5.2.1 REST’s minimum balance and prescribed employment status clauses
The first type of clause considered was described as a ‘prescribed minimum balance clause’, being a clause that requires the REST member to maintain a specified balance in their superannuation account in order to obtain or maintain insurance coverage. The second type of clause considered was described as a ‘prescribed employment status clause’. That type of clause required a member to have a specified type of employment, or to work a minimum number of hours, in order to obtain or maintain coverage.
Until December 2017, the default policies offered to REST’s members contained a prescribed minimum balance clause that operated in conjunction with a prescribed employment status clause.[1] The operation of these clauses combined meant that if a member’s balance fell below a certain amount – $3,000 for TPD and $1,200 for life – and a member was not working, or did not receive contributions from their employer, the member would lose default life and TPD cover after 71 days.[2]
Between 2013 and 2018, the operation of the prescribed minimum balance clause led to REST denying the death claims of 11 members and the TPD claims of 36 members.[3]
Once REST became aware that a member had ceased working, and had a balance below the minimum threshold, it ceased charging premiums to that member.[4] However, if REST was not notified that a member had ceased working, it continued to deduct premiums from the member’s account regardless of whether they had a balance below the minimum threshold.[5]
The operation of the prescribed minimum balance and prescribed employment status clauses was considered by reference to two examples.
The totally and permanently disabled member
In the first case, a REST member became totally and permanently disabled five days after his cover ceased.[6] Until a claim was made, REST had not been aware that the member had ceased work.[7] REST had continued to deduct premiums up until the time of the member’s claim.[8] The claim was denied because of the operation of the prescribed minimum balance and prescribed employment status clauses.[9] All premiums paid by the member after his coverage had ceased were refunded to him.[10]
The paraplegic member
In the second case, the member had joined REST in 2005.[11] She became a paraplegic in May 2012 after falling from the fifth floor of a building.[12]
After the member was injured, she received her 2012 REST annual statement.[13] The statement informed her that she had TPD coverage of $108,000.[14] The statement did not mention the $3,000 minimum balance requirement.[15] Mr Ross gave evidence that this information ‘possibly’ should have been included in REST annual statements.[16]
In January 2014, with the assistance of her lawyers, the member submitted a TPD claim to REST.[17] It took REST six months to provide the claim to AIA.[18] Mr Ross gave evidence that this was ‘too long’[19] and that a delay of this length would now be unusual.[20] After being notified of the claim, AIA had to follow up REST for further information on a number of occasions.[21]
In November 2014, AIA accepted the member’s claim, and transferred $108,000 to REST.[22] REST did not immediately notify the member.[23]
In December 2014, REST emailed AIA requesting that it review its decision.[24] REST also refunded the $108,000 to AIA.[25] Mr Ross said that this communication was made because REST had realised that it had made an administrative mistake in relation to the member’s last employment date, and had failed to enter that date into its systems.[26] Mr Ross said that he considered it appropriate for REST’s administrator to have acted as it did.[27] He did not consider that conduct to be inconsistent with REST’s obligation to do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary if the claim has a reasonable prospect of success.[28]
AIA reviewed its decision and determined that the claim should be denied.[29]
The member later commenced litigation in the Supreme Court of New South Wales.[30] After some time, and various amendments to the member’s pleading, AIA settled the claim and paid the member the full amount insured.[31]
Mr Ross did not believe that REST failed to act in the best interests of the member, but said that with hindsight, he wished REST could have done more to get the benefit paid to the member sooner.[32]
A question arose during this case study as to whether REST did everything that is reasonable to pursue the member’s claim, as is required by section 52(7)(d) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act). Whether it did would turn on a number of factors, including on whether the claim had a reasonable prospect of success at any particular point. However where, as here, the intent of this part of the case was to explore the operation of particular types of clause and to consider at a more general level the role of the trustee in the handling of group life claims, it is unnecessary for me to form a concluded view on that issue. It is enough to say that the claim was factually difficult and that REST’s records were incomplete and inaccurate (at least in some part due to incorrect data entry by REST or its administrator).[33]
5.2.2 REST’s definition of TPD
Another clause considered in the course of the case study was the clause defining ‘totally and permanently disabled’. Mr Ross said that TPD insurance is the most complex type of group life insurance offered because the test is complicated.[34]
