A recent New South Wales Supreme Court decision, Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 36314 (Manglicmot), has considered the duties of a trustee of a superannuation fund in relation to a change in the fund’s insurance policy. The decision by Justice Rein helps to clarify a number of issues relevant to trustees of superannuation funds, including:
- the duties trustees owe to members when changing death and total and permanent disablement (TPD) policies
- whether there is a test of ‘reasonableness’ applied by the court when determining if a decision by a trustee can be reviewed by the court
- whether the giving of reasons by a trustee for a decision affects the test applied by the court in determining whether that decision can be reviewed
- whether the section 52 covenants within the Superannuation Industry (Supervision) Act 1993 (SIS Act) significantly alter the general law duties owed by trustees, and
- the meaning of ‘best interests’ within section 52(c) of the SIS Act.
Facts
The Plaintiff’s TPD claim
The plaintiff, Roy Manglicmot (Plaintiff), was a member of the Officers’ Superannuation Fund (Fund) and employed as a bank teller by the Commonwealth Bank of Australia (Bank). The Plaintiff commenced employment with the Bank in 1998 and in 2000 suffered various injuries which resulted in him moving from full time employment to part time employment of a maximum 15 hours work per week in November 2002 (two years after the initial injuries). Thereafter the Plaintiff continued to work in a part-time capacity at the Bank up until August 2003, when he accepted a redundancy package offered by the Bank.
After accepting redundancy the Plaintiff filed a TPD claim with the trustee of the Fund, Commonwealth Bank Officers Superannuation Corporation (Trustee). The Trustee referred the claim to its insurer, CommInsure Pty Ltd (CommInsure), which determined (and gave reasons for its determination) that the Plaintiff did not meet the definition of TPD set out in the relevant policy (the CommInsure policy).
The Trustee’s decision to change insurance policies
In the lead up to 30 June 2003, the provider of total and permanent disablement insurance to the Fund, Hannover Life Re of Australasia Ltd (Hannover), informed the Trustee that its policy (Hannover policy) would not be renewed upon its 30 June 2003 expiration unless the Trustee agreed to a 130% increase in premiums, with no guarantee of premiums for the future.
Subsequently, the Trustee invited CommInsure to provide a quote. CommInsure offered the Trustee an insurance policy on terms that ‘will either match or better’ the terms of the Hannover policy for a premium increase of 80%, guaranteed for three years. The Trustee accepted CommInsure’s offer and the CommInsure policy commenced on 1 July 2003.
Late in 2003 the Trustee conducted its own internal review, and requested its solicitors to conduct a review, to identify any gaps in cover between the CommInsure and Hannover policies. No difference between the TPD definitions in the policies was identified.
The Plaintiff’s claim
The Plaintiff, whilst not agreeing with the reasons given by CommInsure for rejecting his claim, accepted that he was not eligible for a TPD benefit because he did not meet the following definition of TPD under the CommInsure policy because he was able to work on a part time basis:
(b) [the member] has been absent from all employment for 6 consecutive months from the date of disablement and… will not ever be able to resume any occupation, whether or not for reward
The term ‘occupation’ was defined in the CommInsure policy as ‘an occupation that the person can perform on a full time
or part time basis…’
However, the Plaintiff claimed that he would have met the following definition of TPD (and therefore been eligible for a TPD benefit of $120,000) under the Hannover policy because it did not restrict the Plaintiff from working on a part-time basis:
(b) having been absent from work through injury or illness for an initial period of six (6) consecutive months and… unable ever to engage in or work for reward in any occupation or work which he or she is reasonably capable of performing by reason of education, training or experience.
Consequently, the Plaintiff sued the Trustee on the basis that:
- the inclusion of the words ‘part time’ in the definition of TPD in the CommInsure policy ‘significantly reduced the scope of cover’ previously offered under the Hannover policy
- the Trustee’s failure to obtain cover equal to or better than the Hannover policy was a breach of its duty to ‘act in the best interests of members’, and
- the breach caused the Plaintiff to suffer loss of $120,000 (the amount that would have been payable under the Hannover policy).
Whether giving reasons for a decision affects the test to be applied in determining whether a trustee’s discretion is reviewable by the court
It was not disputed that the Trustee had the power to exercise its discretion to determine to enter into the CommInsure policy. The question at issue was whether the Trustee’s discretion was one that could be reviewed by the court. In deciding on this issue the court considered whether the Trustee’s decision to give reasons for the exercise of its discretion affected the test to be applied by the court in determining whether the exercise of discretion was reviewable.
Justice Rein accepted the test for reviewing a trustee’s discretion set out in Jacobs Law of Trusts (citing In re Beloved Wilkes’s Charity (1851) 3 Mac & G 440 at 488) which held that a court can only review a trustee’s exercise of a discretion where the trustee has acted:
- with an indirect motive
- without honesty of intention
- without fair or real genuine consideration of the exercise of discretion, or
- for an improper purpose.
In considering whether the giving of reasons affected this test, Justice Rein referred to a wide range of authority before determining that ‘the principles on which the Court must proceed are the same whether reasons are given or not’ and that giving reasons does not alter the test for whether a discretion exercised by a trustee is reviewable by the court. Justice Rein then went on to clarify that there was no test of ‘reasonableness’ imported into the court’s determination, regardless of whether a trustee gives reasons for a decision or not.
Although Justice Rein found that giving reasons for the exercise of a discretion does not change the relevant test, his honour did state that the court can have regard to any reasons given to aid in its determination of whether the requirements in the test had been breached. Giving reasons may, therefore, make it easier ‘to determine whether a breach had occurred’.
