Background

The proceeding relates to the plaintiff’s claim for a death benefit on the life of Mr Larcombe (the Deceased) under a policy of insurance issued by OnePath Life (OnePath) (the Policy).

On 30 October 2014, the Deceased applied for the Policy, and represented that he did not smoke (at least in the last 12 months) and had never used drugs. In response to the following questions contained in the application form, the Deceased answered ‘no’:

• Question 3: During the last 12 months, have you smoked tobacco or any other substance?
• Question 30: Do you take, or have you ever taken drugs or any medications on a regular or ongoing basis?
• Question 31: Have you ever used or injected any drugs not prescribed for you by a medical attendant or have you ever received advice, counselling or treatment for drug dependence?

In reliance upon these representations, OnePath issued cover with a substantial Death Benefit.

The Deceased died on 19 August 2016. The plaintiff made a claim for payment of the Death Benefit (the Claim).

Evidence emerged that the Deceased used illicit drugs prior to Policy inception, and OnePath thus avoided the Policy.

After proceedings were commenced, OnePath obtained an order that the plaintiff answer interrogatories. As a result, the plaintiff, who was the Deceased’s partner, was required to admit that prior to Policy inception on 21 November 2014:

• She had observed the Deceased snort cocaine on, at least, eight occasions in the six years prior to Policy inception, including four months before completing the application. She also observed him take ecstasy (amphetamines) tablets on 3-4 occasions in 2008 and 2009
• There were a number of occasions on which she saw the Deceased smoke tobacco during the 12 month period to November 2014.

These answers to interrogatories then formed the basis of the underwriting evidence, that had this drug use been known, death cover would not have been issued on any terms, and had there been no drug use and had the Deceased disclosed that he had smoked 12 months prior to the Application, “smoker rates” would have been charged.

Issues and evidence

At hearing, the court determined all issues in OnePath’s favour including that the Deceased fraudulently failed to comply with the duty of disclosure imposed by s21(1) of the ICA; and that OnePath’s avoidance under s29(2) of the ICA should be upheld.

The only witnesses who gave evidence were the plaintiff and a treating doctor. The plaintiff conceded in cross examination that:

• The Deceased had a drug dealer
• The Deceased likely used cocaine when she was not present.

OnePath called evidence that the Deceased had a significant and long-standing history of taking a range of illicit drugs, usually cocaine, but also base amphetamine, ecstasy and crystal methamphetamine. OnePath drew attention, in particular, to:

• The plaintiff’s evidence, which disclosed no less than eight occasions, in the six years prior to Policy inception, including four months before completing the application, she saw the Deceased use cocaine and again on
• 31 December 2014, two months after the Application
• The Deceased’s use of other drugs
• A GP’s evidence that the Deceased ‘binged on cocaine and ice’ on the weekend of 13 September 2014 (six weeks before applying for the Policy) and had raised liver function, which is consistent with alcohol or drug use
• The recording by another GP (seven months after the Policy inception) that the Deceased had been taking cocaine heavily and his referral of the Deceased to the Sydney Clinic
• The history recorded at the Sydney Clinic (seven months after Policy inception) that, three years previously, the Deceased took drugs every day for 18 months and was sober for approximately three months
• The recording in the Sydney Clinic records of a ‘binging issue’, that the Deceased had a problem with cocaine, base amphetamine, ice and pills, and had had significant quantities of cocaine over the previous month.

The thrust of the plaintiff’s argument was that the Deceased used cocaine in social settings, on special occasions or celebrations when a number of people used it in the same way as others may drink alcohol together, and that it was a normal social activity within his social circle, even though it involved illicit drugs. The plaintiff characterised the Deceased’s drug use as recreational, occasional, irregular and sporadic. The plaintiff argued that the evidence did not establish any significant use of cocaine beyond that which she gives evidence of having observed.

The plaintiff submitted that the Deceased did not know and that a reasonable person in his position would not have known that ‘occasional social use of cocaine was relevant to the decision of OnePath to insure his life, in circumstances where he was relatively young, of good health, self-employed in the finance business, earning a good income, and in a de-facto relationship, with one young child.’

OnePath called evidence from the original underwriter (that was not challenged) that:

• He would not have been prepared to offer cover on any terms had the Deceased’s history of drug use (as disclosed in the answers to interrogatories) been disclosed
• Had there been no drug use and the Deceased disclosed that he had smoked tobacco in the 12 months prior to the Application, a higher premium would have been charged.

Decision

In finding in favour of OnePath, the court found that the Deceased’s failure to disclose drug use was fraudulent. The court also found that the Deceased was a smoker, and his answers to the questions regarding smoking in the application were false.

In particular, the court made the following findings:

• The Deceased’s drug use was serious, regular and much heavier than revealed in the plaintiff’s evidence
• It rejected the plaintiff’s submissions that the questions in the application were unclear. His Honour commented that the questions ‘are clearly and obviously directed to the use of illicit drug use’.
• It is inconceivable that the Deceased:
  • Did not know that he was, and for a long time had been, a ‘non-trivial drug user’
  • Did not know and understand that his illicit drug use was relevant to OnePath’s decision whether to accept the risk and, if so, on what terms. His Honour found that the Deceased did know and understand this, but in any event, a reasonable person in his circumstances could be expected to know this.

The court also rejected that the fact that the Deceased had made some disclosures in the application, including the correct name of a GP established his lack of fraud. Rather, the court found his disclosures were consistent with a finding of fraud, as nothing in the Application would have alerted OnePath to any problem. It was significant that the Deceased gave an inaccurate answer that his most health check was due to age (in fact he attended as he binged on cocaine) and he made no disclosure that he was a smoker.

Commentary

The life insurance industry is well aware that fraudulent breach of the duty of disclosure is difficult to prove, especially when the insured is dead. The insurer needs to rely on inferences to establish fraudulent intent. This judgment establishes that fraud can be established despite the death of the insured.

The admissions made by the plaintiff regarding the Deceased’s drug use, as a result of administering interrogatories, was critical to OnePath’s success. Interrogatories are a useful tool in obtaining admissions prior to a hearing, which assists an insurer determine the strength of its case, prior to proceeding to hearing.

Note: the authors of this article appeared for OnePath in the proceedings.