Question (d), Ground 4 and Grounds 1 and 3 of the Notice of Contention
85 Having concluded that no misrepresentation was made to AIA, and therefore s 29(2) could not be relied on by it to avoid the separate contract with Dr Sharma, AFCA then considered whether the decision by CommInsure to deny cover, and the concurrence of the Trustee, were nonetheless in their respective operation fair and reasonable in all the circumstances by reference to the issue that it framed in part 2.4 of the Determination: whether "the common law or equity would allow insurer 2 to recover those benefits due to the deceased's fraudulent misrepresentation."
86 Central to the reasoning which then follows, is that AFCA concluded that s 33 of the ICA does not operate "either expressly or by necessary intendment to exclude an insurer's rights under the general law (prior to the amendments to the ICA), in circumstances where the insurer has assumed cover, for an already insured member, from another superannuation insurer in the superannuation group life context." That conclusion is anchored by the earlier observation that the ICA "does not properly contemplate a situation in which an insurer takes over risk from another insurer in a superannuation group life setting."
87 At common law, a misrepresentation or failure to disclose a material fact (breach of the duty of utmost good faith) may entitle an insurer to rescind or avoid a contract of insurance: see generally; Babatiskos v Car Owner's Mutual Insurance Co Ltd [1970] VR 297 and Sutton on Insurance Law at [7.1140]. Similarly, in equity the general remedy for fraudulent misrepresentation is rescission: Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed) at [24-015]. The issue is whether s 33 of the ICA operates an exclusive code so as to displace the operation of these principles in this case? I have concluded that it does.
88 The statutory language could not be clearer: the provisions of Division 3 "are exclusive of any other right that the insurer has otherwise than under this Act" in respect of, inter alia, "a misrepresentation or incorrect statement." In Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606, the High Court was concerned with a fraudulent failure to disclose past claims history by one co-insured. Of the effect of s 33, Mason CJ, Dawson, Toohey and Gaudron JJ said at 615:
The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt IV. To that extent Pt IV is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited.
89 The Full Court of this Court in Macquarie Underwriting Pty Ltd v Permanent Custodians Ltd (2007) 240 ALR 519; [2007] FCAFC 60 at [27], Allsop, and Buchannan JJ, (Macquarie Underwriting) emphasised the limiting effect of s 33:
The effect of s 33 is to limit remedies for non-disclosure and misrepresentation to those provided by the Insurance Contracts Act itself. Of particular relevance is s 28 which, whilst permitting avoidance of an insurance contract in the event of a fraudulent non-disclosure or misrepresentation, otherwise limits the protection of an insurer's interests to reduction of the claim 'to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made' (s 28(3)). It is now clear on the authorities that this reduction can, if the evidence permits the conclusion, be to zero.
90 See also - Graham v Colonial Mutual Assurance Society Ltd (No 2) [ 2014] FCA 717 at [19], McKerracher J; Montclair v MetLife Insurance Ltd [2015] VSC 306 at [42], Ginnane J and Sutton On Insurance Law at [7.1180].
91 I cannot accept as correct the reasoning of AFCA that s 33 does not operate as a code so as to exclude general common law or equitable principles. Whilst s 7 of the ICA states that is the "intention of the Parliament that this Act is not, except in so far as this Act, expressly or by necessary intendment, otherwise provides, to affect the operation of any other law of the Commonwealth… or the operation of any principle or rule of the common law (including the law of merchant) or of equity," I am clearly of the view that s 33 is a contrary expression of intent in that the remedies for non-disclosure and misrepresentation in Division 3 of Pt IV operate as an exclusive code, save for rights of the insurer "otherwise than under this Act." So understood, it is simply not to the point that AFCA concluded that the provisions of Division 3 do not operate "adequately" or "properly" where a subsequent insurer assumes the risk of misrepresentation or non-disclosure of a person who became a group member when an earlier insurer was on risk and therefore resort could be had to general common law or equitable principles to fill the gap.
92 AFCA, and AIA on this appeal, also relied upon ss 27A and 32 in support of the conclusion that Division 3 does not operate as a code. Whilst I have concluded that s 27A operates retrospectively upon the contract of life insurance entered into as a result of the application for increased cover made by Dr Sharma in March 2011, and hence by subparagraph (3) it applies the provisions of the Division as if "the insurance cover provided in relation to each life insured were provided by a separate contract of life insurance," it does not address the lacuna in the legislative scheme that exists on the facts of this case. That is because s 32, as applied by s 27A, is only applicable to a failure to comply with the duty of disclosure or a misrepresentation "made, to the insurer under a blanket superannuation contract in respect of a proposed member" for the straightforward reason that when Dr Sharma made his application for additional cover, he was a member of the Fund and did not have the status of a proposed member.
