Applying the facts on TPI insurance

A recent court ruling means decisions to reject TPI insurance claims can now be challenged on much wider grounds, writes Jenny Willcocks.

The High Court decision of Finch v Telstra Super Pty Ltd [2010] HCA 36 was handed down on 20 October, 2010. Finch succeeded in having the decision of the Court of Appeal of the Supreme Court of Victoria set aside, and the decision of Byrne J in the Supreme Court of Victoria made on 28 November, 2008, re-instated.

The case addressed a number of significant issues concerning total and permanent invalidity (TPI) claims from superannuation funds.

The facts

Alan Finch was born a male but had lived as a female. He underwent surgery to change his gender from male to female and commenced employment with Telstra in 1992 as Helen Finch and was a member of the Telstra Superannuation Fund (the fund), which is a defined benefit fund.

Mr Finch suffered psychological difficulties due to his gender change and took sick leave from Telstra on 30 September, 1996, and in October that year resumed living as a male.

He underwent further surgery to reverse the gender change and subsequently became severely depressed, suffered from adjustment disorder and was sensitive about his appearance.

He returned to work with Telstra in March 1997 under the name Alan Finch and in January 1998 accepted a redundancy package.

Mr Finch provided evidence that his last months at Telstra had been extremely distressing as the environment had been hostile. After ceasing work with Telstra, he did not work for a period of 12 months.

Mr Finch worked short periods with Foxtel and part-time for Qantas and provided information that these two jobs were failed rehabilitation attempts.

Mr Finch had been seeking a TPI benefit from the Telstra Super Fund since 19 May, 2000, without success.

The trustee made two determinations, rejecting Mr Finch's claim on the basis that he was not "unlikely ever to engage in gainful work" as required by the definition of TPI in the trust deed. Mr Finch challenged the trustee's decision in the Supreme Court of Victoria.

Definition of TPI

The relevant TPI definition required:

• the member to be "continuously absent from all active work for at least six months"; and
• the trustee had to form an opinion that the member "ceased to be an employee and was unlikely ever to engage in any gainful work" for which he was for the time being reasonably qualified by education, training or experience.

Decision of Byrne J, Supreme Court Of Victoria

Six months absence

Mr Finch argued he satisfied this requirement by the time the trustee made its determination because he had not worked after leaving Telstra for more than six months.

The trustee did not dispute this interpretation at the time of making its determinations but argued in the Supreme Court that the six-month absence from work had to be satisfied by the time Mr Finch left Telstra.

Byrne J agreed with Mr Finch that the six months absence could be satisfied after a member ceased to be employed by Telstra, based on the trust deed.

Review by court

An exercise of a trustee's discretion can only be challenged if:

• there was a lack of good faith or real and genuine consideration;
• the trustee did not act for a proper purpose; or
• if reasons were given and those reasons were not sound.

These narrow grounds of review were based on Karger v Paul. A court might also infer a breach if the decision was one that no reasonable trustee could make on the material before it.

Byrne J determined that the trustee failed to comply with its obligation to give genuine consideration as to whether Mr Finch was unlikely ever to engage in gainful work.

Mr Finch had produced strong medical evidence supporting his claim, but the trustee relied on:

• a letter from Mr Finch's former managers at Telstra;
• the fact he had been offered a job with Telstra before ceasing employment; and
• his employment with Foxtel and Qantas,
• to determine that he was likely to engage in employment in the future.

Byrne J determined, based on the very strong medical evidence provided, that the trustee should have made further enquiries into Mr Finch's last month with Telstra and his employment after leaving Telstra with Foxtel and Qantas, and also the statement Mr Finch made to the chief executive officer of the trustee of the fund that his employment with Qantas was "a real job".

Byrne J applied the Karger v Paul test and concluded that the trustee had failed to decide the TPI applications in good faith and give genuine consideration due to its failure to further investigate the matter and invite comment from Mr Finch. Byrne J ordered that the matter be remitted to the trustee on that basis.

Court of appeal

The trustee had accepted that the six-month absence could be absence from work from Telstra, or anywhere else, provided it occurred before Mr Finch left Telstra. Despite this, the Court of Appeal determined that the six-month absence had to be absence from work at Telstra and determined:

Mr Finch did not satisfy the condition to be absent from active work for at least six months; and that condition must be satisfied as at the day he ceased work for Telstra and the absence from work needed to be absence from work at Telstra.

Although there had been a six-month absence by the time the trustee made its determination, the Court of Appeal did not see this as sufficient.

High Court decision

In a unanimous decision, the High Court set aside the decision of the Court of Appeal and held that the TPI definition did not require Mr Finch to be continuously absent from "all active work" for six months before leaving Telstra's employment.

Mr Finch's absences from work after he left Telstra's employment enabled him to satisfy that part of the definition. The High Court stated that to conclude otherwise would mean a member was not able to cease work because of TPI unless they had already ceased to be an employee.

If this were accepted it would mean that there could never be a valid claim for TPI, which would be absurd.

The High Court also indicated that to require the absence from active work for six months to take place before the member ceased to be an employee was to read words into the clause unnecessarily.

