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Insurance in super ill-suited for mental health conditions

ASIC found that ADL tests aren't delivering for mental health claimants

woman_worried_about_TDP_insurance_disability
Last updated: 03 August 2020

Need to know

  • A recent ASIC report has found people claiming total and permanent disability (TPD) insurance for mental health conditions through their superannuation faced poor outcomes
  • Those working in the field say it's extremely difficult for a mental health claimant to succeed where an 'activities of daily living' (ADL) test applies
  • ASIC reports that some people may withdraw their claims because of a re-emergence of a mental health condition

Mental health conditions are hardly a rarity. One in five Australians aged 18–65 years will experience a condition, such as anxiety, depression or post-traumatic stress disorder (PTSD), in any given year.

This means it's vital that people who make mental health claims through the total and permanent disability (TPD) insurance they have through their superannuation are dealt with fairly. 

Last year, the regulator, the Australian Securities and Investments Commission (ASIC), undertook an extensive review of TPD insurance in super and found it wanting in a number of areas, such as the high rate of declined claims for people with mental health conditions.

One in five Australians aged 18–65 years will experience a mental health condition in any given year

ASIC instructed certain insurers to review their practices on this insurance, and report back by the end of March 2020.

The system of offering inbuilt TPD insurance through your superannuation provides disability insurance for millions of Australians, but the process of making a claim can be extremely trying and may cause or re-aggravate mental health issues in itself.

"For many, TPD offers their only avenue of possible compensation," explains Scott Dougall, a partner at law firm Carroll and O'Dea. "Our experience on behalf of our clients is that the process can really test the mental health and well-being of claimants."

Mental health claimants facing the ADL are 'doomed to failure'

A major obstacle for a mental health claimant is the activities of daily living (ADL) test. Variations of this test, such as the activities of daily working (ADW) test, are similarly restrictive. 

As CHOICE covered previously, people facing this test (often in casual or part-time employment, or 'hazardous' occupations) have a much lower chance of making a successful claim.

This problem was highlighted by ASIC in its recent report, Holes in the Safety Net. It found that mental health claims were far more likely to be denied where an ADL test applied: 77% of these claims were rejected, compared with 15% for the standard test. 

The regulator concluded that policies requiring the ADL test were "unsuitable for many consumers to whom it is being provided or sold".

The focus on physical capacity

One reason for this is how the ADL test is framed. To succeed, a claimant needs to show they can't do two basic physical activities, from a list that includes speaking, walking, eating, dressing and using the bathroom. 

A person with a severe mental health condition may not be able to work, but would have little hope of succeeding in a TPD claim because of the way the test focuses purely on physical capacity.

ASIC found that mental health claims were far more likely to be denied where an ADL test applied

"With mental health, you're not usually that immobile," explains John Berrill, director of Berrill and Watson. "A lot of [the ADL test] is about mobility, so mental health claims would be extremely difficult."

The relevant regulations define permanent incapacity in terms of ill health "whether physical or mental" that makes it unlikely that a person will again be employed in the field they're reasonably qualified to work in. The ADL test departs from this definition by exclusively focusing on physical capabilities.

"Anyone with a mental health condition would [find it] futile to press ahead with an ADL claim since they would be doomed to failure," says Carl Mickels, senior solicitor at Firths.

Catch 22 for casual workers

Casual workers are often caught by the ADL test, which may apply when someone works less than a certain number of hours. 

This can create a catch-22 situation for people with mental health conditions. A person may have been out of employment or working shorter hours precisely because of their mental health condition, triggering the much tougher ADL definition which is ill-suited for mental health claims.

Recently, the Financial Rights Legal Centre (FRLC) saw a client who faced a battle to make a claim because their insurance policy applied the ADL test to anyone who worked fewer than 15 hours a week in the three months before making the claim.

"It (was) very distressing to that person to have such an onerous definition apply," says FRLC director of casework Alexandra Kelly.

Do people withdraw their claim to protect their mental health?

ASIC's report found insurers often didn't have insight into why people withdrew their claims. One possible reason ASIC pointed to is that people may experience a re-emergence of a mental health condition which contributes to them withdrawing from the process altogether.

Kelly says the FRLC has seen clients who've been advised not to proceed with a claim. "They've got advice from their doctor or mental health practitioner who says, 'We don't think (making a claim) is a good idea for you, because the process itself might have a negative impact on you'.

