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Insurer’s reduction of income protection benefits not a capital idea

27 November 2018 | Insurance Issues

The plaintiff held an income protection policy with the defendant. In September 2014, the defendant accepted the plaintiff’s claim for Total Disability Benefits. In January 2017, the plaintiff received an award of damages for personal injuries. The defendant subsequently reduced the amount of the plaintiff’s benefits on the basis that the damages constituted ‘Other Disability Income’ as that term was defined under the Policy. The plaintiff filed proceedings seeking a declaration that the settlement sum did not constitute ‘Other Disability Income’.

In Issue

Whether an award of damages for personal injuries is capital or income.

The Background

In August 2014, the plaintiff was medically discharged from the New South Wales Police Force and the defendant subsequently accepted her claim for Total Disability Benefits. The amount of the benefits payable was 75% of the plaintiff’s monthly salary (as at the date of Total Disability).

The Policy stated that the amount of any benefit payable was to be reduced by any “Other Disability Income” accrued during the month. The term ‘Other Disability Income’ included any benefit under any workers’ compensation legalisation.

The plaintiff made a claim against her former employer for damages for psychological injury. That claim was settled in January 2017 and the plaintiff received an award of damages (the settlement sum). The defendant opined that settlement sum constituted ‘Other Disability Income’ as defined by the Policy and from July 2017, the defendant reduced the amount of the plaintiff’s income protection benefits.

The Decision at Trial

The plaintiff argued that an award of damages for personal injury is capital, not income, and therefore does not fall within the definition of ‘Other Disability Income’. Further, damages are not awarded for the loss of income but rather, for the loss of earning capacity in so far as that produces a financial loss. Finally, the plaintiff argued that an award of damages is not taxable because it does not fall within the ordinary concept of income.

The court noted that the defendant’s response was “largely one of confession and avoidance”. It did not dispute that for the purpose of taxation, a settlement sum would be treated as capital, not income. However, the defendant argued that the term “income” in the phrase ‘Other Disability Income’ meant any income, it did not have to be ‘earned’ (ie it was sufficient it if was ‘derived’ by the insured person). The defendant further argued that the settlement sum was income derived as a result of a benefit under the workers’ compensation scheme and therefore, was ‘Other Disability Income’.  

The court rejected the defendant’s submissions. It held the settlement sum was not income and was not a benefit under the workers’ compensation legislation and therefore, did not fall within the definition of ‘Other Disability Income’.

Implications for you

This case reinforces the principle that an award of damages for personal injuries is not ‘income’ and cannot be taken into account when assessing a person’s entitlement to benefits under an income protection policy.

Susan Buswell v TAL Life Limited [2018] NSWSC 1507

Ngaire Wegner

Ngaire Wegner

Senior Associate