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Mutual Discretionary Trusts V’s Insurance – What You Need To Know ... The average consumer is in no position to understand the complexities, uncertainties and limitations of the cover provided and, in particular, the possibility of the trust not being financially viable when a claim is made. He needs the protection of regulation by a body such as APRA. This problem has been identified and recommendation 42 of the HIH Royal Commission proposed that the Insurance Act be extended to capture such discretionary trusts and the government has commissioned a review to examine the role of discretionary mutual funds in the Australian insurance market, headed by Mr Gary Potts, which is due to report shortly. Insurance Contracts Act The Insurance Contracts Act regulates the terms and conditions of insurance contracts. It is generally considered to be far more in favour of an insured than the insurer. The most obvious example is section 54 which limits the rights of an insurer to rely upon a clause in a contract of insurance excluding or limiting the insurer’s liability. Another example is section 56 which removes an insurer’s right to avoid the contract in some instances of fraudulent claims. The Insurance Contracts Act does not apply to a discretionary trust and so a member of the discretionary trust does not have the benefit of its provisions, including sections 54 and 56. Uncertainty of the Obligations of a Trustee The law governing insurance companies and its insurance contracts is far more certain and well known than in the case of discretionary trusts. When breaking new ground, it is difficult to ensure that all legal requirements have been satisfied. Despite the best intentions, it is often only over a matter of time that all obligations are identified. |
An insured faces far less of a risk of such unintentional breach by an insurer than does a member of a discretionary trust. The trustee has discretion whether to pay benefits from a trust An insured has a right to his entitlements payable under his policy. If monies are payable the insurer must pay them. The insured has a right to enforce the payment. However, a member of a trust has no such right. The trust deed provides that the benefit of the agreement is to be provided at the trustee’s discretion. Although a member may believe that the trustee would pay, he has no certainty that he would and no remedy if he does not. The greatest concern is in relation to claims in the future as whatever the trustee’s practice is now this does not guarantee that he will pay in similar circumstances in the future – as previously discussed, liability insurance in particular can have a very long tail. When considering such trusts, the courts have upheld the contracts on the basis that the rationale that the principle of freedom of contract allows the parties to reach an agreement on whatever terms they like. They have attempted to give efficacy to the arrangements by implying terms into the contract qualifying the discretion of the trustee. We believe that it is likely that the court would be prepared to imply terms such that the trustee must exercise his discretion fairly (Medical Defence Union v Department of Trade [1980] 1 Ch 82), and perhaps even reasonably and in good faith. However, such qualifications merely require the trustee to exercise his discretion honestly and with an objective standard of conduct in the circumstances. Provided his decision is not exercised capriciously or merely to avoid payment from the trust funds, it is likely to be acceptable. A member merely has a right to have his claim considered. This is far short of an insured’s right to his entitlement payable under his policy. |
