HCF wrongly claimed on some of its life-insurance policies that it could deny coverage to customers with a pre-existing condition, even if they were not aware of the illness when signing up.
The health insurance giant could face major penalties over the claims, which the Federal Court ruled on Monday might have been misleading.
Several policies offered by the non-profit fund's life insurance arm, HCF Life, included a "pre-existing condition" term, purporting to allow it to deny coverage if a customer did not disclose a condition before entering the contract.
The term stated coverage could be denied if a doctor later formed the view that symptoms or signs of the condition existed before the customer signed the contract.
Justice Ian Jackman agreed with claims from the Australian Securities and Investments Commission that HCF was prevented from making such a term under the Insurance Contracts Act.
The act states coverage cannot be denied to someone with a pre-existing condition if an ordinary person could not be reasonably expected to recognise the symptoms.
"I accept that the meaning conveyed by the impugned conduct is misleading because it presents as an accurate, complete and unqualified statement of the circumstances in which benefits will not be payable to a consumer by reason of a pre-existing condition," Justice Jackman said in his ruling.
"Whereas in fact ... the (act) renders the pre-existing condition terms partially unenforceable."
ASIC said it would seek penalties for misleading conduct.
The watchdog alleged the pre-existing condition term was an unfair contract term under corporate regulations, but that element of the case was dismissed by the court.
ASIC deputy chair Sarah Court said consumers relied on accurate information to make insurance claims, often in trying personal circumstances.
"By including a term that was liable to mislead consumers and that purported to give HCF a broader right to deny coverage than was the case, HCF Life misled consumers about their rights," she said.
HCF has been contacted for comment.
