TPD Assessment and Cost Implications for Insurers who Fail to Act Fairly

Important takeaways from Hannnover Life Re of Australasia v Cesario Colella [2014] VSCA 205

Background

Mr Collela (the claimant) injured his knee while working for Visy as a despatch manager. The injury worsened over time due to further falls and, in an attempt to remedy the injury, the claimant underwent three arthroscopic procedures in 2004, 2005 and 2007. He commenced employment with Carter in November 2006 and ceased employment in April 2007 due to a significant and continuing knee condition.

The claimant claimed on the Carter Group Life Policy for TPD benefit and provided considerable medical evidence in support. In total, five claims were made and the insurer rejected each of those claims. Proceedings were commenced in the County Court of Victoria to recover the TPD benefit. The trial judge ordered the insurer to pay the trustee for the claimant the benefit of $160,000 and interest of $53,455.25.

The insurer was ordered to pay the claimant’s costs on an indemnity basis from 14 March 2012.

The insurer appealed the decision of the trial judge with respect to the construction of the policy, assessment of the evidence, the award of interest and indemnity costs.

Grounds of Appeal & Appeal Court’s findings

1. Construction of the TPD policy – did the claimant satisfy the first and second limb?

To succeed on the policy the claimant had to show that he satisfied both limbs of the TPD definition:

a) He was unable to do any work as a result of the injury or illness for six consecutive months; and

b) At the end of the six months he continued to be so disabled and that in the opinion of the insurer he was unable to resume his previous occupation at any time in the future and will be unable at any time in the future to perform any other occupation.

In respect of the first limb, and taking guidance from the Full Court of the Federal Court decision of Repatriation Commission v Hill,[i] the Court of Appeal found that the expression “unable to do work” is concerned with the capacity of a person to perform remunerative work of a kind for which the person is otherwise suited. The capacity to perform remunerative work is different from the capacity to perform a “work task” and is dependent in part on a person’s background, training, skills and experience.

The capacity to perform work must be in the context of an occupation or employment recognised in the community and such work does not have to be available in the town or region in which the person lives. It is not concerned with the availability of employment but rather the person’s capacity to perform it.

While the Court of Appeal found that the trial judge went too far by taking into account whether such work was reasonably available in the marketplace and in an area the claimant could reasonably apply, the result was the same as the evidence demonstrated the claimant was unable to do any work as a result of the injury.

In respect of the second limb, the following principles were accepted by the Court of Appeal:

  • Determination of the claimant’s disability is to be made at the time of the assessment by the insurer;
  • The disability must prevent the claimant from resuming his occupation at any time into the future;
  • The disability must prevent the claimant from performing any other occupation at any time into the future;
  • “Other occupation” means occupation for which the person is qualified by education, training or experience;
  • Such occupation includes part-time work or that of a lower status than the previous occupation, or an occupation returning a lower income.

The Court of Appeal accepted the trial judge’s finding that the claimant was totally and permanently disabled from returning to work. Relevant factors were that the claimant had no trade, qualification or certificates, his training and experience was solely in the paper industry (manual machine operation and then despatch), the claimant had little capacity to operate a computer, he was not competent in clerical work and he had in fact not been able to obtain work.

The Court of Appeal found that if a claimant requires retraining in order to be employable, he is totally and permanently disabled within the definition. The Court must take a realistic and commonsense approach directed to the realities affecting the capacity of the insured under consideration.

2. Did the insurer act fairly and reasonably in its decision to disallow the claim on the policy?

It is a well established principle that an insurer must act fairly and reasonably in considering and determining a matter. The trial judge extensively reviewed the final refusal of the insurer, including a review of the surveillance film, numerous medical reports and witness statements. It was submitted on appeal that the trial judge failed to address the correct question, namely whether the insurer’s decision was so unreasonable that a reasonable person in that situation could not have made it. The Court rejected that submission, finding the correct test is that set out in Hannover Life Re of Australia Ltd v Sayseng,[ii] that if the decision can be shown to be unreasonable on the material before it, it can be successfully attacked and then becomes one for determination by the Court.

It was further submitted by the insurer that the trial judge impermissibly engaged in an overzealous scrutiny of the reasons given the insurer by picking out flaws in the reasoning process contained in the final refusal. The Court similarly rejected that submission finding that the conclusion reached by the insurer was outside the bounds of reasonable disagreement.

3. Interest.

Interest was allowed from 8 January 2009 to 23 August 2013 calculated at $53,455.25. Section 57(2) of the Insurance Contracts Act 1984 (Cth) provides for an insurer to pay interest for the period commencing on the day on which it was unreasonable for the insurer to have withheld payment and ending on the day on which payment was made. The Court held it was open to the trial judge to find on the evidence before him that the insurer was unreasonable when it withheld payment at the time of the first refusal (8 January 2009). That refusal contained errors and over simplifications and was selective of the medical evidence.

4. Costs.

The insurer was ordered to pay indemnity costs as it was unreasonable for the insurer not to accept a Calderbank offer from the claimant dated 27 February 2012. The claimant offered to accept $130,000 in full and final settlement. Indemnity costs were awarded from 14 March 2014.

There is a high threshold for the grant of leave to appeal an award for costs. The Court found there was no error in principle, erroneous view of the facts or manifest unreasonableness in the trial judge’s award of costs and dismissed the appeal.

Among other reasons, the Court found that (1) there were flaws in the insurer’s decision making process dating back to the first claim, (2) the insurer cherry-picked evidence that suited its refusal and (3) as at the date of the Calderbank offer, the insurer had in its possession sufficient material to determine the claim in the claimant’s favour and failed to obtain at least one important medical opinion.

The Result

Application for leave to appeal on all grounds dismissed with costs.

Takeaway message

Implications of this decision are two-fold:

1. It reinforces the key principles relevant to assessing the availability of alternative work in the context of a TPD claim:

  • Insurers and trustees are required to take a realistic and commonsense approach;
  • There must be a real and not a theoretical possibility that work will be available;
  • The capacity to perform remunerative work is different from the capacity to perform a work task and should not be some special “light duties” job specifically created for the injured person;
  • The capacity to perform work is not concerned with the availability of employment, but rather the person’s capacity to perform it.

2. Insurers have an obligation to act fairly and reasonably in determining a claim under a policy of insurance:

  • In order to avoid potentially large costs sanctions, insurers must have a proper evidentiary basis before rejecting a TPD claim, including obtaining responding medical evidence which supports the rejection of such a claim.
  • Insurers cannot isolate components of the evidence which favour a rejection and must look at the evidence as a whole so that any and all inconsistencies can be reconciled in fair manner.

[i] [2005] FCAFC 7; (2005) 142 FCR 88
[ii] [2005] NSWCA 214 [36]

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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