In Berryman v Zurich Australia Ltd [2016] WASC 196 it was decided that a bankrupt's entitlement to claim a TPD benefit under a life insurance policy is not an entitlement that is divisible amongst the bankrupt's creditors, and therefore such an entitlement does not vest in the Official Trustee in bankruptcy. Tottle J of the Supreme Court of Western Australia ruled that the bankrupt insured could continue an action in his own name to recover the TPD benefit. Life insurers may need to adjust their claims' payment practices in light of the Berryman decision. Before this decision, it was generally accepted within the industry that entitlement to TPD and income protection payments vested in the Official Trustee in Bankruptcy.
Facts
The plaintiff, Mr Berryman, was a self-employed carpenter who suffered an injury at work on 7 July 2009 when a large rock crushed his foot.
On 16 November 2009 Mr Berryman made a claim under his "Protection Plus" life insurance policy with Zurich for payment of a TPD benefit of AUD 2 million. Zurich declined the claim. On 29 August 2014 Mr Berryman commenced an action against Zurich for damages for breach of the insurance policy. Mr Berryman was declared bankrupt on 31 August 2015.
Zurich brought an application to have Mr Berryman's proceeding dismissed on the ground that the proceeding was deemed to have been abandoned by the operation of section 60 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). The parties agreed to have this issue tried as a preliminary point.
Issues and decision
Section 58 of the Bankruptcy Act provides that when a debtor becomes bankrupt the property of the bankrupt vests in the trustee in bankruptcy. Section 60 provides that an action commenced by a person who subsequently becomes a bankrupt is stayed until the trustee makes an election to prosecute or discontinue the action. The trustee has 28 days to make an election, failing which the trustee is deemed to have abandoned the action. Zurich argued that the trustee had not made the election within the requisite time period and thus the action had been abandoned.
Mr Berryman relied on subsection 60(4) of the Bankruptcy Act, which preserves the right of a bankrupt to continue an action concerning the bankrupt's rights in various property specified in section 116(2)(g) of the Bankruptcy Act on the basis that such property is not divisible amongst the creditors of the bankrupt.
Section 116(2)(g) relevantly excludes:
any right of the bankrupt to recover damages or compensation for personal injury or wrong done to the bankrupt...and any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) in respect of such an injury or wrong...
Section 60 (4) relevantly permits a bankrupt to continue, in his or her own name, an action commenced before bankruptcy "in respect of any personal injury or wrong done to the bankrupt".
Zurich contended that Mr Berryman's claim in the proceeding was for breach of the insurance contract (being a property right) rather than for personal injury and thus the claim did not fall within the scope of sections 60(4) and 116(2)(g).
Zurich argued that the test prescribed by the High Court in Cox v Journeaux (No 2) (1935) 52 CLR 713 (Cox) should be relied upon. Under the test in Cox, a claim in respect of a personal injury or wrong is one that is "calculated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property".
Mr Berryman instead sought to convince the Court that it should rely upon the decision in Moss v Eaglestone [2011] NSWCA 404 (Moss), in which the NSW Court of Appeal decided that a bankrupt's action against his former solicitor for damages for loss of a chance to prosecute a defamation action fell within the section 60(4) exception. The NSW Court of Appeal noted that sections 60(4) and 116(2)(g) reflected and incorporated the common law of bankruptcy, which includes the principle that the bankrupt's estate and the participating creditors "should not be swelled and advantaged by a wrong to the person or reputation of the bankrupt".
Mr Berryman also referred the Court to the decision of Sheehan v Brett-Young (No 2) [2016] VSC 39 (Sheehan), in which a bankrupt solicitor claimed against the Law Institute of Victoria for misfeasance in public office. The bankrupt claimed, among other things, damages for loss of earning capacity. The Supreme Court of Victoria decided that the bankrupt's cause of action remained with the bankrupt.
Mr Berryman argued that his TPD claim was analogous to the situations in Moss and Sheehan, in that the TPD claim was a vindication of his personal rights flowing from a personal injury and the common law of bankruptcy would not sanction his creditors being advantaged by receiving the TPD benefit.
Tottle J accepted that Mr Berryman was pursuing a breach of contract claim for liquidated damages. Nevertheless, the Court accepted Mr Berryman's submissions and held that the TPD claim fell within sections 60(4) and 116(2)(g) of the Bankruptcy Act.
Tottle J considered that, having regard to the common law of bankruptcy, the TPD claim should be characterised as a claim for compensation for a personal injury or wrong which was not part of the legitimate entitlement of creditors.
The Court also considered that a bankrupt's right to claim under a policy of disability insurance fell within the scope of section 116(2)(g) because the value of the right was entirely dependent on the insured suffering a personal injury of sufficient seriousness to meet the policy conditions. Tottle J preferred the position in Moss and Sheehan, where a bankrupt's right that is derived from a personal injury is protected from creditors, to the more restrictive test in Cox.
Finally, the Court noted that section 60(4) was expressed to apply "in respect of" claims for personal injury or wrong. His Honour decided there was a sufficient connection between the TPD claim and Mr Berryman's personal injury such that the TPD claim was "in respect of" a personal injury.
Accordingly, the Court refused Zurich's application for the proceedings to be dismissed. As a result, Mr Berryman can now continue with his claim.
No reliance on section 116(2)(d) of the Bankruptcy Act
Interestingly, Mr Berryman did not attempt to rely on section 116(2)(d) of the Bankruptcy Act which relevantly excludes from property divisible amongst a bankrupt's creditors "policies of life assurance" and the proceeds of such policies received on or after the date of the bankruptcy.
There is a line of authority, summarised in NM Superannuation Pty Ltd v Young (1993) 113 ALR 39, which says that section 116(2)(d) protects only the bankrupt's entitlement to the death benefit payable under a life insurance policy. Under that line of authority, policies that provide accident and illness cover (i.e. TPD and income protection benefits) are not "policies of life assurance". Where policies provide multiple forms of cover, as is now common, section 116(2)(d) prevents the death benefit from forming part of the bankrupt estate but will not necessarily ensure that other benefits under the policy are kept separate from the estate.
Implications
We expect bankrupt insureds will now rely on the Berryman decision to retain their right to personally proceed with actions against life insurers for payment of TPD and income protection benefits. Until this issue is conclusively decided at an appellate level, life insurers may be drawn into disputes between bankrupt insureds and the Official Trustee as to who has the right to pursue a claim and who is entitled to payment of any benefit.
The Berryman decision does not affect the rights of the Official Trustee in Bankruptcy to serve notices on life insurers under section 139ZL of the Bankruptcy Act requiring the insurer to make payments to the trustee instead of the insured. Those notices are served where the bankrupt has been assessed as liable to pay a contribution from their income toward the bankrupt estate.
What Happens When A TPD Claimant Is Declared Bankrupt In Australia?
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