93 I deal next with the reasoning of AFCA that AIA either "would have" or "may have" common law or equitable rights to "recover benefits due to the deceased's fraudulent misrepresentation" or to "recover any loss that it incurs from paying out additional insurance benefits obtained by the deceased's fraudulent misrepresentations, due to its detrimental reliance on those misrepresentations in continuing his additional cover." In the Determination this is the second step in the reasoning (the first being the conclusion that Division 3 does not operate as a code) which founds the state of satisfaction required by s 1055(3) of the Corporations Act and affirmation of the decision of CommInsure. In proceeding as it did, AFCA plainly formed the opinion as a step in its decisional process about what might be the rights of the insurer and the life insured at law or in equity without identifying the principle that it had in mind by reference to any authority, or how it may operate and in what circumstance.
94 That reasoning proceeds on the misunderstanding of the effect of s 33 that I have identified. AFCA posed for itself the wrong question. It should have concluded that s 33 operates a code, the effect of which was to limit the rights of AIA to those provided for in the ICA. Its conclusion that s 29 could not be relied on to avoid the contract, should then have led it to consider whether AIA, and before it CommInsure, had any other right on the facts found under the ICA. AFCA overlooked the words "otherwise than under this Act' in s33. As the Full Court stated in Macquarie Underwriting at [27] other remedies may be provided for in the ICA for non-disclosure or misrepresentation.
95 A further error is that AFCA engaged in no more than pure speculation on a question central to the state of statutory satisfaction required by s 1055(3). As is well understood, where an administrative decision-maker is required to form an opinion or be satisfied "as a condition of the exercise of power," the decision must proceed upon a correct understanding of the law: R v Connell; Ex parte The Hetton Bellbird Collieries Ltd (1944) 69 CLR 407 at 430, Latham CJ. In this appeal I am not concerned with whether any misunderstanding of the law by AFCA amounts to jurisdictional error (cf Snedden v Minister for Justice (2014) 230 FCR 82: [2014] FCAFC 156 at [153] - [155] and [164]) as the appeal right that is conferred on a party to a superannuation complaint is "on a question of law" and is to be understood in accordance with Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315; [2015] FCAFC 92 where at [123] the Court (Allsop CJ, Kenny, Besanko, Robertson and Mortimer JJ) referenced with approval the reasoning of Davies J in Tuite v Administrative Appeals Tribunal (1993) 40 FCR 483 at 484 that a question of law extends to "the enunciation of the principle of the common law or equity" relevant to the decision. See also Wanson v Comcare (2020) 276 FCR 613; [2020] FCAFC 76 at [36]- [39] (Katzmann, Anastassiou and Abraham JJ). To speculate as to what the law might be does not demonstrate that AFCA correctly understood the law that applies.
96 Moreover, the statutory requirement not to make a determination of a superannuation complaint that would be contrary to law (s 1055(7)) implicitly requires that AFCA, where it considers a legal principle to be relevant to its decisional task, proceed by correctly identifying and stating the principle in order to comply with that obligation.
97 In responding to these difficulties, AIA submits that Dr Sharma breached his duty of utmost good faith with the consequence that CommInsure "would have common law remedies to avoid the contract" in that CommInsure "would also have had remedies for unconscionable conduct within the meaning of the unwritten law, or statute." That argument is embraced by ground 3 of the Notice of Contention. I was referred to a number of authorities for the respective propositions that a non-party to a contract of insurance may have the benefit of the insurer's obligation of utmost good faith (Hanover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Insurance Cases 90-123), that an insurer may, (despite the absence of a statutory duty of non-disclosure of a third party beneficiary who is not a party to the contract, but with a right to receive the proceeds pursuant to s 48), resist a claim for the payment of benefits by that non-party based on non-disclosure or misrepresentation of the third party ( C E Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25), and to cases that are more generally concerned with remedies for unconscionable conduct within the meaning of the common law or statutory provisions (ASIC v National Exchange Pty Ltd (2005) 148 FCR 132; Ipstar Australia Pty Ltd v APS Satellite Pty Ltd (2018) 356 ALR 440 and Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389). In oral argument, counsel for AIA, elided his submissions on fraud with the duty of good faith in insurance contracts, which was not something put to or considered by AFCA.
