Taylor v Asteron Life Ltd [2020] NZCA 354 – Post contractual obligations of utmost good faith

• Every insurance contract contains an essential term, implied by law, that the insured must be honest in connection with a claim, subject to express terms.
• Cancellation of insurance contracts is governed by the Contract and Commercial Law Act 2017 (CCLA).
• The insurer’s right to cancel is prospective. The insurer may recoup payments made for the dishonest claim, but the insured does not have to repay valid claims and does not forfeit rights to valid claims accrued prior to the date of cancellation.

Mr Taylor, a self-employed insurance broker, held an income protection insurance policy with Asteron. In 2010, Mr Taylor became sick and was unable to work. He made a claim, which Asteron accepted. Asteron paid Mr Taylor total disability benefits (TDB) until September 2014. It then suspended payments because Mr Taylor would not provide financial information Asteron required to assess his loss of earnings.

Mr Taylor commenced proceedings against Asteron seeking a declaration that he was entitled to the TDB, and unpaid benefits from 2014 onwards. Asteron denied liability and said that Mr Taylor was not totally disabled and he had not suffered loss of earnings. Asteron counterclaimed that it had cancelled the policy because Mr Taylor had breached his duty of good faith by making false statements in support of his claim. It sought recovery of the benefits it had paid him. Mr Taylor’s claim was unsuccessful. Asteron’s counterclaim succeeded. The High Court awarded Asteron $371,286.70 plus interest and costs.

It was accepted that Mr Taylor suffered a sickness as defined in the policy. At issue was whether this prevented him from working 10 hours or more per week in his usual occupation, entitling him to the TDB.

Mr Taylor claimed that although he attended his insuring broking business premises whilst on claim, it was only for a few hours a week and he was not actively involved in the business, so he was not “working”. Cooke J rejected Mr Taylor’s evidence and found that he had not established he was totally disabled. Further, the profit that Mr Taylor earned from his broking business meant he had not suffered a loss of earnings covered by the policy.

Cooke J considered Asteron’s counterclaim. He said the CCLA was the correct legal framework for addressing the right to cancel or avoid liability under an insurance contract for breach of the duty of good faith in connection with a claim. He held this duty was an essential implied term of the insurance contract between Mr Taylor and Asteron.

Mr Taylor breached his duty of good faith by making dishonest statements, misstating the hours he was working in the progress forms he submitted to Asteron in support of his claim. Cooke J found that Mr Taylor deliberately misrepresented both the hours he was working and that his business was making a loss.

Although Mr Taylor disputed that Asteron had properly cancelled the contract, Cooke J held that Asteron had given sufficient notice under s 41 of the Act and it was entitled to relief under ss 43 and 49 CCLA. Mr Taylor’s affirmative defence of change of position failed because he had not acted in good faith. Cooke J awarded Asteron damages for the full amount of its counterclaim.

Mr Taylor argued on appeal (amongst other things) the High Court was wrong to find he was not totally disabled, he misrepresented his work and income, and that Asteron was entitled to cancel the policy and a full refund of all amounts paid to him.

The Court upheld the High Court’s decision on Mr Taylor’s claim. He had not proven he was totally disabled and the evidence was compelling that he was working in his business for more than 10 hours per week. As Mr Taylor was self-employed, his loss of earnings included profit derived from his ownership of the business, not just income from personal efforts.¹ Mr Taylor suffered no loss.²

The Court of Appeal’s decision on Asteron’s counterclaim noted that the duty of honesty in connection with a claim is well settled, but previous judgments in New Zealand had not explicitly considered its genesis or the remedies that flow from it.

The Court agreed with Lord Sumption’s approach in Versloot Dredging,³ and Lord Hobhouse’s approached in The Star Sea⁴ that there is a distinction between the insured’s duty of good faith before the policy incepts and their duty of good faith after the contract is formed. For the latter, the source of the obligation is the insurance contract.⁵ The Court held that the fraudulent claims rule can and should be accommodated within the general principles of contract law. Subject to the express terms of the contract, it is an essential, implied term in all insurance contracts that the insured must act honestly when making a claim.⁶

An insurer’s right to cancel a policy for breach is wholly governed by the CCLA. There are no special rules for cancellation of insurance contracts outside of the Act.⁷

For fraudulent claims, unless there is an express term providing for cancellation, the insurer must establish the insured has breached the implied term to act honestly in connection with a claim, and that it is either an essential term or the consequences of the breach are substantial (s 37 CCLA). It is implicit that the insured’s honesty in connection with claims is an essential term.⁸

Under s 42 CCLA cancellation is prospective. The insurer is not liable for the fraudulent claim (or could recover any payment as damages). The insured does not forfeit valid claims paid or accrued before cancellation.⁹

The Court of Appeal agreed Mr Taylor had been dishonest¹⁰ and Asteron was entitled to cancel the contract under s 37 CCLA.¹¹ Asteron was entitled to recover money it had paid Mr Taylor for the fraudulent claim.¹² However, the Court considered that Mr Taylor’s initial disability claim was properly made, so Mr Taylor was entitled to retain benefit payments of about $52,000.¹³

The Court of Appeal’s decision is important for all those involved in the insurance sector. The source of the insured’s obligation to be honest in connection with a claim lies in the contract, as an express or implied term, unless expressly modified by the parties.

The Court’s reasoning that Mr Taylor’s initial claim was valid and he was entitled to retain money paid before his dishonest statements seems to be at odds with its decision that the insured’s dishonesty in connection with a claim entitles the insurer to recover the whole claim. In our view there are good policy reasons for recovery of the whole claim, separate to the question of a dishonest insured’s entitlement to retain payments made for an earlier valid claim. The Court of Appeal (wrongly in our view) treated Mr Taylor’s disability claim as successive claims. However, Mr Taylor made one claim for his disability and supported it dishonestly in his report forms. The fact that he received periodic benefit payments for his disability claim does not transform it into successive claims. He arguably ought to have been ordered to repay the entire amount he was paid.

1. At [86].
2. At [89].
3. Versloot Dredging BV v HDI Gerling Industrie Versicherung [2016] UKSC 45, [2017] AC 1.
4. Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1, [2003] 1 AC 469.
5. Taylor, above in n i, at [102].
6. At [109]-[111].
7. At [112].
8. At [115]-[116].
9. At [118].
10. At [134].
11. At [135].
12. At [120].
13. At [146].

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