REST’s definition of ‘totally and permanently disabled’ has three disjunctive limbs. The first limb has two elements. A person must be absent from work for a period of three consecutive months, and be so disabled that they are unlikely to engage in any occupation for which they are reasonably suited though education, training or experience.[35] The second element of the first limb requires that the member be so disabled that it is unlikely that the member will ever engage in any reasonably suitable occupation. That limb is not unlike the definition of ‘permanent incapacity’ in the SIS Regulations.[36] The second limb of REST’s definition will be met if a member has suffered specific injuries, for example the loss of use of two hands or two feet.[37] The third limb of the definition requires that the member be unable to perform at least two ‘activities of daily living’ –dressing, bathing, toileting, mobility or feeding – without assistance.[38]
Mr Ross accepted that it was possible for a member to satisfy the first limb of REST’s definition, but not the second or the third limbs.[39] However, REST will only assess a member’s eligibility against the first limb if the member satisfies REST that they have been in ‘Gainful Employment’ in the 13 months before the incident.[40] REST defines ‘Gainful Employment’ as:[41]
Being employed for gain or reward in any business, trade, profession or employment for at least ten (10) hours per week. If a member does not meet the ‘Gainful Employment’ requirement, REST will assess their eligibility for TPD benefits under the second and third limb of REST’s definition, but not the first limb.[42]
In the last five years, REST has denied the death or TPD claims of 224 of its members based on the operation of its prescribed employment status clause, including the ‘Gainful Employment’ requirement.[43]
5.2.3 Income protection
REST provides default income protection cover to its members. [44] Mr Ross considered that this form of insurance cover was particularly valuable to REST’s membership.[45]
A member may not claim the income protection benefit if that member is unemployed.[46] Despite this, absent explicit notification that a member had ceased working, Mr Ross was not aware of any systems that REST had in place to detect and stop the deduction of income protection premiums for unemployed members.[47] Mr Ross accepted that this meant that those members would be paying a premium for a policy on which they could not claim, but did not accept that income protection insurance would be ‘junk insurance’ in those circumstances.[48] In its submissions, REST resisted any finding that it should have systems in place to determine if a member might be unemployed and noted that it included warnings in member statements and on its website.[49]
In the last five years, REST declined 37 income protection claims due to the requirement for the claimant to be employed.[50]
5.2.4 Reasons for decisions – Death benefits
One of the topics addressed in the statement of Paul Howard was REST’s process for giving reasons for decisions in response to complaints about the proposed payment of death benefits.[51] After the case study concluded, REST provided a further statement of Mr Howard, which supplemented his earlier statement.[52]
The additional information provided in the supplementary statement included that, on 20 September 2018, REST filed a breach report with ASIC and the Australian Prudential Regulation Authority (APRA) in which REST said that it considered that it had inadvertently breached section 101(1)(c) of the SIS Act – which requires trustees to provide reasons for a decision in response to a complaint about the proposed payment of a death benefit.[53] The statement says that REST considered that it may have breached that section 184 times since 15 March 2017.[54]
In the light of that evidence, I find that REST may have engaged in misconduct by breaching section 101(1)(c) of the SIS Act. Section 29E(1)(a) of that Act imposes a condition on the licences of all responsible superannuation entities to comply with various laws, including the SIS Act. It follows that REST may also have breached a condition imposed on its licence. In its submissions, REST accepted that such findings were open.[55]
REST’s failure to comply with section 101(1)(c) and the licence condition imposed by section 29E(1)(a) was the direct result of its systems, in particular, the use of a template letter that was inadequately drafted.[56]
[1] Transcript, Lachlan Ross, 14 September 2018, 5808, 5816.
[2] Transcript, Lachlan Ross, 14 September 2018, 5808, 5815–6.
[3] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, 3 [7].
[4] Transcript, Lachlan Ross, 14 September 2018, 5819.
[5] Transcript, Lachlan Ross, 14 September 2018, 5820–2.
[6] Transcript, Lachlan Ross, 14 September 2018, 5820–1.
[7] Transcript, Lachlan Ross, 14 September 2018, 5820–1; Exhibit 6.227, 10 November 2017, AIA Procedural Fairness Letter about Declining TPD, 2.
[8] Transcript, Lachlan Ross, 14 September 2018, 5822.
[9] Transcript, Lachlan Ross, 14 September 2018, 5822.
[10] Exhibit 6.227, 10 November 2017, AIA Procedural Fairness Letter about Declining TPD, 3.
[11] Transcript, Lachlan Ross, 14 September 2018, 5828.
[12] Transcript, Lachlan Ross, 14 September 2018, 5831.
