19 December 2014

Case Notes - Australia (December 2014)

Buckee v Commonwealth of Australia [2014] FCA 242

The applicants instituted a class action in the Federal Court against two insurers (the Commonwealth and QBE Insurance (Australia) Limited) in respect of property damage caused by a bushfire in Western Australia. Other proceedings relating to the bushfire had been brought in the Supreme Court of Western Australia, but it is not possible to bring a class action in that court. The Commonwealth and QBE asserted that the Federal Court did not have jurisdiction to hear and determine the matter and that the class action should be dismissed.

The court agreed. The fact that the case involved insurance policies and Commonwealth legislation – the Insurance Contracts Act 1984 (Cth) – did not mean that each and every issue in relation to the policies was necessarily a matter arising under federal law. The controversy between the parties did not involve any immediate right, duty or liability that depended for its existence on the Act and attracted the federal jurisdiction of the Court. Nor was the fact that the Commonwealth was a party to the proceedings a factor that gave the court jurisdiction over the proceedings.

You can access the reasons for judgment here.

Derek Wong, Solicitor

Sydney Water Corporation v McGrath [2014] NSWCA 197

HIH’s liquidators held moneys received from reinsurers under contracts for reinsurance made by HIH. Sydney Water Corporation (SWC) held insurance policies with HIH. Before the group’s liquidation, HIH accepted a claim from SWC, made a claim under its reinsurance contracts and paid SWC approximately $2.5 million. SWC’s subsequent unpaid claims amounted to more than $7.5 million, and it applied under Corporations Act 2001 (Cth) s 562A(4) for an order that the reinsurance proceeds held by the liquidators be paid to it, rather than distributed among all insurance creditors. SWC argued that this would be ‘just and equitable’ in the circumstances, particularly because of the close business relationship it had fostered with HIH’s reinsurers and the role they had played in helping to secure HIH’s reinsurance contracts. The primary judge dismissed this application, concluding that there was no ‘extraordinary or unusual’ relationship between SWC and HIH’s reinsurers that would justify the order.

The Court of Appeal upheld the primary judge’s decision that it was not ‘just and equitable’ to give SWC priority over other insurance creditors. The decision confirms that the bar for an ‘extraordinary or unusual relationship’ that would result in a successful priority application under s 562A(4) is quite high – the mere development of a close business relationship will not be unusual enough to obtain any advantage in respect of reinsurance proceeds in the event of insolvency.

You can access the reasons for judgment here.

Amelia Blefari, Summer Clerk

Liberty International Underwriters v The Salisbury Group Pty Ltd (in liq) [2014] QSC 240

TSG was a company that provided financial services, and W was its authorised representative. A trustee of a discretionary (family) trust that had received advice from W brought proceedings against W and TSG. The insurer for TSG and W declined indemnity because W was a beneficiary of the trust. The insurer applied to the court for declarations that the litigation was not the subject of indemnity because the policy excluded cover for claims made ’on behalf’ of one insured (W) against another insured (TSG), and claims made on behalf of an entity in which an insured (W) had a ‘financial interest’.

Liberty’s application was unsuccessful. As the trust was discretionary, with the trustee having absolute discretion as to which of the beneficiaries would receive a distribution, W could not be said to have a ‘financial interest’ in the trust. Nor could it be said that the trustee was bringing proceedings ‘on behalf of’ W. While trustees are generally viewed as bringing proceedings on behalf of trusts, this did not mean that the trustee was making a claim ‘on behalf of’ W.

You can access the reasons for judgment here.

Megan Smith, Senior Associate

Allianz Australia Insurance Ltd v Mercer [2014] TASFC 3

Section 601AG of the Corporations Act 2001 (Cth) permits a person to recover, from the insurer of a deregistered company, an amount payable under an insurance contract immediately before deregistration. The issue in this case was whether an action under s 601AG was governed by the time limit applicable to the underlying cause of action.

The respondent was injured in the course of employment and claimed damages against his employer, a company that who was subsequently deregistered. The respondent instituted proceedings under s 601AG against the employer’s insurer, Allianz. Allianz argued the claim was statute barred, as the applicable limitation period was the limitation period of the underlying cause of action. On appeal, the court agreed, concluding that s 601AG preserves the plaintiff’s position by avoiding unjust profit to the insurer, but does not enhance the plaintiff’s position at the insurer’s expense. However, the court noted that, where the limitation period applicable to a s 601AG claim had expired, a plaintiff might have recourse to s 601AH and seek reinstatement of the deregistered company with a direction that the period of time between deregistration and reinstatement not be counted for the purposes of the limitation period.

You can access the reasons for judgment here.

Millie Dale, Summer Clerk

Amlin Corporate Member Ltd v Austcorp Project No 20 Pty Ltd [2014] FCAFC 78

LM Investment Management Ltd (LM), the insured, loaned money to Bellpac to acquire a coal mine. The loan was guaranteed by a Mr Wong. LM later appointed receivers and managers to Bellpac, which subsequently went into liquidation. LM commenced court proceedings against Mr Wong to recover under the guarantee. Mr Wong filed a Response in which he argued that his liability under the guarantee ought to be discharged or reduced because LM was, through the conduct of the receivers, responsible for the mine being sold at a gross undervalue.

