On 28 October 2024, Justice Jackman of the Federal Court of Australia delivered judgment in Australian Securities and Investments Commission v HCF Life Insurance Company Pty Limited [2024] FCA 1240, ruling in favour of the Australian Securities and Investments Commission (ASIC).

His Honour considered exclusionary terms across a range of life insurance products (compendiously referred to as Recover Cover) which provided that HCF Life Insurance Company Pty Limited (HCF Life) could deny coverage where a policyholder failed to disclose a pre-existing condition prior to entering the contract, and a medical practitioner subsequently formed an opinion that signs or symptoms of their condition existed prior to the entering of the contract (Pre-Existing Condition Terms).

His Honour held that HCF Life breached s 12DF of the Australian Securities and Investments Commission Act 2001 (ASIC Act) by engaging in conduct that was liable to mislead the public as to the nature, characteristics and operation of their life insurance products. Notwithstanding these findings, his Honour did not deem the Pre-Existing Condition Terms as unfair contract terms (UCT) for the purposes of s 12BF of the ASIC Act.

Background to the judgment

Historically, HCF Life offered insurance products containing exclusions for pre-existing conditions which mirrored s 47(2) of the Insurance Contracts Act 1984 (Cth) (ICA). Section 47(2) states that an insurer may not rely on a provision limiting or excluding liability by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into, if the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability, at the time of entering the contract.

However, from August 2019, HCF Life amended the Pre-Existing Condition Term in three of their Recover Cover range of life insurance products to exclude cover where a medical practitioner forms the opinion that signs or symptoms of the relevant condition existed before policy inception. Notably, HCF Life did not advert to nor explain the existence or effect of s 47(2) of the ICA in their policies or associated documents.

ASIC claimed that the terms in the Recover Cover products were partially unenforceable as a result of their inconsistency with s 47(2) of the ICA and alleged that by distributing product disclosure statements (PDS) and entering into policies on the terms contained within the Recover Cover products, HCF engaged in conduct that was liable to mislead the public in contravention of s 12DF of the ASIC Act. ASIC also alleged that the terms were unfair within the meaning of s 12BF of the ASIC Act.

Were the Pre-Existing Condition Terms partially unenforceable due to s 47(2) of the ICA?

His Honour reasoned that the Pre-Existing Condition Terms turn upon the medical practitioner's subjective opinion of whether signs or symptoms of a condition, illness or ailment existed before the policy was entered into, while, by distinction, s 47(2) of the ICA asks whether the insured was aware (or a reasonable person in the circumstances could be expected to have been aware) of the underlying sickness or disability. His Honour particularly drew attention to the distinction between the existence of signs/symptoms and awareness of the underlying condition, illness or ailment to which they relate.

Illustratively, his Honour refers to an example where a doctor forms an opinion that headaches experienced by an insured in March were symptoms of a cancer not diagnosed until May. If that insured purchased a Recover Cover product in April, the cancer would be a 'Pre-Existing Condition' as defined. However, unless the insured was aware (or a reasonable person in their circumstances could be expected to have been aware) of the cancer at the time of contracting in April, s 47 would preclude HCF Life from relying on the exclusion to deny the claim. For this reason, his Honour found the Pre-Existing Condition Terms inconsistent with s 47 of the ICA and therefore partially unenforceable.

Furthermore, his Honour emphasised that the Pre-Existing Condition Terms gave determinative value to the subjective opinion of the medical practitioner, which had the effect of broadening the exclusion provision beyond the scope of s 47(2) of the ICA, noting that 'one individual’s satisfaction of an objective fact will inevitably be broader than a provision that is engaged only upon the actual existence of that same fact'.

Therefore, Justice Jackman held that the triggering test required by the Pre-Existing Condition Terms was materially different from s 47(2) of the ICA, rendering the Pre-Existing Condition Terms partially unenforceable.

It is important to note that his Honour recognised that HCF Life, in practice, administered the Pre-Existing Condition Terms consistently with s 47 of the ICA. Moreover, ASIC did not present any evidence of any policyholder actually having been misled. Notwithstanding these factual findings, the key inquiry was whether the Pre-Existing Condition Terms, being inconsistent with s 47, were liable to mislead the public.

Misleading conduct of an insurer

Section 12DF(1) of the ASIC Act prohibits persons, in trade or commerce, from engaging in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services. Justice Jackman noted that the phrase ”liable to mislead' requires an 'actual probability that the public will be misled by the impugned conduct'. His Honour also found that the PDSs made available to members of the public fell within the scope of conduct directed to 'the public', noting that this term does not require conduct directed to the world at large but would be a sufficient approach to the public 'if the approach is general and random, and if the number of people approached is sufficiently large.'

In considering the conduct of HCF Life, his Honour referred to ASIC v Vanguard Investments Australia Ltd [2024] FCA 308, in which O'Bryan J applied the four step test from Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8 (Self Care), originally formulated for the more general prohibition of misleading or deceptive conduct in trade or commerce under s 18 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law). Justice O'Bryan noted that this test was applicable to s 12DF of the ASIC Act as this section was 'part of a suite of legislative prohibitions of misleading or conduct in trade or commerce which originated in the Australian Consumer Law'. Hence, Justice Jackman applied the following test from Self Care:

• First, identifying with precision the “impugned conduct” said to contravene s 18 (Issue 1);
• Second, considering whether the identified conduct was conduct “in trade or commerce” (Issue 2);
• Third, considering what meaning that conduct conveyed (Issue 3); and
• Fourth, determining whether that conduct in light of that meaning was misleading or deceptive, … likely to mislead or deceive, or, for the purposes of s 12DF, 'liable to mislead' (Issue 4).

