Hugh Catherwood, a life insured under an Asteron life insurance policy, sought payment of a death benefit on the grounds that he was terminally ill with a life expectancy of less than 12 months.

Asteron declined cover because the insured was being treated and therefore expected to live longer. Catherwood sued, arguing that the treatment should not be taken into account (Catherwood v Asteron Life Limited [2021] NZHC 2612 and  Catherwood v Asteron Life Limited [2023] NZCA 357).

Unsurprisingly, both the High Court and the Court of Appeal agreed with the insurer, concluding that it was right to take the treatment into account and therefore to decline cover. In reaching its decision, the Court of Appeal made a number of broader observations about the interpretation of insurance policies more generally.

Background

Catherwood’s policy with Asteron provided for both trauma and life cover. Under the trauma cover, an insured is entitled to payment of a trauma benefit if he or she undergoes major surgery and survives for at least two weeks. Catherwood had approximately $565,000 of trauma cover.

Under the life cover, an insured is entitled to payment of a death benefit it he or she becomes “terminally ill”. This occurs if the insured’s “life expectancy is, due to sickness and regardless of any available treatment, not greater than 12 months”. Catherwood’s death benefit was approximately $1.2 million.

Catherwood was diagnosed with a tumour at the top of his stomach in January 2019. He was treated with eight weeks of chemotherapy, surgery to remove part of his stomach and oesophagus and a further eight weeks of chemotherapy. Catherwood claimed under his trauma cover. Asteron accepted that claim, and paid him $565,000.

Once he had received his trauma payment, Catherwood then claimed under his life cover, arguing that the assessment of his life expectancy should be undertaken “regardless of any available treatment”. He said this meant the effect of any available treatment should be ignored and the evidence was that, in the absence of any treatment, he would have likely died in the 12 months following diagnosis.

Asteron declined the claim, saying that Catherwood needed to have a life expectancy of less than 12 months even after any available treatment. It said “regardless of any available treatment” means “despite any available treatment”. The evidence was that, taking into account the treatment, Catherwood’s chance of dying in the 12 months following diagnosis was less than 10%.

Court of Appeal

The Court of Appeal rejected Catherwood’s interpretation of the policy. It accepted that the policy was “not well worded” and that the words “regardless of” could mean either “ignoring the effect of” (as contended by Catherwood) or “despite the effect of” (as contended by Asteron).

This then raised an important question: how does the court interpret words in an insurance policy where those words are capable of bearing two different meanings? In this case, the court considered three different approaches:

• looking at the broader context in which the words are used in the policy;
• applying the contra proferentem rule; and
• considering the approach used in other policies in the market.

Other options

The Court of Appeal ruled that, under the modern approach to contract interpretation, it was appropriate to consider the context in which the words were used. It said this context supported Asteron’s interpretation. The argument that an insured can claim a death benefit for a terminal illness in circumstances where there is an available cure and the insured is likely to survive is contradictory. It gives no meaning to the “terminal” in “terminal illness”, the court said.

And there were other options under the policy (such as the trauma cover) for conditions falling short of death. In our view, this is clearly correct. No reasonable person would understand the terminal illness cover to apply in circumstances where the insured is in fact likely to survive for more than 12 months.

Contra proferentem

The Court of Appeal accepted that the definition of terminal illness was “ambiguous” because the words “regardless of” can bear two different meanings.

However, the court rejected Catherwood’s argument that this invoked the contra proferentem rule, namely that where a policy is ambiguous, it must be construed against the party who drafted it. While the court accepted that the rule can be of use in interpreting insurance policies, it concluded the rule did not apply here because the court considered there was “no ambiguity as to the proper interpretation of the definition”.

In our view, this is a helpful explanation of the way the contra proferentem rule applies. It is not enough that the words themselves are ambiguous. It must be the case that, even after considering the broader context, there is still an ambiguity about the proper interpretation of the policy.

Industry practice

The High Court admitted evidence that other insurance policies in the market had terminal illness benefits that apply after taking into account available medical treatment, although the court did not rely on that market evidence in interpreting the policy. Catherwood challenged the admissibility of that evidence.

The Court of Appeal commented briefly on the admissibility issue, saying evidence of industry practice “speaks to the general context within which Mr Catherwood’s contract was entered into”, and that the evidence was therefore properly admissible in this case. ■

David Friar is a partner and Liam McNeely is a senior associate at Bell Gully ■