Hanley, Linda; Bowran-Burge, Grace --- "The Victorian Ombudsman's WorkSafe investigation: A guide for practitioners" [2018] PrecedentAULA 67; (2018) 149 Precedent 9

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INSURANCE INVESTIGATIONS AND THE CLAIMS-HANDLING PROCESS

HOW TO PROTECT POLICYHOLDERS

By Alexandra Kelly and Drew MacRae

The Royal Commission’s spotlight on the life and general insurance sectors offered a timely reminder on how solicitors can help their clients to work their way through the sometimes difficult claims and dispute process.

Two years ago, the Financial Rights Legal Centre (FRLC) released its report Guilty until Proven Innocent: Insurance Investigations in Australia.^[1] The report detailed a litany of abuses in general insurance claims-handling, ranging from incredibly long interviews (sometimes over five hours in length) and long dispute processes (averaging close to 18 months) to investigators bullying and threatening policyholders, prejudging their guilt and treating consumers like criminals. The onerous demands of insurance investigations and claims processes have led to high numbers of consumers withdrawing their claims; not due to any admission of fraudulent behaviour, but simply because the process is too burdensome and/or invasive for many consumers to bear.

At the time, we provided a ‘how to’ guide for solicitors helping their clients to negotiate the claims and dispute process. While much has stayed the same, there have been recent changes in the general insurance space and significant developments in consumer protections in the life insurance space.

The biggest change has been the introduction of the Life Insurance Code of Practice^[2] (Life Insurance Code). The Code, which came into effect in July 2017, introduces somewhat similar commitments to those recommended in the FRLC’s report regarding claims-handling standards, along with ground-breaking new standards regulating how investigations, interviews, independent medical examinations and surveillance may be carried out.^[3]

The general insurers have agreed to introduce mandatory minimum standards on the ‘Use of Investigators’ too, under their own General Insurance Code of Practice (General Insurance Code), although this has yet to be finalised, and is unlikely to come into effect until July 2019.

In May 2017 the General Insurance Code Governance Committee’s Own Motion Inquiry into Investigation of Claims and Outsourced Services^[4] was released. The Committee made some 30 recommendations, including that insurers must regularly review their fraud indicators for relevance and ensure that service providers are sufficiently trained on the General Insurance Code.

If a general insurer rejects a claim, the insured has the right to request its reasons in writing under cl 7.19(a) of the General Insurance Code. This obligation also exists under the Life Insurance Code (cl 8.19).

When requesting reasons, the insured should also request a copy of all evidence the insurer is relying on to deny the claim, including expert reports, transcripts, and audio or video recordings.

If the insurer refuses to provide the evidence, the insured can rely on cls 7.19(b) and (c) of the General Insurance Code or 8.19(b) and (c) of the Life Insurance Code, as well as on the duty of utmost good faith, to argue that the insurer should provide this information. Note, too, that the Life Insurance Code enables the life insurer to provide the information to the insured’s doctor, where appropriate.

To get a general or life insurer to revisit its decision, a written complaint must be made to its Internal Dispute Resolution (IDR) section.

Where a consumer’s claim is refused by a general or life insurer, they can choose either to commence proceedings in court or dispute the findings with an External Dispute Resolution Scheme (EDR).

Another change has been the introduction of the Australian Financial Complaints Authority (AFCA). The AFCA replaced the Financial Ombudsman Service (FOS) from 1 November 2018. The AFCA replaces the three existing EDR schemes of the FOS, the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT) giving consumers access to a single EDR scheme.

If a complaint to an insurer’s IDR department is rejected consumers are now advised to raise a dispute with the AFCA, which is both a free and an independent body.

The AFCA can make a determination that is binding on the insurer. This means that if the AFCA decides the insurer has to pay, then it has no choice but to do so.^[5]

WILL THE AFCA INTRODUCE A SIGNIFICANT CHANGE IN APPROACH?

The AFCA’s rules were mapped against the FOS Terms of Reference, CIO Rules and SCT Rules – it has taken on the jurisdiction of the SCT – and where there were any differences, the higher standard has been adopted.^[6] Given that the FOS has historically had general and life insurer members, it is likely that the approaches used by the FOS will be continued by the AFCA.

