Need to know
- Some total and permanent disability cover offered through superannuation requires claimants to show they can't perform 'activities of daily living' (ADL)
- The test often applies to casual workers, people not currently working and people in 'hazardous' occupations
- Experts say it's extremely difficult to pass an ADL test
Some insurance policies that people have through their superannuation are being denied at exceptionally high rates, according to the regulator.
A recent report from the Australian Securities and Investments Commission (ASIC) identified that fine-print terms known as 'activities of daily living' (ADL) tests are to blame.
What is the 'activities of daily living' (ADL) test?
An ADL assessment is part of the total permanent disability (TPD) insurance that Australians get through their super.
In most of these insurance policies, there are two different tests you could face if you make a claim.
There's a standard test, and then there's the tougher ADL test, which requires claimants to show that they can't perform two or more of the 'activities of daily living' to have their claim paid out. These activities generally include:
- feeding yourself
- getting out of bed
- bathing and using the bathroom.
Very few people are injured or disabled to the point that they'd pass this test.
Who does the ADL test apply to?
Generally, it applies to people in part-time or intermittent work. People who work in "high risk" or "hazardous" occupations may also have to pass an ADL test to make a claim.
The insurance lobby argues that few people are affected by ADL tests. But ASIC found there are about half a million Australians who would be assessed under this test if they did have to make a claim.
Analysis by Super Consumers Australia found the prevalence of ADLs in default insurance policies through super means almost 4.6 million Australians could be subject to an ADL test – for example, if they moved into casual or seasonal work.
ASIC commissioner Sean Hughes says three people a day in Australia are having their claims assessed under the ADL test, "which has a concerningly high decline rate".
More people likely to be missing out than it appears
According to ASIC's report, three in five people (60%) who had to satisfy the ADL test had their claims rejected. This rate is five times higher than the 12% who failed to satisfy the easier standard test.
Insurance lawyer John Berrill says it's "extraordinarily difficult" to succeed in a claim with the ADL test.
Further, he believes that ASIC's figure of two in five (40%) people who can successfully claim on the ADL test "is only half the story".
In his view, the true number of successful claimants may be more like just one in ten (10%) of people who could potentially make a claim. A large number withdraw their claim or never claim in the first place because the burden of proof is set so high.
Carl Mickels, senior solicitor at law firm Firths, also believes that the ASIC number doesn't fully reflect the difficulty in making these kinds of claim.
Of the thousands of clients he has seen who have to pass an ADL test, Mickels can only recall a couple who have been successful
"There's no way to take into account how many ADL claims are withdrawn (and hence not declined, thereby not showing up as a statistic) by solicitors or members themselves when they learn how onerous the policy wording is," he says.
"I believe that the 60% decline stated by ASIC are only the people who genuinely believed they satisfied the ADL [test] and they were declined."
Of the thousands of clients he has seen who have to pass an ADL test, Mickels can only recall a couple who have been successful.
"I suspect that a lot of people would be turned off," Berrill says. "They'd contact the insurer and be told: 'Well, you're in fact covered under an ADL definition. You can make a claim but it's unlikely that you'll win'."
ASIC itself recognises that insurers have very little understanding of why people drop out of making a claim. This makes it impossible to know the true number of people who don't get their insurance payout because of ADL tests.
Man working on power lines. People working in 'hazardous occupations' often face the ADL test if they claim on the total and permanent disability insurance in their super.
This junk insurance costs as much as useful insurance
Another issue identified in the ASIC report is the lack of value. For people working casually or in a "high risk" or "hazardous" occupation, the extreme difficulty in ever making a successful claim means the insurance offers little value. In other words, it's junk.
"People that hold this type of automatic cover through superannuation are typically paying the same premium – for what is essentially junk insurance – as people who can access less restrictive definitions under general TPD cover," says ASIC commissioner Sean Hughes.
The Australian Lawyers' Alliance has also highlighted this issue: "A member does not usually find out about the application of the inferior coverage until their claim is declined, despite paying the same premium as optimally insured members," it writes.
Should ADL tests be outlawed?
The only hint of good news is that lawyers working in the field believe ADL tests are less common than they were a couple of years ago and some insurers have voluntarily removed it from their policies. The bad news is that they're still lurking in many policies that people have through their superannuation.
Analysis by Super Consumers Australia found that in 2019, of 62 products in large funds, 43 (69%) used the ADL test. Some of the 19 remaining funds had replaced it with similar, extremely difficult tests.
There would be people who have no realistic prospects of finding work in a job they're qualified for due to their disability, but an ADL test would stop them from claimingXavier O'Halloran, director of Super Consumers Australia
Some experts say ADL tests in total and permanent disability (TPD) insurance should be outlawed because they aren't compatible with the aims of this type of cover. After all, the whole point of TPD insurance is to provide financial support to people who experience an illness or injury that prevents them from working again.
"Worryingly, an ADL test has nothing to do with a member's ability to work," says Xavier O'Halloran, director of Super Consumers Australia.
"There would be people who have no realistic prospects of finding work in a job they're qualified for due to their disability, but an ADL test would stop them from claiming."
Ending the junk insurance created by ADL tests
In its report, ASIC urges super funds to act on its findings. It instructs funds to ensure the TPD definition in the insurance they provide is in line with their legal obligation to act in the best interests of the fund members.
It gave funds a deadline of 31 March 2020 to get their house in order and report back on what changes they've made to their insurance.
The ASIC report wasn't the first to identify that the ADL test was bad value and unfair on those relying on this insurance.
The Hayne royal commission heard shocking stories about people having their insurance claims rejected because of loopholes and fine-print exclusions
The Productivity Commission had already highlighted the problem of junk insurance. More specifically, it noted that people were paying the same premiums for insurance cover that was much more restrictive, and thus worth less.
The Hayne royal commission also touched on this issue. After hearing shocking stories about people having their insurance claims rejected because of loopholes and fine-print exclusions, the commissioner recommended a further review into whether there should be universal key definitions and terms for group life insurance in super.
Treasury completed its consultation in April 2019, but the federal government still hasn't responded.
Financial Rights Legal Centre and Super Consumers Australia (then known as Superannuation Consumers' Centre) made a submission recommending:
- standardising the definition of TPD
- banning insurers from including different and tougher definitions (such as ADLs) in the TPD insurance they offer through super.
The regulations define permanent incapacity as when a person's ill health (whether physical or mental) makes it unlikely that they will engage in paid work for which they are reasonably qualified given the experience and training they have.
Government needs to urgently amend the law so that insurance policies cannot use stricter tests like the ADL, which are producing terrible outcomes for consumersXavier O'Halloran, Super Consumers Australia
"What it boils down to is making sure people have insurance if they can never work in a job they're qualified for," says O'Halloran. "Anything else will see people left without protection when they need it most."
"The royal commission hit on the solution to this problem. Government needs to urgently amend the law so that insurance policies cannot use stricter tests like the ADL, which are producing terrible outcomes for consumers."
"They need to go," Berrill says of ADL tests. "We need to get rid of them".
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.