Justice Rein stated that in this case there was no evidence ‘to indicate that the trustee’s decision was not exercised in good faith, or that it was not exercised upon a fair or real and genuine consideration, or that it was not exercised for the purposes for which the power was conferred’. Therefore, it was held that the Trustee’s decision to enter into the CommInsure policy was not a decision reviewable by the court.
Factors for a trustee to consider when determining to change insurance policies
Although Justice Rein determined that the Trustee’s decision was not reviewable by the court, he went on to consider whether there would have been a breach by the Trustee if the decision was open to review. His Honour stated that, in making its decision, the Trustee ‘was bound not only to have regard to the benefits provided by any particular policy, but also to the premiums payable, which came out of the Fund’. His Honour took into account the fact that the CommInsure policy provided premiums at least 20% better than the Hannover policy (including a three-year guarantee of those premiums), that CommInsure provided a commitment to match the terms of the Hannover policy and that the Trustee sought legal advice as to whether there was any gap in cover between the policies, before finding that there would be no breach by the Trustee even if the decision was reviewable under law.
SIS
The Plaintiff claimed that the covenants incorporated into the Fund’s trust deed under section 52 of the SIS Act (to the extent that those covenants were not already incorporated into the trust deed) had substantially altered the obligations owed by the Trustee under the general law. However this argument was rejected by Justice Rein:
I do not accept that s 52 imposes a higher standard on a trustee than the general law.
With respect to the section 52(2)(c) SIS Act (and general law) duty ‘to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries’, Justice Rein held that:
I do not accept that the trustee is made liable for any outcome which turns out to be unbeneficial to members, even if the original decision which led to that outcome was taken with the best interests of all members in mind. Another way of describing this approach is to say that s 52(2) is concerned with process, not outcome.
Consequently, because the Plaintiff had failed to establish a breach of duties owed by the Trustee under general law (and therefore the section 52 SIS Act covenants), the Plaintiff’s case was rejected.
Causation
Finally, Justice Rein considered whether the Plaintiff would have been able to claim a benefit under the CommInsure policy if it had incorporated the wording of the Hannover deed (ie, not specified ‘part time’ in the definition of TPD), and therefore whether (if the Trustee had in fact breached its duties owed to the Plaintiff by entering into the CommInsure policy) the Trustee’s decision caused the alleged loss suffered.
Due to the finding that the Plaintiff was otherwise ineligible for a TPD benefit under the CommInsure policy even if it had incorporated the Hannover policy wording (see below), Justice Rein did not make a determination of whether the words ‘full time’ would be read into the Hannover policy TPD definition (and thereby permitting TPD claims where a member was able to engage in work on a part-time basis). His Honour stated that although there was a ‘prospect’ that the words would be read into the policy, it was ‘arguable’ that they should not. In other words, although his Honour did not rule out the possibility that ‘full time’ could be read into the TPD definition, he indicated that it was perhaps unlikely. On that basis, the definitions in the two policies were probably not as significant as the Plaintiff alleged.
Finally, Justice Rein considered the requirement in the TPD definition of the CommInsure policy that a member ‘has been absent from employment for 6 consecutive months from the date of disablement’. The term ‘date of disablement’ is defined in the CommInsure policy as the later of:
- the date on which the sickness or injury that was the principle [sic] cause of the member’s disablement commenced or occurred, and
- the date the member ceased all work.
His Honour found that the Plaintiff had not been absent for any consecutive period of six months prior to his departure in August 2003 and, therefore, would have been ineligible for cover under the CommInsure policy even if the Hannover policy wording was incorporated into that policy. Interestingly, his Honour did not clarify the ‘date of disablement’ in his judgment nor consider the effect of reading ‘full time’ into the definition of ‘date of disablement’ in the CommInsure policy (ie, such that the requirement was that a member ‘has been absent from all [full time] employment for 6 consecutive months from (the date the member ceased all [full time] work)’).
Implications for trustees
Manglicmot highlights a number of relevant factors for trustees to take account of:
- First, Manglicmot serves as precedent that ‘best interests’ is a ‘process’ rather than ‘outcome’ orientated duty on trustees. This means that provided a trustee has undertaken a sound process in exercising a discretion, and none of the limbs of the test for a court to review a trustee’s discretion have been breached, the trustee’s exercise of discretion will not be reviewable by a court. This is an important clarification of the questions raised by the decisions in Re VBN and Australian Prudential Regulation Authority (2006) 92 ALD 259 and Invensys Australia Superannuation Fund Pty Ltd v Austrac Investment Ltd (2006) 15 VR 87.
Further, and importantly, it also clarifies that there is no separate test of ‘reasonableness’ which will be applied by a court in determining whether an exercise of trustee discretion should be reviewed. This again emphasises that trustees should focus on ensuring they undertake a sound ‘process’ in exercising any discretion rather than focusing on possible outcomes achieved.
- This decision is a judicial confirmation that the SIS Act covenants do not expand on general law trustee duties. This is a welcome and important message for trustees to bear in mind when exercising their discretions as it means that the section 52 ‘best interests’ covenant does not impose a duty on a superannuation trustee to achieve the best outcome for members.
- With respect to changes in insurers for death and TPD benefits, Manglicmot demonstrates that the process undertaken in exercising a discretion to change policies should include a detailed examination of differences between the policies and involve weighing up savings or costs associated with the change with any differences in scope of the cover provided.
Further, care should be taken by trustees and insurers to ensure that the terms of insurance are precisely worded.
- Finally, whilst Manglicmot is precedent for the fact that giving reasons in the exercise of a discretion does not change the relevant test for whether the exercise of discretion is subject to judicial review, the case also serves as a reminder that giving reasons can make it easier for a court to establish that the test for judicial review has been met. Therefore, trustees should remain cautious in recording and providing reasons in relation to the exercise of any discretion.