As with the FOS and CIO, the AFCA is not a court; it is an alternative to court and provides an alternate means of dispute resolution which is not bound by any rules of evidence. The Ombudsman is subject to the Rules and its Operational Guidelines, which can be found on its website.^[7] Operational Guidelines set out the way the AFCA will interpret the rules and how they will approach matters. It is useful to review the Operational Guidelines when making a claim, as they can change more frequently than the rules as the AFCA refines its approach.

When hearing cases and making determinations, the AFCA will consider legal principles, applicable industry codes, good industry practice and previous relevant decisions.

Consumers can make a complaint regarding claims-handling – such as the conduct of the investigation or whether a specific piece of information is required – prior to a decision on the claim itself. However, it should be noted that such complaints may add significant time to the period of time it takes to determine a claim.

The FOS expedited all general insurance disputes in which the insurer alleged fraud to an Ombudsman or ‘fraud referee’ to make a determination without first making a recommendation, which it would ordinarily undertake for a general insurance dispute. Under the FOS approach, the matter was referred to the decision-maker at an early stage and they arranged an interview with the parties.^[8] The AFCA’s Operational Guidelines do not refer to fraud matters being referred to decision-makers at an early stage (as the FOS did), but the Operational Guidelines do state that in general insurance matters where fraud is alleged decisions will be made by an Ombudsman^[9] and are likely to be matters where the AFCA may require parties to be interviewed.^[10]

FRLC’s experience with the FOS was that it would generally take the following approach in determining a general insurance matter:

1. The Ombudsman assesses whether the insured has, on the balance of probabilities, established that an insured event has taken place;

2. The Ombudsman examines whether there is a financial motive; that is, evidence that suggests the policyholder may receive a financial benefit from a false claim;

3. The Ombudsman takes into account the forensic evidence available; for example, a forensic locksmith’s report in relation to the use of coded keys or other reports that may contradict the insured’s version of events; and

4. The Ombudsman examines the credibility of the insured, including looking at inconsistencies in statements and witnesses, to establish whether the insured may not be providing accurate information.

WHAT ABOUT LIFE INSURANCE?

For life insurance, the issues in claims differ and the ‘fraud referee’ approach was not used by the FOS. As such, it is unlikely that the AFCA will introduce a fraud referee approach for life insurance. The AFCA Operational Guidelines indicate that matters where fraud is alleged in life insurance matters are likely to be referred to a Panel for decision-making rather than to a single Ombudsman.^[11]

Life insurance matters could be heard in the superannuation or the non-superannuation stream, depending on the nature of the claim. In the AFCA superannuation jurisdiction there is no monetary cap, but in the non-super stream there is a limit per claim^[12] as with general insurance.

As with general insurance, the obligation to prove the insured event lies with the insured. Interestingly, a common consumer complaint heard by FRLC is the difficulty in obtaining the policy documents and schedules. The Life Insurance Code requires an insurer to provide policy documentation promptly.^[13]

Once a claim is made, the typical claims issues that FRLC solicitors hear about include:

• requests for excessive information, such as tax, income or medical information;

• surveillance being used to establish that the claimant does not meet the policy definition;

• disputes over the requirement to use activity diaries; and

• requirements to see independent medical examiners.

At all times in life and general insurance the insured needs to act with the duty of utmost good faith and provide all relevant information supporting a claim. The common law concept of the ‘duty of utmost good faith’ is now codified under s13 of the Insurance Contracts Act 1984 (Cth).

What this means for an insured is that they need to be open, honest and transparent and co-operate with the insurer on all requests for information to support a claim, including participating in interviews, undergoing an independent medical examination, and providing all relevant medical information, health records and financial information.

In some circumstances an insurer may decline a claim due to:

• the insured not establishing the insured event;

• the insured failing to co-operate with the claim;

• an exclusion; or

• an allegation of fraud or non-disclosure.

Often, multiple reasons may be given. It is not uncommon for insureds in life insurance to be asked to provide substantial information before an insurer will accept their claim or provide general authorities that enable the insurer to access a greater pool of information.