98 For the reasons I have given, I reject those submissions to the extent they rely on general common law or equitable principles. However, in part those submissions extend to statutory remedies and is capable of refinement as follows. Section 13 of the ICA implies into contracts of insurance a duty of utmost good faith which requires "each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith," the common law antecedent of which may be traced to the celebrated decision of Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905: 97 ER 1162. That duty has pre and post-contractual effect. Counsel for AIA relied upon Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; [2001] VSCA 48, where Buchannan JA, in the context of a fraudulent claim, observed at [15] that at common law;
The Courts' attitude to fraudulent claims is a manifestation of the fundamental principle of insurance law that the utmost good faith must be observed by each party, the importance of which has often been emphasised. For example, Scrutton, L.J. said of marine insurance:
"Now, insurance is a contract of the utmost good faith, and it is of the gravest importance to commerce that that position should be observed.
Again, Park, J. said of life insurance:
"It is absolutely necessary that there should be the purest good faith between the parties and the most accurate representation of all material particulars."
Their Lordships were speaking of a proponent's duty of disclosure to an insurer contemplating issuing a policy of insurance, but the requirement of the utmost good faith applies equally to events after as well as before the conclusion of the contract of insurance, and the justification for the requirement is the same in both cases.
(Citations omitted).
99 In addition there is the general statement of Farwell J that fraud "unravels everything" in May v Platt [1900] 1 Ch 616 at 623 and the jury direction of Willes J in Britton v Royal Insurance Co (1866) 4 F & F 905 at 908-909: "if there is a wilful falsehood and fraud in the claim, the insured forfeits all whatever on the policy" which reflects the overall policy of the common law to discourage fraud: Manifest Shipping Co Ltd v Uni Polaris Insurance Co Ltd [2003] 1 AC 469 at [62]-[63], Lord Hobhouse.
100 There are several responses to the submissions as now put by AIA. First, s 12 of the ICA at the relevant time provided:
The effect of this Part is not limited or restricted in any way by any other law, including the subsequent provisions of this Act, but this Part does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure.
101 Whether s 12 operates as a "statutory carve-out for the duty of disclosure…so that any failure to disclose falls within s 21 rather than s 13(1)" (Sutton on Insurance Law at [6.20]) is unsettled. In CIC Insurance Ltd v Barwon Regional Water Authority [1999] 1 VR 683: [1998] VSCA 77 (a case concerning the failure of an insured to correctly declare the value of the insured property), Ormiston JA at [40] (with whom Phillips and Kenny JJA agreed) considered it arguable that a failure to disclose may also be concurrently regarded as breach of the duty of utmost good faith. Relevantly he reasoned that:
Section 12, being the first of the statutory provisions dealing with the duty of utmost good faith, expressly says that Part II "does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure". On their face the words are curiously expressed but the reference to "duty of disclosure" is confined by the definition in s.11(1) of the Act to the duty referred to in s.21 of the Act, namely the first and principal section contained in Part IV relating to the duty of disclosure. The obligation to disclose imposed by that part of the Act is extensive but carefully worked out so as to have regard to the respective rights and obligations of insurer and insured. Section 12 is merely intended to ensure that ss.12, 13 and 14 do not place a higher duty on an insured than is otherwise required under Part IV. It does not, however, follow that failure to make proper disclosure may not be seen for certain purposes, at least, as a breach of the duty of utmost good faith, even if that might have the effect of providing an alternative remedy for a failure to make disclosure to those remedies which appear in Part IV. Although it may be argued that these are but two sides of the same coin leading to remedies which are not mutually exclusive, it is not necessary to resolve these matters.
102 If that is correct, then this remedy is "otherwise" provided for in the ICA within the meaning of s 33 and may be open to be relied on by AIA. AFCA gave no consideration to that, doubtless because AIA did not clearly articulate that argument to it in this way.
103 Secondly, it is said in Sutton on Insurance Law at [7.1180] that an action for damages may be open for breach of the implied statutory term of good faith. On the finding of fraudulent misrepresentation of AFCA, there may be arguments that the claim by the Estate, is one made in breach of the implied term for which s 13 provides once it is understood that the duty provided for at s 13 is not confined to dishonesty: CGU Insurance Ltd v AMP Financial Planning (2007) 235 CLR 1. In that decision Callinan and Heydon JJ at [257] stated:
At the outset we should say that we agree with the Chief Justice and Crennan J that a lack of utmost good faith is not to be equated with dishonesty only. The analogy may not be taken too far, but the sort of conduct that might constitute an absence of utmost good faith may have elements in common with an absence of clean hands according to equitable doctrine which requires that a plaintiff seeking relief not himself be guilty of tainted relevant conduct. We have referred to the doctrine of clean hands because, as with another equitable doctrine, that he who seeks equity must do equity, it invokes notions of reciprocity which are of relevance here. That is not to say that conduct falling short of actual impropriety might not constitute an absence of utmost good faith of the kind which the Insurance Act demands. Something less than that might well do so. Utmost good faith will usually require something more than passivity: it will usually require affirmative or positive action on the part of a person owing a duty of it.
