People generally agree that you should not receive financial advantage, or even compensation, from a loss suffered as a result of committing a criminal activity.
As a result, the inclusion of a Criminal Activity Exclusion clause within an income protection insurance policy does not necessarily concern advisers.
However, like most things to do with financial services, nothing is ever quite that simple.
Criminal activity
At common law, for an offence to be deemed ‘criminal activity’ two things are needed.
First, a ‘physical act’ that gives rise to the offence.
For example, striking a blow causing serious injury could lead to a charge of ‘intentionally causing serious injury’; or the driving of a vehicle subsequent to the consumption of alcohol could lead to a charge of ‘exceeding the prescribed concentration of alcohol while driving a motor vehicle’.
Second, there must be ‘intent’. For instance, in a charge of ‘intentionally causing serious injury’, the accused must have intended to cause serious injury.
Therefore, to be convicted at common law, the court would need to be satisfied that the accused voluntarily and intentionally committed the physical act.
In contrast, a statute offence does not necessarily require ‘intent’.
Broadly speaking, there are three types of statute offences.
In the first type, ‘intent’ must have existed at the time of committing the offence.
This may be actual intent, for instance where the accused intended to commit murder; reckless intent, where the accused was aware of the probable consequences of an action and proceeded anyway, or in rare cases, negligent intent, such as manslaughter by criminal negligence.
Next are strict liability offences, such as the selling of liquor by a licensee to a person under the age of 18. In these situations, the defence of the honest and reasonable mistake is open to the accused.
For example, a licensee may satisfy the court that, on reasonable enquiry, the licensee believed the customer to be aged 18 or over.
Finally, there are absolute liability offences in which the prosecution does not have to prove ‘intent’ — for example, exceeding the prescribed concentration of alcohol in the blood while driving a motor vehicle.
In these situations, the defence of the honest and reasonable mistake is not available — it does not matter that the accused believed, even on reasonable grounds, that they were below the prescribed concentration.
Conviction and sentencing
Subsequent to being charged with a criminal offence, there are generally three possible outcomes:
~ the accused pleads guilty;
~ the accused goes to trial and is found guilty; or
~ the accused goes to trial and is found not guilty.
Either of the first two will generally constitute a conviction following which a sentence will be imposed.
Whether or not an offence can result in a term of imprisonment will depend on legislation applicable in the state or territory in which the offence occurred.
A sentence of imprisonment is the last resort on the punishment hierarchy and, for example, in Victoria it must not be imposed unless the court considers that the purpose for which the sentence is to be imposed cannot be achieved by another means, such as fines, community-based service or suspended sentences.
Company 1
Within the income protection insurance market, the contracts of three companies contain an exclusion for criminal activity.
At Company 1, a benefit will not be paid if the event giving rise to the claim is caused directly or indirectly by your voluntary participation in any criminal activity.
‘Criminal activity’ means any crime for which you are convicted and could receive a jail sentence, whether or not you do in fact receive a jail sentence for that crime.
This exclusion requires that participation in the criminal act be voluntary, therefore, this would have to be proven in respect of any statute offences.
On the other hand, the insured does not necessarily need to be incarcerated. If the crime carries with it the potential for a jail term, the exclusion would apply.
This could cause uncertainty for crimes where the punishment ranges from a fine for a minor incident through to jail for a severe incident of the same crime — such as corporate crimes, exceeding the prescribed concentration of alcohol in the blood while driving a motor vehicle, and so on.
It is also unclear if a first offender of an offence, who might normally be punished with a fine, would be caught up in an exclusion situation because a multiple offender may be liable for imprisonment.
The impact of this particular wording also appears quite extensive in that it captures any disability arising ‘directly or indirectly’ as a result of voluntary participation in a criminal activity.
Thus, it is worth questioning whether the exclusion would apply if disability arose:
~ during the committing of the actual crime;
~ during imprisonment; or
~ while travelling to and from and during any period of periodic detention — if, in fact, periodic detention is considered ‘imprisonment’.
Also, could the exclusion apply if a disability arose during the periods described above and it continued subsequent to the periods described above?