This can be very stressful for a consumer, who by the very nature of needing to make a claim will be in a vulnerable state, often suffering from the effects of a sickness or accident and financially stressed with no source of income other than the possible insurance claim. It may also seem like a fishing expedition when an insurer investigates cases of non-disclosure in order to reject a claim. At the extreme end, this can come across as a delaying tactic that may result in an insured withdrawing or abandoning a claim or returning to work out of financial necessity.

Protections

The Life Insurance Code provides some protections in s8, relating to when an insured makes a claim. These include:

• not discouraging an insured from making a claim;^[14]

• keeping the insured updated every 20 business days, including with a contact person, about the claims process;^[15]

• explaining why information is requested from the insured;^[16]

• only asking for and relying on relevant information, and if a disagreement arises over the relevance ensuring that an insured has access to the complaints process;^[17]

• asking for information as early as possible and avoiding multiple requests;^[18]

• allowing the insured to refuse a request by the insurer to complete a general authority and request it be limited to particular sources.^[19]

The Code sets out in cl 8.6 that where a general authority has not been completed this may result in delaying the assessment of a claim. Under the Life Insurance Code, the insurer has six months from the date it has been notified of a claim to make a decision. This timeframe can be extended where there are ‘unexpected circumstances’. These are defined in the part 15 definitions. Unexpected circumstances include ‘where you have not responded to our reasonable enquiries or requests for documents or information’.

When deciding whether to provide the information requested, the insured should be cognisant of the potential of a refusal to delay a claim. Where the information will assist in establishing the elements of the insured event, providing it is advised.

If there are concerns that the information is not required for a legitimate purpose, it is advised to set out what information the insured is prepared to provide and to ask why the remainder is relevant. On receipt of an explanation, the insured would then reconsider providing the documents.

Activity diaries

Activity diaries are not expressly mentioned in the Life Insurance Code. They do, however, cause concerns for clients in income-related claims. The Life Insurance Code sets out a number of provisions that may assist, including that where a claimant is having difficulty in providing information to support their claim, the insurer is required to work to find a solution.^[20]

Generally, where activity diaries are requested and a claimant is struggling to maintain and provide them due to their health, it is advisable to obtain corroborating medical evidence to establish this^[21] and to raise this with the insurer. The use of activity diaries was recently the subject of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). In a case study presented in the life insurance round, medical evidence was presented that may indicate that the insurer’s conduct caused harm to the insured.^[22] Counsel Assisting stated in the Round 6 closing address:

‘the psychiatric condition of the insured had been the subject of significant deterioration over a particular period, that there was increased paranoia and anxiety and stress, and that the insured spoke of her insurer – her experiences with the insurer, in connection with the presentation of those symptoms. And I think our position would be that that psychiatric evidence is demonstrative of the breach of the utmost duty of good faith in section 13 of the Insurance Contracts Act which we say emerges from the evidence as one of the forms of misconduct’.^[23]

Independent medical examinations

Many clients express concerns with respect to requests to be examined by an insurer’s medical practitioner. Under the Life Insurance Code the insurer may engage an ‘independent service provider’ where they believe it is ‘relevant and reasonable for the assessment’ of an application.^[24]

Independent medical assessors or examiners are not defined under the Life Insurance Code. While they are required to comply with the Australian Medical Association’s Ethical Guidelines on Independent Medical Assessments or the equivalent guidelines for providers overseas,^[25] they are not expected to meet standards of independence expected elsewhere,^[26] including signing an Independent Medical Examiner Declaration or adhering to specific standards relating to fees, no bias and prejudice, quality, privacy, confidentiality and advertising.

