ADL definitions in TPD insurance: Is the default at fault? (part two)
28th Oct 2020
Definitions in TPD insurance
Total and permanent disability (TPD) insurance does not have one specific definition but can have a number of various definitions, one of which is the activities of daily living (ADL) definition. The ADL definition is an alternative to the any occupation (referred to as the ‘standard form’) and own occupation definitions.
This definition can be the sole definition in some TPD policies by design, but it is commonly featured as a fall-back definition in default superannuation-held TPD policies (often called group life policies).
While definitions of ADL may vary in their exact terms, ASIC describes ADL as generally requiring that ‘consumers cannot perform several “activities of daily living” such as feeding, dressing or washing themselves.’
Group life insurance claims and the ADL definition
A claim on default group life insurance would be assessed under the ADL definition where the claimant fails to satisfy a conditional clause often found alongside the any occupation definition – that the claimant needed to be working ‘normally’ immediately prior to the ‘disability’ event.
An example of such a conditional term is ‘[Any occupation applies only] in respect of an insured person who was gainfully employed within the six months prior to the date of disablement.’
Under this conditional clause, if the claimant’s work was already restricted prior to the asserted ‘disability’ event the claimant would fail the any occupation definition, and be assessed under an alternative definition which is often the ADL definition.
The ADL definition reports a much higher rate of decline when compared to claims made under the any occupation definition, and is regarded as more narrow. However it is important to recognise that this is not likely to be ‘unfair’ in a legal sense (for example, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) made no reference to the ADL definition at all).
Are higher rates of decline ‘unfair’?
The fact that a definition has higher rates of decline is not proof of its ‘unfairness’. The definition being narrower is not ‘unfair’ because TPD is not required to have particular terms – which the ADL definition has now disrupted. For example, a similar product to TPD is life insurance which is by design significantly narrower than ADL.
It is easy to discern that the ADL definition per se cannot be ‘unfair’ as it enlivens rather than restricts a claimant’s ability to claim. Should a claimant initially not meet any occupation because they were not working sufficiently as required under the conditional clauses, the alternative definitions (such as ADL) would then become applicable.
Since a claim rejected under ADL is declined under any occupation first, the perception that the rates of decline for any occupation and ADL definitions are mutually exclusive is inaccurate. Whether the ADL definition is narrower as compared to any occupation is thus not very critical.
ADL does not prevent claims which could have been successful from being successful, as a successful claim can clearly be made under ADL if one were so ill as to satisfy that definition. Rather, the higher decline rates, supposedly as a result of ADL, reveal that there are many claims with similar circumstances that fail both definitions. For example, if a claimant is already unable to work and/or seriously ill, meaning that they cannot satisfy any occupation, but not so ill as to meet ADL.
The not-so-standard form
This situation arises because insurance in superannuation needs only to be consistent with a limited set of definitions (ie. permanent incapacity) and the remaining terms regarding critical issues, such as eligibility, can vary greatly. Thus for the most part, the ‘standard form’ is not standard at all, and most of the terms can be anything as agreed between the superannuation trustee and insurer. As observed by the Royal Commission, the member (and potential claimant) is excluded from that process and often left ill-informed about the operation of those complicated terms.
Whether ADL is of poor value is subjective. Whether a financial product is worth the money is ultimately a financial consideration, not a legal one. But many are seemingly unaware of what their TPD insurance offers, especially when it comes to the ADL definition. As practitioners, we should advise our clients to be properly informed of the effects of their insurance to avoid unexpected exposure in their time of need – for example, thinking they can make a successful claim only to learn that the various definitions operate differently.
Ultimately when it comes to insurance contracts, including TPD, it is important to review the policy terms before forming any opinion about it. TPD is not ‘no real chance to return to work’, rather it is whatever the policy says it is.
See last week’s Opinion for part one of this article discussing the various definitions in TPD insurance.
Matthew Lo is a lawyer at LHD Lawyers and practises exclusively in life insurances. He is a primary author of LexisNexis’ Practical Guidance for TPD Claims. Matthew also has experience with superannuation law, particularly self-managed superannuation funds, and with defined benefits schemes.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).
 ASIC, Holes in the Safety Net: A Review of TPD Insurance Claims (Report 633, October 2019) 5, Table 1.
 Compare with ibid, .
 ASIC, above note 2, .
 Ibid, .
 Within the meaning of the Australian Consumer Law (ACL); compare with ACL, s24(1); Australian Securities and Investments Commission Act 2001 (Cth), s12BG(1). Unfair contract terms will apply to insurance following the introduction of the Treasury Laws Amendment (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth) which adopts Recommendation 4.7 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
 Treasury, Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) (Report, 4 February 2019).
 Compare with ibid, 317–24.
 Dominantly with the insurance in superannuation.
 ASIC, above note 2, .
 Royal Commission, above note 8, 318–19.
 Ibid, 321.
 And those held indirectly for their benefit.