Discretionary decision

The Court of Appeal determined that the question of whether Mr Finch was unlikely ever to engage in any gainful work for which he was for the time being reasonably qualified by education, training or experience was a discretionary decision. In reaching that conclusion it relied on Karger v Paul.

The High Court disagreed and held that the trustee's decision did not involve the exercise of a discretion, but was a factual determination requiring the trustee to form an opinion as to whether a member had ceased to be an employee, and was unlikely ever to engage in gainful work.

In forming those opinions, there were factors to be examined and judgements to be made, but it was not a matter of discretionary power, just "an ingredient in the performance of the trust duty".

Superannuation trust

Even though TPI decisions are not discretionary, superannuation fund trustees are still required to make some discretionary decisions (eg, distribution of death benefits).

The High Court considered whether the traditional limitations in Karger v Paul applied to those decisions of superannuation fund trustees that are discretionary.

The High Court stated that different criteria applied to the operation of a superannuation fund from those applicable to discretionary decisions by a trustee under a non-superannuation trust.

This is based on differences in the trusts, including that employer sponsored superannuation was part of an employee's remuneration and membership in the employer's superannuation fund might be compulsory.

It is therefore something that an employee receives in return for their work and their contributions and should be regarded as "deferred pay".

Duty of enquiry

The crucial question for the High Court was whether the Court of Appeal's reasons for rejecting Byrne J's view that the trustee had not given genuine consideration were sound.

It found nothing to suggest that the trustee undertook any consideration of Mr Finch's claim that the work at Foxtel and Qantas was a failed rehabilitation effort.

The High Court supported Byrne J's conclusion that the trustee failed to decide the matter in good faith and by giving genuine consideration. It did not accept that Byrne J had misunderstood the Karger v Paul test, and accepted his view that the trustee had failed in its duty to make enquiries.

Status of Karger v Paul

Mr Finch had argued that the High Court should hold that the principles stated in Karger v Paul did not apply to superannuation trusts, at least concerning substantial matters like claims for TPI benefits.

He argued that the decision of a superannuation fund trustee should be set aside if it were not "fair and reasonable" in the same way that the Superannuation Complaints Tribunal is able to deal with trustee decisions.

Unfortunately, the High Court held it was not necessary to evaluate the merits as to how far the Karger v Paul principles applied, or whether other principles should be adopted, as the case could be resolved by accepting Byrne J's reasoning as sound, and the Court of Appeal's criticism of that judgment being unsuccessful.

However, it did qualify the Karger v Paul principles as they apply to superannuation funds by stating that superannuation fund trustees making a discretionary decision are subject to a higher duty to inform themselves than other trustees.

If the consideration was not properly informed, it would not be genuine.

The High Court stated that the duty of trustees to properly inform themselves was more intense in superannuation trusts than in trusts of the Karger v Paul type (ie, discretionary trusts).

This was based on the importance to beneficiaries of superannuation trusts who are entitled to benefits to have those benefits paid.

Failure by the trustee to seek relevant information to resolve conflicting material was viewed by the High Court as not only constituting a breach of duty but also being reviewable as a lack of genuine consideration under the Karger v Paul principles.

High Court orders

The High Court set aside the decision of the Court of Appeal and reinstated the decision of Byrne J. Mr Finch argued that the matter should not be remitted back to the trustee, but the High Court determined that there was no bad faith by the trustee, merely a failure to observe due process by giving genuine consideration to the matter.

In those circumstances, the matter must be remitted to the trustee for final determination.

Consequences of the decision

It is unfortunate that the High Court did not take the opportunity to address the issues around the Karger v Paul principles and their application to superannuation trusts.

However, it is clear that determinations as to whether a member is TPI are questions of fact, not discretionary and, consequently, the Karger v Paul principles do not apply.

This is significant because decisions to reject TPI claims can now be challenged on much wider grounds, as the Karger v Paul principles only apply to discretionary decisions.

This could result in more members issuing proceedings for TPI claims in a court, rather than the Superannuation Complaints Tribunal, where legal fees cannot be awarded.

The reasoning of the High Court makes it clear that the duty of superannuation fund trustees to conduct enquiries goes way beyond the approach taken by many trustees in dealing with claims of this type.

Many trustees currently adopt the approach that it is the member's responsibility to establish his or her case. The case effectively imposes on the trustee a duty to conduct a reasonable level of investigation and analysis.

It will not be sufficient to take statements at face value, particularly where they are adverse to the member without further investigation.

Although the case is based on the particular wording of the trust deed, the approach of the High Court on the review issue imposes that higher duty on all superannuation fund trustees, irrespective of their deed.

Trustees should review the definition of 'total and permanent disablement' in their trust deeds and insurance policies to ensure that the date on which the six-month period ends (as well as when it begins) is clearly stated.

They should also review their claims procedures in light of this decision to ensure they are sufficiently robust to meet their duty to give properly informed consideration to members' claims.

The writer would like to acknowledge the insight into this case provided by Marita Wall, one of the barristers representing Mr Finch.

Jenny Willcocks is lead partner of Holding Redlich's superannuation and funds management practice.