehills
michael.vrisakis@hsf.com   


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