An insurer owned by Zurich is accused of simply rejecting a claim as "fraudulent" without properly investigating the customer or informing her about her right to appeal.
The Federal Court lawsuit against OnePath, filed by the Australian Securities and Investments Commission on Wednesday, is the first to seek financial penalties over a firm's alleged failure to act with "utmost good faith" when handling a claim.
"This proceeding raises important issues about what an insurer's duty of utmost good faith requires of that insurer prior to taking the significant step of determining to avoid an insurance policy on the grounds of fraudulent non-disclosure," ASIC wrote in documents filed with the court.
In 2016, a OnePath customer took out an income protection policy through an ANZ financial advisor. At the time, she disclosed prior mental health conditions to the then ANZ-owned subsidiary.
Two years later, she made a claim following a shoulder injury which was accepted by ANZ in November 2018.
The firm was then sold to Zurich in May 2019.
During an investigation in 2020, OnePath uncovered further information about hospitalisation regarding the mental condition between 2001 and 2005.
In June that year, the firm decided not to pay out, claiming the customer had acted fraudulently by failing to disclose this information.
The woman later disputed this allegation of fraud, saying that the ANZ advisor she spoke to said she had not needed to inform OnePath of hospitalisations over five years before she took out the policy.
ASIC claimed OnePath failed to clarify that the customer's conduct was thought to be fraudulent, failed to fully investigate her explanation for the non-disclosure, and did not inform her about her right to appeal via OnePath's internal resolutions process or the Australian Financial Complaints Authority.
"If an insurer is concerned a customer has engaged in fraudulent non-disclosure, they must make their concerns explicit, give the customer the opportunity to respond and make proper inquiries into any explanation given by the customer before concluding that fraud has occurred," ASIC deputy chair Sarah Court said.
"Insurers deal with their consumers at their most vulnerable. This makes it crucially important that they ensure their customers understand their rights, including their rights of appeal if an insurance claim is declined."
Before the legislative change in 2019, civil penalties could not be imposed for breaches of the type alleged against OnePath, Ms Court told AAP.
While unaware of others who had made similar complaints, the deputy chair said a large number of claims had been processed by AFCA relating to insurance.
"Those numbers of complaints are growing and that's gone across the board," she said.
"Insurance I think is a critical and growing area concern for consumers, particularly in light of natural disasters and all those things that we know mean consumers are having to rely on their insurance policies."
Zurich Financial Services Australia acknowledged the lawsuit in a statement.
"Zurich is considering the matters raised by ASIC in its concise statement and is committed to working constructively through the court process," a spokesperson said.
"Zurich will not be providing further comment given the matter is now before the court."
In July 2021, OnePath was hit with a $35 million remediation order after its poor phone sales practices caused extensive customer harm.
ASIC has also launched civil penalty proceedings against superannuation trustee OnePath Custodians for allegedly charging customers fees without providing any service.