Company 1 responded by saying: “The reference to whether the insured could have received a sentence as a result of a crime is primarily there to ensure the exclusion only operates in regards to the more severe criminal acts.
“Also, the application of the exclusion does not apply until the courts have made their ruling.
“The exclusion would apply if disability arose during the committing of the crime.
“Whether the exclusion applied during imprisonment or whilst travelling to and from any period of periodic detention would depend on the nature of the activity that caused the disability.”
Company 2
The policy owner will not receive any benefits from the policy if disability arises out of, or in connection with, the individual’s participation in a criminal activity or incarceration.
‘Criminal activity’ means any activity giving rise to conviction and incarceration. ‘Incarceration’ means confinement in a jail of any description (including a prison farm or a remand centre).
This clause is wider reaching in that ‘all’ criminal activity, voluntary or otherwise, is included under the exclusion, but the criminal activity must lead to incarceration for the exclusion to apply.
It is not clear; however,
~ whether the exclusion would continue to apply if disability arose during the committing of the crime or during incarceration and it continued subsequent to the period of incarceration;
~ how the exclusion would operate in regards to periodic detention; and
~ the client’s position in regards to repaying benefits if a claim was made, and paid, while awaiting trial, which subsequently led to conviction and incarceration.
Company 2 stated that: “The exclusion clause would continue beyond the period of incarceration where the disability was caused by the insured’s participation in a criminal activity or incarceration. We believe this is clear on a full reading of our wording because the exclusion applies to ‘…any disability caused by…’.
“Periodic detention is incarceration. Therefore, the exclusion would also apply. In relation to straight incarceration exclusions, we say we will not pay benefits in relation to any period during which the insured is incarcerated. We believe that the likely interpretation by the courts is that we are not required to pay for the days when the insured is incarcerated, but we would have to pay for the other days when the insured is not.
“If we paid benefits, but subsequently we discovered there was a criminal conviction and incarceration, then there would be an obligation to repay. Commercial reality may make it difficult for us to recover. We would likely only commence on a provisional payment agreement that would cover this eventuality. If there was a real risk of jail time and the disability arose during the activity, then we would delay pending the outcome, if possible. If the incarceration is unrelated to criminal activity, then we would not be entitled to recover.”
Company 3
No benefit shall be payable if a claim results from being a voluntary participant in a criminal activity and during any period where the insured person is incarcerated.
Once again, in regards to statute offences, it would need to be shown that the crime was ‘voluntarily’ committed. It is also clear that the criminal activity must lead to incarceration and that the exclusion only operates during the period the insured is incarcerated — for instance, any disability extending beyond the period of incarceration would not be excluded.
The problem of being paid, and then potentially having to repay, benefits while awaiting trial also does not arise.
The issue, however, concerning periodic detention appears to be unclear.
Company 3 says: “Our determination on incarceration is when an individual is under the control of the law or justice authority regardless of the method or period of detention.
“In the case of periodic detention, we would not accept a claim if it occurred during the period they were under the control of the authorities — for instance, the time logged in through to the time logged out.
“We would also consider the process of incarceration to include the imprisoning by authorities leading up to the trial or the laying of charges.”
Muddy waters
As indicated, most people are philosophically in agreement that someone should not profit from, nor should they even obtain compensation for, a loss suffered as a result of participating in a criminal activity.
At the same time, most people are also philosophically in agreement that an insurance contract should clearly and comprehensively set out the position for all parties in regards to cover under the policy.
Having said that, those companies that have openly attempted to address the issues associated with claims related to criminal activities should be commended.
Another point is that silence is not always golden. Even though some contracts do not contain an actual exclusion for criminal activities, there may be occasions where the insurer would look to avoid making a claim payment if it arose from participation in a criminal activity.
As a result of this analysis, it would seem that there is still a way to go before total clarity is achieved in regards to the workings of the criminal activity exclusion clause.
Col Fullagar is risk manager at Genesys Wealth Advisers . He wishes to acknowledge the assistance provided by Aviva and Asteron in writing this article.
