Australia's corporate regulator is alleging MLC Life Insurance has financially harmed more than 260,000 customers — who did not receive benefits amounting to $17.5 million — by failing to deliver basic insurance services for more than 20 years.

The Australian Securities and Investments Commission (ASIC) has begun civil proceedings in the Federal Court, alleging MLC failed to implement appropriate systems and controls that led to unpaid insurance benefits, premiums being charged without notice, and underpaid refunds.

ASIC has alleged MLC Limited breached its obligations as a financial services provider and its duty to act with the utmost good faith when handling claims.

It is seeking declarations, pecuniary penalties and other relief from the Federal Court.

It alleges that, from 1999 to November 2020, MLC had failed to:

• Fully refund premiums to 260,888 customers who had cancelled their loan insurance policies or paid out their loans
• Notify 800 customers that their annual premiums had increased, their premiums were overdue, or that their insurance policies had been cancelled or lapsed
• Update its definition of "Severe Rheumatoid Arthritis" in a timely way, resulting in 12 customers suffering from the condition being denied insurance cover, and MLC having to update the definition in more than 190,000 insurance policies
• Pay a life insurance benefit, known as as "rehabilitation bonus benefit", to 297 eligible customers who were undergoing rehabilitation following an insured injury or disability.

"Customers should be able to trust insurers to pay their full benefit in times of need and keep them informed about significant changes to their policies," ASIC deputy chair Sarah Court said.

"This case alleges failures by MLC, over many years, to ensure a reliable delivery of basic and everyday insurance services."

Ms Court said insurers needed to have adequate systems and controls in place to manage risk and administer their insurance policies properly.

"Too often, we are seeing consumers harmed by implementation issues, legacy IT systems and failures resulting from poor governance and culture," she said.

MLC started self-reporting the problems to ASIC in 2016, and it has paid millions of dollars in remediation to affected customers.

However, ASIC is taking MLC to the Federal Court to seek pecuniary penalties.

A problem in the banking royal commission

These specific allegations against MLC were not part of the banking royal commission.

However, poor claims-handling and the failure of life insurers to update medical definitions in their insurance policies to accord with current medical practice were both issues considered by the commission.

The commission heard that eight out of the 10 life insurers in Australia accepted deficiencies in processes for reviewing and updating medical definitions in their policies.

In one example, the commission heard how CommInsure (then-owned by Commonwealth Bank) denied an insurance payout to a woman suffering breast cancer because it didn't think the surgery she endured was "radical" enough — because she didn't lose her entire breast.

The definition of "radical" was undefined in CommInsure's policy. CommInsure later admitted it was wrong to dispute the claim.

However, in MLC's case, ASIC alleges MLC failed to update its definition of "Severe Rheumatoid Arthritis" in a timely way, resulting in 12 customers suffering from the condition being denied insurance cover.

In its concise statement lodged with the Federal Court, ASIC claims MLC knew in 2014 that its definition of "Severe Rheumatoid Arthritis" relied on "indicia" (signs, indications, or distinguishing marks) that were inconsistent with medical practice.

It said the old indicia did not account for advances in the treatment of SRA and were, therefore, inappropriate for classifying a person as suffering SRA.

However, despite that knowledge, MLC did not update its old definitions for a number of years, leading to a dozen customers being denied insurance cover — in one case, it meant a customer did not receive $195,000 to which they should have been entitled.