The notion that the claims process itself can worsen a person's mental health is supported by research done by mental health organisation Beyond Blue.

Vulnerable clients more likely to 'throw in the towel'

Josh Mennen, principal lawyer in superannuation and insurance at Maurice Blackburn, also believes the nature of these conditions means it is more likely a mental health claimant will exit the process early. 

"Claimants that suffer from a psychological condition are more vulnerable and more likely to 'throw in the towel' through the claims process," he says.

"They're more susceptible to any inappropriate conduct (from funds or insurers) that discourages them from bringing their claim."

Can the claims process worsen a person's mental health?

A report from mental health organisation Beyond Blue found that lengthy delays are "extremely stressful" and can see a person's mental health deteriorate.

The Life Insurance Council Code Committee recently found that insurers had breached their own code hundreds of times by unreasonably delaying claims.

Kelly says that she has seen clients suffer secondary harm from the process of making a claim. "A lot of people find the whole experience re-traumatising," she explains.

"They might initially present with a physical injury and it's led to a mental health issue and the claims process can exacerbate that."

ASIC has identified that insurers' surveillance of clients can trigger a mental illness

Another aspect of the process that can impact a person's mental health is insurers carrying out surveillance on clients. This can include monitoring a person's activity on social media.

ASIC has identified that such surveillance "can trigger a mental illness".

Lawyers working in the field have also noted that surveillance can be harmful for a claimant's mental health. 

"It's inappropriate for surveillance to be deployed (in mental health claims)," says Mennen. "It can actually have an exacerbating effect, particularly if they're experiencing paranoia or delusions of any sort."

ASIC also made the point that insurers can't gain an accurate picture of someone's mental health through surveillance.

"Physical surveillance would rarely, if ever, provide evidence of the consumer's mental health status," the regulator concludes.

Do insurers discriminate against mental health claimants?

Generally, people have some TPD cover through their super fund. This is provided automatically as 'default' insurance.

People can also take out additional cover. This is underwritten by the insurer, who will ask questions about a person's health and history before deciding what cover to offer and how much it will cost.

Public Interest Advocacy Centre (PIAC) has concerns that insurers may unfairly deny or limit this additional cover to those who have experienced mental health conditions or even just episodes of stress.

We think that those really broad exclusions are unfair and amount to unlawful disability discrimination

Ellen Tilbury, senior solicitor at Public Interest Advocacy Centre (PIAC)

"Once you've made a disclosure that you've received some mental health help or had a mental health condition, generally the practice seems to be that you get a full mental health exclusion on your policy," says Ellen Tilbury, senior solicitor at PIAC.

"We think that those really broad exclusions are unfair and amount to unlawful disability discrimination."

PIAC's experience in this field suggests that insurers may view a person seeking help for a stressful life event, such as a job loss or relationship breakdown, as evidence of a mental health condition and deny or limit cover on this basis. 

Tilbury says the industry has not demonstrated that broad mental health exclusions for underwritten TPD cover are necessary to keep insurance affordable. 

"Insurers are generally reluctant to provide the actuarial and statistical data that they say supports those exclusions," she says.

Making insurance in super work for those with mental health conditions

Super Consumers Australia has previously advocated for universal terms for insurance within MySuper. This would include prohibiting insurers including harsh clauses such as the ADL and similar fine-print exclusions based on the insured person's employment status.

"Ruling out ADLs would mean an end to the purely physical test, which is completely ill-suited to those who cannot work because of their mental health condition," says Super Consumers Australia senior policy adviser, Rebecca Curran.

Towards a standard definition of TPD

Super Consumers Australia also recommended standardising the definition of TPD so that it reflects the definition of 'permanent incapacity' in the regulations. This would align TPD with the purpose of this insurance – to provide financial security in retirement for people forced out of work early because of illness or injury.

The Australian Financial Complaints Authority (AFCA), which handles complaints about superannuation, has also recommended this change to ensure consumers get fair outcomes from the insurance in their super.

Following a recommendation from the Banking Royal Commission, Treasury ran a consultation on the feasibility of introducing universal terms into insurance within super in April last year. The Treasury has yet to release the findings of the review.

We care about accuracy. See something that's not quite right in this article? Let us know or read more about fact checking at CHOICE.

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.