Justice Jackman noted that the impugned conduct was HCF Life's publishing of each Recover Cover PDS to members of the public and entering into the Recover Cover Contracts with members of the public, in circumstances where the relevant PDSs contained the Pre-Existing Condition Term and did not advert to, or explain, the existence or effect of s 47(2) of the ICA, or that the Pre-Existing Condition Terms were partially unenforceable. The conduct itself (Issue 1) was not disputed nor was the fact that it was conduct 'in trade or commerce' (Issue 2).

On Issue 3, Justice Jackman held that the meaning conveyed by the wording of the Pre-Existing Condition Terms was such that an ordinary and reasonable member of the public would:

• read and understand the Pre-Existing Condition Terms as being an accurate and complete statement of when benefits will not be payable under a policy by reason of a pre-existing condition; and
• be ignorant of the potential effect of s 47(2) of the ICA, given that nothing in the Recover Cover PDSs adverts to the possibility that it may preclude HCF Life from relying upon the Pre-Existing Condition Terms in particular circumstances.

Therefore, by publishing the Recover Cover PDSs and entering into the Recover Cover Contracts, both of which contained the Pre-Existing Condition Terms, HCF Life publicly conveyed that the Pre-Existing Condition Terms were an accurate and complete statement of benefits without advertence to the operation of s 47(2) of the ICA.

Consequently, on Issue 4, Justice Jackman ruled that 'the meaning conveyed by the impugned conduct is misleading because it presents as an accurate, complete and unqualified statement of the circumstances in which benefits will not be payable to a consumer by reason of a pre-existing condition, whereas in fact s 47(2) of the ICA renders the Pre-Existing Condition Terms partially unenforceable'. While s 47 of the ICA does not oblige insurers to notify insureds of its effect and does not render inconsistent contractual provisions void, Justice Jackman held that the omission to mention the qualification of s 47(2), in the absence of which an absolute statement was made by HCF Life as to the insureds' rights, was misleading conduct. Further, his Honour noted that s 12DF does not require the public to be misled 'to their detriment'. Ordinary and reasonable readers of the Recover Cover PDS, who were unaffected by the Pre-Existing Condition Terms will still have been misled by the impugned conduct, whether or not they were adversely affected. Accordingly, insurers may be liable under s 12DF even where policyholders have not been affected by their misleading conduct.

Finally, Justice Jackman addressed HCF Life's submission that the ASIC complaint did not go to the nature, characteristics or suitability of the Recover Cover Contracts and instead goes to the administration of a claim under the contract at a later date. His Honour held that the fact that ASIC makes no complaint about the Recover Cover Contracts is not relevant, because the real object of inquiry is not the financial services contract but the financial services generally. The relevant financial service is the provision of insurance and, in his Honour's view, the nature, characteristics or suitability of that financial service include the circumstances in which the insurer will be obliged to pay money to the insured.

Therefore, Justice Jackman ruled that HCF Life had engaged in misleading conduct under s 12DF of the ASIC Act.

Unfair contract terms

The unfair contract terms regime in the ASIC Act was extended to insurance in 2021. The first proceedings brought by ASIC alleging UCT in an insurance contract was Australian Securities and Investments Commission v Auto & General Insurance Company Limited (Auto & General) [2024] FCA 272. In March 2024, Justice Jackman found that the relevant term in the insurance contract was not unfair. ASIC appealed the decision, and a decision of the Full Court is pending.

In this case, Justice Jackman considered whether the Pre-Existing Condition Terms were unfair within the meaning prescribed by sections 12BF and s 12BG(1) of the ASIC Act. On s 12BG(1)(a), Justice Jackman followed his decision in Auto & General and held that the operation of s 47 had the practical effect of ameliorating any potential imbalance in the parties' rights and obligations. On s 12BG(1)(b), his Honour ruled that HCF Life did have a legitimate interest to protect, however both the Pre-Existing Condition Terms and historical pre-existing condition clauses would have equally protected these interests since the practical effect of the Pre-Existing Condition Terms was limited to its consistency with s 47 of the ICA. On s 12BG(1)(c), his Honour found that HCF Life's application of the Pre-Existing Conditions Terms would cause detriment to the insured to the extent that the terms create uncertainty as to whether an insured could make a claim, and that such uncertainty is disadvantageous to an insured. However, due to ASIC failing to establish the requisite elements for s 12BG(1)(a) and (b), Justice Jackman ruled that the term was not unfair.

Implications for insurers

This case reveals the dangers for insurers in drafting policy terms and providing policy information to customers through PDSs, particularly when such terms are in conflict with the provisions of the ICA. It is critical that insurers strive for harmony between their financial products and current insurance law as failure to do so may result in pecuniary penalty and regulator action.

Furthermore, this case demonstrates that even if a provision is found not to offend the unfair contract terms regime it may still be held to have engaged in misleading conduct if they make representations as to the rights and obligations of themselves or policyholders which are inconsistent with the ICA.