A pre-existing condition clause or “PEC” clause is an exclusion clause used in life insurance policies. It excludes claims arising from medical conditions that a person was suffering from before their insurance cover started.
We have observed that PEC clauses are increasingly being used in a wider range of life insurance policies including wholesale or group life insurance where they had not generally appeared previously. However these clauses are not without risk.
As with any exclusion clause, the insurer bears the onus of proving that the clause is applicable in the circumstances to exclude the claim. With the use of these clauses on the rise, it is timely to revisit how PEC clauses work having regard to 2 recent cases that have commented on these types of exclusion clauses in life policies.
What recent cases tell us
Galaxy Homes involved a claim for a terminal illness benefit. This case has previously been commented on in view of the Full Court finding that even though the policy had been cancelled at the time of the claim, the policy must respond to the claim for advanced metastatic melanoma because the melanoma was a claimable event that had occurred while the policy was on foot.
However the Full Court overturned the decision of the trial judge, as it found the insured had a pre-existing malignant melanoma. While this condition was less threatening than the advanced metastatic melanoma for which the claim was made, as it was a pre-existing medical condition, the claim was excluded. The trial judge applied Section 47 of the Insurance Contracts Act2 to prevent the insurer relying on the PEC clause in the policy on the basis that there was no pre-existing medical condition of the same prognostic character as the advanced metastatic melanoma.
The Full Court rejected this finding and held that to give such a purpose to the language of the PEC clause in the policy of insurance would deprive the policy of its commercial efficacy. The fact that the prognosis for a medical condition changes over time does not mean that the medical condition has ceased. Therefore the Full Court was satisfied that there was a pre-existing condition that was relevant to the claim and the pre-existing condition was malignant melanoma.
More recently, the Court of Appeal in NSW considered a PEC clause in an income protection policy that had been taken out by the insured who was a carpenter.
The Court of Appeal had to consider whether the trial judge had correctly found that the insured’s disability had resulted from an accidental injury that was caused solely, directly and independent(ly) of a pre-existing condition.
The policy provided for total and permanent disability benefits where a person was unable to perform the duties of their usual occupation by an injury that resulted solely, directly and independently of a pre-existing condition. In Preston, the insured had significantly injured both ankles in a prior accident. There was no issue of non-disclosure about the prior accident; the insured had disclosed his medical history to the insurer.
The Court of Appeal upheld the decision of the trial judge that the medical evidence presented supported the insurer’s contention that the current disability had been contributed to or been caused in part by the pre-existing injury sustained 13 years earlier from which the insured thought he had fully recovered.
The Court of Appeal identified 2 situations which appeared to result in different outcomes for PEC clauses.
The first situation is where a pre-existing condition that may be dormant or in-active “creates a propensity for an insured person to suffer disabling consequences from what would otherwise be a relatively minor injury”4. The second is where a significant medical or physical condition is aggravated by an injury or combines with an injury to result in disability. In the first scenario, historically the decisions suggest that the courts are more likely to regard the accidental injury as the sole, direct and independent cause of the injury. Whereas in the second scenario, prior decisions suggest that a court is more likely to find that the accidental injury is one of two or more concurrent causes such that the exclusion clause in the policy operates to exclude the claim.
Preston highlights the significance of the medical evidence in these types of cases. While none of the medical experts suggested that there was no connection between the insured person’s inability to work and the earlier accident, they differed in their opinion as to the significance to be attributed to the earlier injuries.
Challenges in relying on PEC clauses
The onus is on the insurer to prove the pre-existing medical condition. Section 47 has not been applied in a way to require that a pre-existing medical condition is still causing symptoms at the time of entering in the contract. It also matters not for Section 47 whether the insured person disclosed the pre-existing medical condition to the insurer before entering into the contract. That is, telling an insurer about a pre-existing condition does not negate the operation of the exclusion clause.
The benefits of using PEC clauses are clear as a strategy to better manage underwriting risk and adverse selection. Nonetheless, insurers should be mindful of comments such as those of Gleeson JA in Preston, where he noted that it had not been argued in the case whether the insured had been misled when taking out the policy, or, whether the insurer’s conduct might have constituted unconscionable conduct in apparently failing to draw to the insured’s attention in clear and plain language, the restrictive terms of the cover provided under the policy. There was no evidence led in the Preston case that there was any such conduct.
However these obiter comments by Gleeson JA signal a warning that when using PEC clauses, insurers should be mindful of the level of disclosure about the clause and the language used to explain the impact of the PEC clause on the terms of the cover, particularly in circumstances where the insured has disclosed certain conditions.
Otherwise, it is likely that aggrieved claimants and their legal advisers will look more broadly at the formation of the contract, the weight given to the restrictive terms of the cover and the level of disclosure in the circumstances in challenging the operation of a PEC clause.
- Full Court of the Supreme Court of South Australia judgement in Galaxy Homes Pty Ltd v National Mutual Life Association of Australia (no 2 ) SASCFC 66
- Insurance Contracts Act 1984 (Cth). Section 47 limits the circumstances in which an insurer can apply a PEC clause so that in summary, a PEC clause cannot exclude a claim in relation to a medical condition that the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of the medical condition.
- NSW Court of Appeal judgement in Preston v AIA Australia Ltd  NSWCA 165
- Op cit. See paragraphs 64 to 81