What are an insurer’s responsibilities when cancelling an insurance policy for fraud?
Taylor v Asteron Life Ltd  NZHC 978 is a significant decision for New Zealand insurance law.
The High Court has held fraudulent claims are to be dealt with using the contractual mechanism provided for by the Contract and Commercial Law Act 2017 (CCL Act). The result being that once an insurer is satisfied that a claim is fraudulent, the insurer should give the assured notice of cancellation of the policy under section 41 of the CCL Act. This will entitle the insurer to restitution of sums already paid to the assured, and relieve them from liability to make further payments. In the absence of cancellation, insurers will have to rely upon an action for damages to recover sums paid, and in principle they cannot refuse further payment without cancellation.
Mr Taylor, an insurance broker, applied for an income protection policy from Asteron in October 1992. The policy was issued in May 1994. The policy provided a Total Disability Benefit (defined as being unable to work in the assured’s usual occupation for more than 10 hours per week) and a Partial Disability Benefit (defined as working in any occupation but, because of sickness or injury able earn 75 per cent or less of monthly insured income).
In July 2010, Mr Taylor submitted a claim under the policy, asserting he had suffered from medical conditions of the kind covered by the policy – bone cancer – and indicating he had stopped all work on 23 December 2009. The claim was accepted and payment was made, backdated to December 2009. In September 2014, when Asteron received evidence that Mr Taylor was in fact still working, payments were suspended and Asteron sought restitution of all payments previously made.
Mr Taylor issued proceedings, seeking a declaration that he was entitled to the sums withheld from him and that he was not liable to make any repayment.
The High Court’s decision
The Court was hampered by a lack of medical evidence from Mr Taylor, but it was able to conclude that although Mr Taylor was suffering from a sickness as defined in the policy, he was neither totally nor partially disabled. In particular, although the number of hours the assured had been unable to work had been adversely affected, his income had not suffered in the manner required by the policy.
The question thus became whether Asteron was entitled to cease payment and to demand restitution of sums paid up to the date when payment ceased. This effectively amounted to a fraudulent claim, and required the Court to consider the correct legal framework for dealing with fraudulent claims.
Earlier authorities had dealt with fraudulent claims on the ground of breach of the duty of utmost good faith. In the High Court Cooke J held that the duty of utmost good faith is an implied term of the insurance contract, as recognised in Young v Tower Insurance Ltd  NZHC 2956, and therefore the matter was to be resolved as a matter of contract law under the CCL Act, rather than by common law principles.
In this case, the Court determined that Mr Taylor was in breach of the duty of utmost good faith by having made dishonest and false statements in relation to his claim. Those statements were included in progress reports made after the initial claim. The evidence was that in fact Mr Taylor had returned to work in 2010, working four hours per day, and remained active in his business.
Under section 37 of the CCL Act, Asteron had the right to cancel the policy if the breach was essential or one that substantially altered Asteron’s benefits and burdens. Section 41 of the CCL Act provides however that cancellation of a contract (here, the policy) takes effect once it is made known to the other party. Asteron had written to Mr Taylor saying it would not be making any more payments, but there was no mention of cancellation then or in later communications. Cancellation of the policy did not occur until during the proceedings, when Asteron served a brief of evidence which constituted notice of cancellation.
Once a contract is cancelled, section 42 of the CCL Act gives the Court the power to grant relief, including restitution. Justice Cooke confirmed that it was appropriate to apply the principles developed by the courts in relation to fraudulent claims at common law, and to order repayment of all sums paid under the policy, even if some elements of the claim were genuine: that was the position established in Orakpo v Barclays Insurance Services Co Ltd  CLC 373 and AXA General Insurance Ltd v Gottlieb  EWCA Civ 112.
Where restitution was on the face of things appropriate, tunder section 43 of the CCL Act the Court had the power to refuse an order in the event of a change of position. Mr Taylor claimed he had relied upon the payments made by him to purchase a holiday house, two luxury cars, and holidays to the Pacific. The Court rejected the defence of change of position, and said that:
“A person who has dishonestly induced another to make a payment cannot claim it is inequitable to require repayment because he or she has changed position in reliance on the fruits of the dishonesty.”
Justice Cooke also noted that it was not clear that the purchases had been made in reliance on payments made by Asteron.
If it was the case that Asteron had not cancelled the policy, then sections 42 and 43 of the CCL Act did not apply and Asteron’s remedy would have been damages for breach of contract. Such damages would have covered sums Asteron would not have paid but for the breach, giving rise to an amount the same as that as if restitution had been ordered.
Although Cooke J referred to the UK decision in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG  UKSC 45, holding that fraudulent statements made in the claims process that did not affect entitlement to payment were to be disregarded, he did not decide whether the case should be followed. Given the reclassification of fraudulent claims as contractual, it could be argued that the “collateral lies” discussed in Versloot might still give insurers the right to seek damages for breach of contract even if they did not justify cancellation.
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Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.