The insurer must provide the insured with the reasons for requiring the additional information that a medical assessment would provide.^[27] If the insured disagrees with the relevance of the assessment, the insurer will review the decision. And if the insured is not satisfied with the insurer’s reasons, the insurer must provide information on how to complain.^[28]

Insurers must meet the costs of the assessment including extraordinary travel costs agreed in advance.^[29] Insureds can request copies of the assessment^[30] and insurers must avoid requesting more than one assessment within a six-month period.^[31]

Surveillance and investigations

A key Life Insurance Code promise is to restrict the use of investigators and surveillance to protect the insured’s legitimate right to privacy. The Life Insurance Code states that surveillance must be approved by a senior claims manager^[32] and sets out restrictions on where surveillance can be carried out.^[33]

Some of the issues that consumers experience include ethically dubious tactics employed by investigators, such as creating fake Facebook profiles to befriend the insured or insured’s friends to gather evidence about the insured’s movements and state of mind.^[34] In the Royal Commission’s examination of the surveillance practices by TAL, it was accepted by the insurer that:

‘the material reported to TAL was very personal and highly intrusive of the first insured’s privacy, and that more generally, the surveillance authorised by TAL in this case was deeply inappropriate’.^[35]

The Life Insurance Code currently does not necessarily prohibit this behaviour. The Code does, however, require insurers to seek out alternative methods of verifying information prior to any surveillance taking place.

It is notable that the credibility and relevance of the information obtained from surveillance is doubtful, as it often does not prove what the insurer aims for it to prove and does not persuade the decision-maker. If the insurer does use surveillance, the insured should request copies of the material thus obtained.An insurer investigating a claim may request that the insured take part in an interview. The purpose of an interview is to obtain from the insured their version of events. If an interview is requested, the insured is required to participate in it. However, the insured can impose some reasonable limits on the interview process. For life insurance policyholders, some of these limits are backed by the force of the Life Insurance Code. For example, the insured can:

• request that the interview be held in a neutral location to make it easier to leave if the policyholder needs to. Life Insurance Code cl 8.11(i) enables an insured to choose to be interviewed somewhere other than their home, unless interviewing them in that location is essential to establishing eligibility for a claim;^[36]

• set a maximum time for the interview in advance. Life insurance interviews should take a maximum of two hours, unless the insured agrees to an extension;

• say ‘I don’t know’ or ‘I don’t remember’ (whichever applies) if they don’t know the answer to a question – which they should say rather than making a guess. They are not advised to unreasonably prevaricate or obfuscate, as this might bring their memory and credibility into question;

• take their time to think through questions before answering;

• make the investigator aware if they are unsure of the answer to a question and should make it clear when making estimations that they are doing so;

• request an interpreter if English is a policyholder’s second language, or if they feel more comfortable communicating in a language other than English;^[37]

• request an interviewer of the same gender if they prefer;^[38]

• have a support person present;^[39]

• request breaks;^[40]

• ask for a digital copy or transcript of the interview if the interview with the investigator is being recorded. The policyholder can also record the interview themselves;^[41] and

• refuse to sign anything that they are unsure about.

Notably, life insureds being interviewed for a claim relating to a mental illness will only be interviewed by someone who the insurer is satisfied has appropriate training or experience to carry out the interview.^[42] If mental health is a factor at all for a general insurance policyholder, it is suggested that the policyholder request the same.

For general insurance customers, the limits they can impose on the interview process are yet to be codified.

NOT HAPPY WITH THE CLAIMS PROCESS?

Bad claims-handling practices will not necessarily result in a claim being paid if the insured has not proven their loss.

The FOS provided compensation for non-financial loss^[43] with respect to particularly egregious examples of poor investigator behaviour. However, this type of additional compensation was conservatively awarded and limited to $3,000. Under the AFCA, this cap is currently $5,000.^[44]

Poor investigator behaviour, delays and other issues are potential breaches of the General and Life Insurance Codes and their requirements to handle claims in an honest, fair, transparent and timely manner. General Insurance Code compliance is managed by the Code Governance Committee (CGC), and the Life Insurance Code by the Life Insurance Code Compliance Committee (Life CCC). Policyholders can report alleged breaches of the General Insurance Code to the CGC.^[45] Similarly, a complaint to the Life CCC can be made pursuant to cl 13.1. A complaint to Code Compliance, however, will not result in a claim being paid, or being more quickly paid. If the matter is not resolved, both Committees take the view that their investigations will be placed on hold until the matter is resolved in the court or EDR scheme.