[13] Exhibit 6.225, Witness statement of Lachlan Ross, 7 September 2018, Exhibit LGR-21 [RST.0013.0001.0047]; Transcript, Lachlan Ross, 14 September 2018, 5831.
[14] Exhibit 6.225, Witness statement of Lachlan Ross, 7 September 2018, Exhibit LGR-21 [RST.0013.0001.0047 at .0052]; Transcript, Lachlan Ross, 14 September 2018, 5832.
[15] Transcript, Lachlan Ross, 14 September 2018, 5832–3.
[16] Transcript, Lachlan Ross, 14 September 2018, 5832–3.
[17] Transcript, Lachlan Ross, 14 September 2018, 5834.
[18] Transcript, Lachlan Ross, 14 September 2018, 5834.
[19] Transcript, Lachlan Ross, 14 September 2018, 5834.
[20] Transcript, Lachlan Ross, 14 September 2018, 5834.
[21] Transcript, Lachlan Ross, 14 September 2018, 5834.
[22] Exhibit 6.225, Witness statement of Lachlan Ross, 7 September 2018, Exhibit LGR-38 [RST.0010.0003.0099].
[23] Transcript, Lachlan Ross, 14 September 2018, 5837.
[24] Exhibit 6.225, Witness statement of Lachlan Ross, 7 September 2018, Exhibit LGR-41 [RST.0010.0003.0105].
[25] Exhibit 6.225, Witness statement of Lachlan Ross, 7 September 2018, Exhibit LGR-41 [RST.0010.0003.0105].
[26] Transcript, Lachlan Ross, 14 September 2018, 5836–7.
[27] Transcript, Lachlan Ross, 14 September 2018, 5837.
[28] Transcript, Lachlan Ross, 14 September 2018, 5837.
[29] Transcript, Lachlan Ross, 14 September 2018, 5840.
[30] Transcript, Lachlan Ross, 14 September 2018, 5843, Transcript, Lachlan Ross, 17 September 2018, 5850.
[31] Transcript, Lachlan Ross, 17 September 2018, 5850; Exhibit 6.225, Witness statement of Lachlan Ross, 7 September 2018, 13 [53].
[32] Transcript, Lachlan Ross, 17 September 2018, 5850.
[33] Transcript, Lachlan Ross, 14 September 2018, 5836.
[34] Transcript, Lachlan Ross, 17 September 2018, 5851.
[35] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, Exhibit LGR-3 [RST.0006.0001.0658 at .0681].
[36] Superannuation Industry (Supervision) Regulations 1994 (Cth) reg 1.03C, which provides that a member is taken to be suffering permanent incapacity if the member’s ill‑health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience.
[37] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, Exhibit LGR-3 [RST.0006.0001.0658 at .0681].
[38] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, Exhibit LGR-3 [RST.0006.0001.0658 at .0682].
[39] Transcript, Lachlan Ross, 17 September 2018, 5852.
[40] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, Exhibit LGR-3 [RST.0006.0001.0658 at .0681].
[41] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, Exhibit LGR-3 [RST.0006.0001.0658 at .0679].
[42] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, Exhibit LGR-3 [RST.0006.0001.0658 at .0681].
[43] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, 11 [32].
[44] Exhibit 6.229, Witness statement of Natalie Binns, 31 August 2018, 2–4 [7].
[45] Transcript, Lachlan Ross, 17 September 2018, 5854.
[46] Transcript, Lachlan Ross, 17 September 2018, 5854–5.
[47] Transcript, Lachlan Ross, 17 September 2018, 5854–5.
[48] Transcript, Lachlan Ross, 17 September 2018, 5855.
[49] REST, Module 6 Case Study Submission, 12–13 [55]–[59].
[50] Exhibit 6.224, Witness statement of Lachlan Ross, 31 August 2018, 15 [51].
[51] Exhibit 6.230, Witness statement of Paul Howard, 7 September 2018, 3 [6].
[52] Exhibit 6.422, Witness statement of Paul Howard, 20 September 2018, 4–6 [9]–[13], 5–6 [15].
[53] Exhibit 6.422, Witness statement of Paul Howard, 20 September 2018, Exhibit PBH-63 [RST.0016.0003.0004].
[54] Exhibit 6.422, Witness statement of Paul Howard, 20 September 2018, Exhibit PBH-63 [RST.0016.0003.0004 at .0004].
[55] REST, Module 6 Case Study Submission, 15–16 [71]–[72].
[56] Exhibit 6.422, Witness statement of Paul Howard, 20 September 2018, 1 [3(a)].