Insurance claims - a new trend to place trustees in the firing line?

There are definite trends in superannuation litigation, particularly in relation to insured benefits.

Many funds will have noticed that proceedings are often being commenced earlier than they were in the past.  More recently we have noticed that plaintiffs are also seeking ways to render trustees liable for failing to take a more proactive role in pursuing claims on behalf of the claimant.

Specifically, we are seeing claims that the trustee has failed to discharge the obligation, under section 52(7)(d) of the Superannuation Industry (Supervision) Act, “…to do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success”.

The SIS covenant, and plaintiffs’ increasing reliance on it, means that trustees ought to review their claims procedures to limit any exposure.  For example, many trustees place significant reliance on the insurer to gather the necessary evidence and make a decision (or not) before the trustee considers the claim in any detail.  And where the insurer declines a claim and the member initiates proceedings, many trustees will simply consent to the insurer taking responsibility for running the trustee’s defence.

Section 52(7)(d) arguably requires trustees to take a pro-active role from the date a claim for an insured benefit is lodged. This is quite apart from the fact that a trustee needs to make a separate decision regarding the release of a member’s non-insured account balance.  An insurer’s decision regarding the payment of an insured amount under a policy of insurance should not dictate whether the trustee releases the member’s existing benefits.

The SIS covenant requires a trustee to do everything reasonable to pursue an insurance claim for the benefit of a beneficiary if the claim has a reasonable prospect of success.  So what does this mean?  At what stage in the claims process must the trustee take action to “pursue” the claim?  What steps constitute “pursuing” a claim.  What steps are reasonable in pursuing a claim and can a trustee take into account the cost to the fund?  How does a trustee determine whether a claim has a reasonable prospect of success and does this change over time as the trustee and the insurer gain more information in support of the claim.  And what is a “reasonable prospect of success”?  Is it (as it appears to be) less onerous than the balance of probabilities?

We will consider this topic in more detail in a future paper.  For the purposes of this blog, we make the following general observations:

• Trustees should actively monitor the insurer to ensure that claims are processed efficiently.
• It would be prudent to have a timetable against which claims assessment “milestones” are measured.  Where milestones are not reached within benchmark time limits, the trustee should consider increasing its level of involvement.
• The trustee should be involved in the information and evidence gathering process so that it has the information necessary to make its own decision regarding whether a benefit is payable under the terms of the trust deed.
• Unless an insurance claim is determined in favour of the member in a timely manner, the trustee should consider the claim separately for the purpose of determining whether the non-insured component (ie the member’s account balance) should be released.
• Unless the trustee has determined, at an appropriate stage in the claims assessment process, that there is no reasonable prospect of a claim succeeding, it cannot take a passive role and leave it to the member to pursue the claim alone.
• In some claims, there will come a point at which the trustee might decide, consistent with its section 52(7) duty, that it should pursue the insurer of its own accord (eg. where the insurer has failed to come to a decision within a reasonable time despite having all the necessary information).
• One final observation we would make is that, on occasions, trustees have relied too heavily on insurers in disablement claims.  Given section 52(7) in particular, we consider that trustees might sometimes leave themselves open to ready criticism where they allow their insurer to conduct claims (and any related legal proceedings) on their behalf with little or no oversight.  While the interests of trustees and insurers might appear superficially aligned, this will not be the case in many instances.