‘Efficiently, honestly and fairly’ – the requirement to update medical definitions in insurance policies
8th Jun 2023
On 18 May, in Australian Securities and Investments Commission v MLC Limited  FCA 539, (ASIC v MLC) Moshinsky J ordered MLC Limited to pay a pecuniary penalty of $10 million. His Honour also declared, among other things, that MLC’s failure to promptly update the medical definition for critical illness in their life insurance policies was a failure to do all things necessary to ensure that the financial services covered by the licence were provided ‘efficiently, honestly and fairly’, in contravention of s912A(1)(a) of the Corporations Act 2001 (Cth).
This is the first time a failure to update the medical definitions in an insurance policy has been judicially declared to be a breach of the law. This is despite the requirement to act ‘efficiently, honestly and fairly’ being copied across from the old Corporations Law (Cth), with the same meaning intended,[i] the interpretation of which has been followed in a line of cases since Young J (as he then was) explained it in Story v National Companies and Securities Commission[ii] based on the law in the former Securities Industry (New South Wales) Code.[iii]
Life insurance relies on medicine for context
By its very nature, life insurance as a financial product relies on medicine to give it context. For example, the level of disability for total and permanent disability (TPD) insurance products is based on a policy definition intimately linked to functional characteristics that have been defined by medicine. And, for obvious reasons, a death policy requires the declaration of a cessation of life by a doctor based on medically accepted criteria. But it is the critical illness policies (more commonly known as trauma insurance) where medical definition is the essence of the policy benefit.
Critical illness insurance provides a lump sum of money if the insured is diagnosed with a defined list of medical events. First issued in 1983 in South Africa to cover the four dreaded diseases – heart attack, stroke, cancer and coronary artery surgery – the product was soon available in many parts of the world, including Australia.[iv] The product evolved to include more than 60 different medical events. But as improvements in medicine made many medical events less dreadful, insurers started listing exclusions within those definitions of medical events to reduce the cost of claims.
One problem with using a medically described condition in an insurance policy is that it will capture a definition appropriate for when it is described but likely no longer useful a few decades later – which is the length of time a life insurance policy is designed for. So, over time, if such definitions are not updated, the policy essentially becomes junk insurance: a policy on which the benefit cannot be claimed.[v]
This was the situation in ASIC v MLC, where the definition of severe rheumatoid arthritis required a level of deformity rarely seen now, even for very severe cases.
New industry code already outdated
It is almost 15 years since this author, as chief medical officer of an insurer, first warned the life insurance industry that they needed to change. Selling policies that are essentially junk insurance, if not illegal, is a moral breach of their social licence. It took a media expose, several parliamentary inquiries and a royal commission before things started to change. Even then, only a voluntary Life Insurers Code of Practice was introduced, set by the Financial Services Council (FSC), with a commitment to review medical definitions in policies that are currently on sale only, with off-sale policies excluded.[vi]
A new FSC Code of Practice comes into effect on 1 July 2023. It states that where a policy has a medical definition that specifies an obsolete method of diagnosis or treatment that is no longer used in mainstream medical practice in Australia, the insurer will ‘assess your claim, including whether it meets the required degree of severity defined in your policy, using a current method of diagnosis or treatment approved for use in Australia’.
Unfortunately, the new Code will not assist claimants for severe rheumatoid arthritis where the definition for the benefit must include all of the listed criteria,[vii] including those that are not necessarily used for diagnosis, treatment or in determining severity.
Thankfully, claimants can now rely on the judgment of ASIC v MLC to assist their claims.
The ALA thanks Dr Benjamin Koh for this contribution.
Dr Benjamin Koh was the chief medical officer at two life insurers, was involved in the media expose of insurer bad conduct, assisted in the Parliamentary and ASIC inquiries into the issue of outdated medical definitions, and advocated for claimants of life insurance policies. He was quoted with approval at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and now works as a class action solicitor at Shine Lawyers. He is also an honorary associate at the University of Technology Sydney, and has two masters degrees, a PhD and an honours degree in law as well as a medical degree.
The views and opinions expressed in this article are the author's and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).
[i] Commonwealth, Parliamentary Debates, Senate, 22 August 2001, 26308 (Senator Conroy) and 23 August 2001, 26452 (Senator Conroy).
[ii] (1988) 13 NSWLR 661.
[iii] Section 60(1)(b).
[iv] A Dreyer, K Gillmore, and M Richardson. ‘Trauma insurance - Want to play a lottery’ (Actuaries Institute, Actuaries Summit, 20-21 May 2013, Sydney).
[v] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Transcript of Proceedings (21 September 2018)6488.
[vi] Riskinfo, ‘Call for increased insurer obligations on medical definitions for off-sale policies’ (5 October 2021) <https://riskinfo.com.au/news/2021/10/05/call-for-increased-insurer-obligations-on-medical-definitions-for-off-sale-policies/>.
[vii] As an example, the AIA website still lists this requirement for the CommInsure-branded policy when assessed on 21 May 2023: <https://www.aia.com.au/content/dam/au/en/tailored-protection/docs/pds-policy-docs/combined-pds-policy-document-180813.pdf>.