104 In argument before me AIA submitted that: "Equity will intervene in a case of fraud, misrepresentation, or unfair dealing" and that submission might be understood as a contention about breach of the statutory implied term of utmost good faith, either by Dr Sharma or in the post contract conduct of the Estate, if it be concluded that maintenance of the claim amounts to having unclean hands. AFCA may have had this, or some similar principle, in mind when it referenced other rights at common law or in equity to redress the consequence of the fraudulent misrepresentation of Dr Sharma. However, the unsatisfactory nature of its reasoning based on a misunderstanding of s 33 of the Act does permit me to form that conclusion.
105 Thirdly, it is not for me to form a view about the possible application of those broader principles as affording an answer to the Trustee or to AIA in response to the complaint. These matters may be considered relevant by AFCA, once it proceeds upon a correct understanding of the law and makes relevant findings of fact in accordance with the materials and arguments put to it by the parties. The appeal to this Court is on the identified a questions of law from the Determination of AFCA and the issue is whether it materially erred in law. It is not a general "judicial review" of the decision of CommInsure or the Trustee: Wan v BT Funds Management Limited [2022] FCA 302 at [87], Anastassiou J.
106 The decision of CommInsure the subject of the superannuation complaint is the decision to avoid or cancel from inception the additional benefits that were agreed to be provided in consequence of the application made by Dr Sharma in March 2011 as set out in the correspondence to the Estate of 16 August 2017. Having correctly concluded that CommInsure could not avoid the contract pursuant to s 29, AFCA ought to have confined its subsequent consideration of other principles to those that may arise by operation of the ICA and not by speculating about other common law or equitable principles that are not provided for in the Act.
107 The same error infects the conclusion of AFCA that the Trustee was correct to concur with the decision of CommInsure, albeit with the obvious mistake in the minute that references s 21 rather than s 29 of the ICA.
108 For these reasons, I find that AFCA materially misdirected itself as to the meaning and effect of s 33 of the ICA, which misunderstanding underpins its ultimate conclusion of fairness and reasonableness. It also misunderstood the limits of its statutory jurisdiction to determine the superannuation complaint made to it. It erred in law, and I uphold ground 4 of the appeal.
109 This brings me to grounds 1 and 3 of the Notice of Contention. On the first, AIA argues that AFCA erred in part 2.3 of the Determination in finding that CommInsure was not entitled to avoid the additional cover under the group life policy for Dr Sharma for the reason that the misrepresentation that he made to OnePath in March 2011 was fraudulent and was a continuing misrepresentation made to CommInsure prior to 1 December 2011. On that submission, s 25 of the ICA should be construed as operating to the effect that the Trustee made the same misrepresentation to CommInsure before it contracted to be the insurer of the Fund.
110 As a general proposition a misrepresentation may have continuing effect until it is withdrawn or the truth is discovered: Commercial Banking Company of Sydney Ltd v R H Brown & Co (1971) 126 CLR 337 at 343-344, Menzies J; Jones v Dumbrell [1981] VR 199 at 203, Smith J and Spencer Bower & Handley: Actionable Misrepresentation (5th ed) at [4.09- 4.10]. Moreover, as explained by Brennan CJ in Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241 at 252 a defendant may be liable for a misrepresentation made not only to a particular person but extending to a member of an identified class of persons known or reasonably known to the defendant.
111 Those principles do not assist AIA because s 29 cannot be relied on and Division 3 of the ICA is a code. The statutory scheme simply does not afford not afford the remedy of avoidance in favour of CommInsure.
112 As to ground 3 of the Notice of Contention, I reject it to the extent that I have concluded that there is no common law right of avoidance of the statutory contract between OnePath and Dr Sharma, or any subsequent insurer, for the reasons I have stated in relation to the operation of s 29 and Division 3 of the ICA. As to the balance of this contention, for the reasons that I have given, AFCA erred in not confining its attention to other remedies that may be open under the ICA for breach of the statutory implied term of utmost good faith at s13. On remittal, it will be a matter for AFCA to determine whether AIA may put arguments and evidence on that question, and if so how Mrs Sharma may be permitted to respond.