Whenever definitions in a total and permanent disability (TPD) insurance policy are amended to reduce premiums it’s certain the change will cost someone something. The question for trustees is whether the cost will be paid fairly and by the correct parties.

One approach currently in favour with insurers is to insert a clause into policies requiring that claimants be under the ‘regular & ongoing care’ of a medical practitioner for a period of time before qualifying for a TPD payment. Insurers tend to justify this as a way of preventing fraud and error by ensuring all treatment options are explored, and who could object to that?

An examination of TPD files for any fund will almost certainly show that most claimants are already under the regular & ongoing care of one or more doctors. The exceptions tend to fall into two categories, those who are avoiding care and those who are unable to be under the required level of care. The difficulty with regular & ongoing care provisions is that they tend to be aimed at the first group but also catch the second.

Even if a trustee accepts that claimants who are not under regular & ongoing care are statistically more likely to be attempting fraud, that does not entitle them to conclude that all TPD claimants must be under regular & ongoing care before they qualify for a TPD benefit. Any such conclusion would have to be supported by separate consideration of the issues, including answering two basic questions:

Who might be unfairly disadvantaged?

Why is it necessary?

Who might be unfairly disadvantaged?

Claimants who may be unable to be under regular & ongoing care include the mentally ill, socially isolated, immobile and homeless. Then there are those who are unable to travel for regular care because they live in remote locations, and those who hold religious beliefs that prevent certain treatments such as blood transfusion.

There seems no way of escaping the conclusion that to argue for a regular & ongoing care provision is to argue that people who are incapable of being under such care should be denied a TPD benefit because of their disability. While that doesn’t mean a trustee can never agree to such a provision, it does mean trustees must be able to justify including an ongoing and regular care provision in terms of their duties and obligations.

Why is it necessary?

It is well established that duties of good faith and fair dealing exist between insurers and claimants. How they apply in TPD claims was clarified in the case of Telstra v Flegeltaub, where it was found that a claimant who unreasonably refuses treatment that would improve their condition without “genuine grounds” can be regarded as not having a permanent disability. This provides an existing basis for declining a claim where the claimant is avoiding treatment without inflicting hardship on those who are unable to be under regular and ongoing care. It also leaves us with a problem.

If the law already provides a way to require reasonable treatment and if reasonable treatment can weed out fraud, then how do regular and ongoing care clauses produce a decrease in premiums if not by denying payment to people who are incapable of being under regular & ongoing care because of their disability?

One answer might be that they don’t, which would make agreement to a regular and ongoing care clause difficult for any trustee. Another answer could be that the clause reduces premiums by creating greater certainty for the insurer. This is plausible given that the term ‘genuine grounds’ has not been fully defined and insurers abhor uncertainty when formulating rates. But is it a credible explanation if the provision makes no allowance for people who are unable to be under the required level of care?

Trustees approached to include a regular & ongoing care provision might consider testing their insurer by offering a compromise that explicitly requires claimants to participate in reasonable treatment and/or rehabilitation before qualifying for a TPD benefit. If such a compromise has no effect on premium increases then trustees can be fairly confident that insurers expect the regular and ongoing care clause to work at least in part by denying benefits to those who are unable to be under the required level of care.

Conclusion

Whether they come down in favour or against regular & ongoing care clauses, trustees should be mindful that in Manglicmot v The Commonwealth Bank Officers’ Superannuation Corp the New South Wales Court of Appeal removed any doubt that they must have a robust understanding of insurance terms to which they agree. Failure to do so could leave a trustee and individual directors exposed on a number of fronts, including by failure to exercise the degree of care, skill and diligence required under s 52A of the SIS Act.