Should a terminal illness benefit be paid if the life assured can be cured?

Disputes about the meaning of life policies do not often come before the Courts in New Zealand. Insurers might regard the scope of life insurance as settled and uncontroversial – payment is dependent upon the duration of human life.¹ However, in the recent judgment in Catherwood v Asteron Life Ltd² the High Court had to consider whether a terminal illness extension to a life policy was payable even though the insured could be cured.

In 2009 Mr Catherwood, the life assured, purchased a life policy from Asteron Life Limited which paid a death benefit when he died or if he became terminally ill. Under the policy terminal illness was defined as:

Your life expectancy is, due to sickness and regardless of any available treatment, not greater than 12 months.

Mr Catherwood also purchased trauma cover which paid a lump sum if he was diagnosed with specified medical conditions.

In 2019 Mr Catherwood was diagnosed with cancer. His oncologist advised that if he did not receive treatment he would die within 12 months. However, with the available treatment, which Mr Catherwood received, he had a less than 10% chance of dying within 12 months.

Mr Catherwood claimed his trauma benefit, which Asteron accepted and paid. He also claimed he was entitled to the terminal illness benefit, then $1,200,020. Asteron declined to pay the terminal illness benefit because, based on the medical advice received, Mr Catherwood was receiving treatment which meant his life expectancy exceeded 12 months.

Mr Catherwood brought proceedings against Asteron for breach of contract. There was no dispute about the medical evidence, Mr Catherwood’s life expectancy or the treatment available to him. The sole issue was an interpretation point: whether “terminally ill” under the policy meant life expectancy of no more than 12 months:

• ignoring the effect of any available treatment (Mr Catherwood); or
• despite the effect of any available treatment (Asteron).

Mr Catherwood’s position was:

• The ordinary and natural meaning of the words “and regardless of” [any available treatment] meant that Asteron was required to disregard the existence and prospects of success of treatment when assessing his life expectancy.
• The prospect of a commercially absurd result (in this case, paying a death benefit to a life assured with a curable illness) should not override the natural and ordinary meaning of the text, except in extreme cases.³
• The terminal illness benefit was payable even if he chose not to receive treatment and its purpose was to give the life assured the choice on how the death benefit was spent, whether on treatment or otherwise.⁴
• Asteron’s interpretation created difficulties because it required inquiry into the availability and effectiveness of treatment and whether this should take into account experimental treatments, overseas treatment or treatments which an insured declines due to side effects, cost or religious beliefs.⁵

Asteron’s position was:

• The policy must be interpreted objectively, and the Court could not reasonably conclude that Asteron objectively intended to pay Mr Catherwood’s death benefit when, on the available medical evidence, he was not going to die.
• The word “regardless” in the terminal illness benefit should not be interpreted in isolation and must be considered in the context of the policy as a whole.
• The policy provided optional benefits, such as the trauma benefit, which responded to diagnosis of specified health conditions. There would be little work for these benefits to do on Mr Catherwood’s interpretation.
• Asteron’s interpretation was supported by evidence from an industry expert who gave evidence that the common characteristics of terminal illness cover in the New Zealand life market is that it is part of the death benefit and brings forward payment when the client is terminally ill, usually specified as a life expectancy of less than 12 months.⁶

The High Court agreed with Asteron: the only reasonable interpretation of the terminal illness benefit is that the insurer is entitled to take into account the effect of available medical treatment.⁷ This was clear from the wording and context of the policy. It was not logical or in accord with common sense to describe someone as terminally ill when there was an available cure.

Looking at the policy as a whole, the terminal illness benefit was part and parcel of the life cover, which was payable on death. The terminal illness benefit merely brought forward payment of the death benefit, which could not be reinstated. In contrast, the optional benefits responded to specific diagnoses and did not impact the death benefit, or we note, the terminal illness benefit. It did not make sense for the terminal illness benefit to overlap with these covers.

The Court did not need to consider whether or not the insured was entitled to decline treatment as that did not arise on these facts and would merely affect the point at which the insured may be entitled to receive the benefit.⁸

The Court also referred to the Australian decisions of Tower Australia v Farkas⁹ and Galaxy Homes Pty v National Mutual Life of Australia Ltd¹⁰ where the Courts took into the account the effect of available treatment in determining entitlement to terminal illness cover, albeit with different wordings.

Asteron’s terminal illness was quite clearly part of the insured’s life cover. Payment was dependent on the duration of human life and brought forward only because the insured’s actual, not theoretical, life expectancy was no more than 12 months. The Court’s rejection of the insured’s interpretation preserves the distinction between life policies and other types of benefits commonly sold with life cover, such as trauma and disability.

1. Bunyon on Life Assurance, 5^th Ed (1914) 1.
2. Catherwood v Asteron Life Limited [2022] NZHC 3296.
3. Following Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [93].
4. At [40].
5. At [43].
6. Mr Catherwood challenged the admissibility of this expert evidence, but the Court allowed it: [72]-[74].
7. At [57] and [69].
8. At [70].
9. Tower Australia Ltd v Farkas [2005] NSWCA 363, 64 NSWLR 253.
10. Galaxy Homes Pty v National Mutual Life of Australia Ltd [2013] SASCFC 34, (2013) 116 SASR 41.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.