Alexandra Kelly is the Principal Solicitor of the Financial Rights Legal Centre (FRLC), a community legal centre that specialises in banking and financial services. Alexandra is the Consumer Representative on the Life Insurance Code Compliance Committee. Drew MacRae is the Policy and Advocacy Officer of the FRLC. For more information, see www.financialrights.org.au. FRLC provides free legal advice to consumers on 1300 663 464 or via its online inquiry form.

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^[1] For more information, see Guilty until Proven Innocent: Insurance Investigations in Australia, <http://financialrights.org.au/publication/> and <www.insurancelaw.org.au>.

^[2] Financial Services Council, Life Insurance Code of Practice (2017) <https://www.fsc.org.au/policy/life-insurance/code-of-practice/life-code-of-practice>.

^[3] Ibid, cls 8.10-8.12.

^[4] General Insurance Code Governance Committee, Own Motion Inquiry on Investigation of Claims and Outsourced Services (May 2017) <http://codeofpractice.com.au/governance-and-monitoring> .

^[5] Except in the superannuation jurisdiction, which replicates the current SCT jurisdiction where there are rights of appeal.

^[6] Australian Financial Complaints Authority (AFCA), The Consultation Paper (June 2018) 3, <https://www.afca.org.au/rules-consultation/>.

^[7] See <www.afca.org.au>.

^[8] Financial Ombudsman Service (FOS), Operational Guidelines, cl 7.3a(i).

^[9] AFCA, Operational Guidelines to the Rules, A13.1 at 77.

^[10] Ibid, A9.3 at 55.

^[11] Ibid, A13.2 at 78.

^[12] From 1 January 2018, the FOS considered claims up to $500,000 (a single dispute could also contain more than one claim). However, the monetary cap on awards the FOS could make for a claim were $323,500 for all disputes except income stream life insurance which was limited to $8,700 per month: Fact sheet: How FOS resolves disputes and our Terms of Reference, <https://www.fos.org.au/custom/files/docs/our-dispute-resolution-process-and-terms-of-reference-2018-update-pdf.pdf>.

^[13] See above note 2, cl 14.7.

^[14] Ibid, cl 8.2.

^[15] Ibid, cl 8.4.

^[16] Ibid, cl 8.3.

^[17] Ibid, cl 8.5.

^[18] Ibid, cl 8.7.

^[19] Ibid, cl 8.6.

^[20] Ibid, cl 8.25.

^[21] See FOS Determination 347310 which preferred the General Practitioner’s evidence of the distress caused over the evidence of the insurer’s independent medical assessor in finding the activity diary was unnecessary.

^[22] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) 13.9.18, TAL case study of the First Insured discussed in evidence provided by Ms Lorraine van Eeden.

^[23] Royal Commission 21.9.18, Transcript P-6485, 5-10.

^[24] See above note 2, cl 5.6.

^[25] Ibid, cl 10.5.

^[26] Victorian WorkCover Authority (VWA) (2016) Code of Practice for Private Investigators, Version 2.1, effective 1 July 2016.

^[27] Ibid, cl 5.6.

^[28] Ibid.

^[29] Ibid, cl 8.10(a).

^[30] Ibid, cl 8.10(b).

^[31] Ibid, cl 8.10(c).

^[32] Ibid, cl 8.12(c).

^[33] Royal Commission 14.09.18, Transcript R2 P-5786, 25 noted the significantly high rates of surveillance in claims over the last five years, and a notable reduction in the amount since the inception of the Life Code.

^[34] Hellessey v Metlife Insurance Limited (2017) NSWSC 1284.

^[35] Royal Commission 21.9.18, Transcript P-6478, 22-25.

^[36] See above note 2, cl 8.11(f).

^[37] Ibid, cl 8.11(c).

^[38] Ibid, cl 8.11(h).

^[39] Ibid, cl 8.11(c).

^[40] Ibid, cl 8.11(g).

^[41] Ibid, cl 8.11(j).

^[42] Ibid, cl 8.11(d).

^[43] FOS, Terms of Reference, cl 9.3.

^[44] AFCA, Complaint Resolution Scheme Rules (November 2018) D4.

^[45] General Insurance Code of Practice 2014, s13.1.