What are an insurers responsibilities when cancelling an insurance policy for fraud?

Taylor v Asteron Life Ltd [2019] NZHC 978 is a significant decision for New Zealand insurance law.

The High Court has held fraudulent claims are to be dealt with using the contractual mechanism provided for by the Contract and Commercial Law Act 2017 (CCL Act). The result being that once an insurer is satisfied that a claim is fraudulent, the insurer should give the assured notice of cancellation of the policy under section 41 of the CCL Act. This will entitle the insurer to restitution of sums already paid to the assured, and relieve them from liability to make further payments. In the absence of cancellation, insurers will have to rely upon an action for damages to recover sums paid, and in principle they cannot refuse further payment without cancellation.

Background

Mr Taylor, an insurance broker, applied for an income protection policy from Asteron in October 1992. The policy was issued in May 1994. The policy provided a Total Disability Benefit (defined as being unable to work in the assured's usual occupation for more than 10 hours per week) and a Partial Disability Benefit (defined as working in any occupation but, because of sickness or injury able earn 75 per cent or less of monthly insured income).

In July 2010, Mr Taylor submitted a claim under the policy, asserting he had suffered from medical conditions of the kind covered by the policy - bone cancer - and indicating he had stopped all work on 23 December 2009. The claim was accepted and payment was made, backdated to December 2009. In September 2014, when Asteron received evidence that Mr Taylor was in fact still working, payments were suspended and Asteron sought restitution of all payments previously made.

Mr Taylor issued proceedings, seeking a declaration that he was entitled to the sums withheld from him and that he was not liable to make any repayment.

The High Court's decision

The Court was hampered by a lack of medical evidence from Mr Taylor, but it was able to conclude that although Mr Taylor was suffering from a sickness as defined in the policy, he was neither totally nor partially disabled. In particular, although the number of hours the assured had been unable to work had been adversely affected, his income had not suffered in the manner required by the policy.

The question thus became whether Asteron was entitled to cease payment and to demand restitution of sums paid up to the date when payment ceased. This effectively amounted to a fraudulent claim, and...