Some funds provide insured benefits to members. Whether a member is entitled to the insured benefit depends both on the terms of the trust deed and on the terms of the insurance policy. The definition of ‘total and permanent disablement benefit’ or ‘total disablement’ (for income protection or salary continuance benefits) differs from fund to fund and policy to policy. It is vital to look at the definition in question, as noted above. Often, a total disablement benefit is payable if a member is unable to do the member’s own job from month to month, but a total and permanent disablement benefit is payable only if the insurer determines that the member is unlikely to return to employment. In these cases, the trustee has no power to determine whether a member is entitled to the insured total and permanent disability benefit.
If the insurer’s decision is challenged in court, the court must decide whether the insurer, in deciding whether a member is entitled to a total and permanent disability benefit, has acted reasonably, in good faith, and with due regard for the interests of the member. If the insurer has so acted, the court cannot set aside the decision of the insurer even if it considers that, if the court were to make the decision, it would have found that the member was entitled to disability benefits.
On the other hand, if the insurance contract provides for benefits to be paid if the member is unlikely to return to employment (and not only if the insurer ‘considers’ or ‘is satisfied’ that the member is unlikely to return to employment) then the court can set aside the decision of the insurer if it considers that the member was entitled to disability benefits.
The trustee is under an obligation to consider whether an insurer that has rejected a claim has acted properly and, if it has not, to take action, including suing the insurer, if necessary, in order to protect the rights of the member. In practice, trustees rarely, if ever, sue insurers.
The member may sue the insurer on the ground that it has failed to act in good faith, reasonably and with due regard to the interests of the member or, if the insurance contract does not require the payment of benefits only if the insurer ‘considers’ or ‘is satisfied’ that benefits ought to be paid, on the simple ground that the member is disabled as defined in the insurance contract. The member can do this, even though not a party to the contract of insurance, because the trustee (which is a party) holds its rights under the contract on trust for the members. It is also necessary for the trustee to be party to the legal action. The trustee may agree to join the member in suing the insurer or, more usually, may be sued by the member for failing to act against the insurer to protect the member’s rights.
Trustees and insurers ought to provide a claimant with information about material adverse to the claim and with an opportunity of addressing those matters before dismissing a claim. If this is not done, a court may set aside the decision. (See Re Hannover Life of Australasia Ltd v Sayseng  NSWCA 214 and Sandstrom v FSS Trustee Corporation  NSWSC 200 at [28–48] for statements of the relevant principles.)
If the court decides the insurer breached its duty to act honestly and reasonably, it will usually not allow the insurer to make the decision again but will substitute the court’s decision.
Alternatively, a complaint can be made to AFCA about the insurer’s decision. AFCA has the same powers to review the decisions of insurers concerning payment of disability benefits under superannuation trusts as it has to review the decisions of trustees. In particular, AFCA is not limited to looking at the process whereby the insurer made its decision and can look at whether the decision was fair.