LM’s insurers argued that they were not obliged to indemnify LM in relation to the Response. The Court agreed, concluding that the Response simply raised an equitable defence of set-off against LM’s claim under the guarantee, and so was not a ‘claim for any civil liability’ and had not been ’brought against’ anyone within the meaning of the insuring clauses of the policies. Further, the words ‘arising from’ in the insuring clause implied that there must be a causal connection between the ‘Loss’ and the ‘Claim’. Here, the Response could not be linked to any loss for which LM could be found liable in the proceedings.

You can access the reasons for judgment here.

Sam Monk, Summer Clerk

Jaques v AIG Australia Ltd [2014] VSC 269

In this case, the Supreme Court of Victoria considered the legal distinction between executive and non-executive directors, for the purpose of determining whether a director was entitled to the benefit of a special excess limit available under a policy of investment management insurance.

The Court held that the essential characteristic of an executive director was his or her discharge of executive functions in the management and administration of the company, usually as an employee. Non-executive directors, on the other hand, are usually independent of corporate management. While a managing director is, as a matter of law (and absent special circumstances), an executive director, it is a question of fact whether another director is an executive director. It may depend on whether there is some feature of the company’s constitution or its conduct ingeneral meeting or of the board of directors, that evidences the delegation of executive function to that director to operate as an executive (for example, board approval of an employment contract of a director as an executive).

An appeal from this decision was dismissed (see AIG Australia Ltd v Jaques [2014] VSCA 332).

You can access the reasons for judgment here.

Laura Acton, Legal Adviser (not Australia qualified)

McLennan v Insurance Australia Ltd [2014] NSWCA 300

When a fire damages or destroys a home and its contents, which party has the burden of proving that the fire was not caused by a firebug? In this case, the primary judge held that it was the insured, and that she had not discharged that burden. On appeal, this decision was reversed.

The wording of the NRMA insurance contract created a general obligation on NRMA to indemnify the insured, subject to particular exceptions, one of which was ‘fire started with the intention of causing damage’. All that the insured had to prove was that a fire damaged her home and contents. NRMA bore the onus of proving the loss fell within the exception.

You can access the reasons for judgment here.

Tyson Beckman, Summer Clerk

Swansson v Harrison [2014] VSC 118

This case concerned a negligence claim against a financial adviser who advised his client to switch to a new life insurance policy that was subsequently avoided for non-disclosure. A couple of days before receiving the advice, the client had visited his GP with a stomach complaint, was diagnosed with an infection and prescribed antibiotics. The new policy application referred to the stomach complaint but represented that the matter was ‘resolved’. Following the submission of the application, the client’s symptoms worsened and he attended further medical consultations, but did not notify the adviser or insurer of these developments. The new policy was issued, and the adviser cancelled the old policy. A couple of months later, the client was diagnosed with terminal pancreatic cancer. The new insurer refused to pay out under the policy on the basis that the client had not complied with his duty of disclosure under Insurance Contracts Act 1984 (Cth) s 29. The client’s entry into the new policy had re-exposed him to the risk of his policy being avoided for innocent non-disclosure, a risk that had long since passed in relation to the old policy.

The court held that the client and adviser were jointly negligent for failing to disclose information about the previously identified stomach condition or the medical treatment received. A reasonably prudent adviser would have checked again with the client before cancelling the old policy, while the client had been advised of the ongoing duty of disclosure and ought to have informed his adviser of the developments in his medical condition. This case highlights the importance of making final enquiries of a client prior to cancellation of a policy, and ensuring that all discussions with clients and prospective clients are documented.

You can access the reasons for judgment here.

Laura Acton, Legal Adviser (not Australia qualified)

Invion Limited v SGB Jones Pty Ltd [2014] QSC 97

This case involved litigation against three of Invion’s directors, and the directors’ claim for indemnity under a D&O policy. Two of the directors were also executives of Invion, while the third was a director of a company (SGB) that provided consulting services to Invion. Without the approval of Invion’s board, the directors amended Invion’s contracts with the executives and SGB so that each executive and SGB could terminate their relevant contract with Invion for any cause and receive a termination payment equivalent to 12 months’ salary or 12 months’ retainer, respectively. The executives and SGB then terminated their contracts with Invion and received these termination payments.

When Invion claimed against the directors for breaches of Corporations Act 2001 (Cth) ss 180, 181 and 182, seeking compensation under s 1317H and other remedies, the directors claimed indemnity under Invion’s D&O policy. However, the Court held that there was no right to indemnity because the policy excluded liability for loss connected with ‘the committing of any deliberately dishonest or deliberately fraudulent act’, and the directors’ conduct had been deliberately dishonest. In the case of the executive directors, indemnity was also excluded because the policy definition of ‘loss’ excluded ‘employment related benefits’. The Court doubted that the claim made against the non-executive director concerned ‘employment related benefits’, as the termination payment was made to SGB, rather than the director personally.

You can access the reasons for judgment here.

Megan Smith, Senior Associate

Allianz Australia Insurance Limited v Vitale [2014] NSWSC 364

Can an insurer insist on a deed of indemnity from a builder/developer when granting building warranty insurance? In this case, Allianz agreed to issue home building insurance to Avcon Constructions only if the directors of Avcon executed deeds of indemnity in its favour. When a claim was brought under the policy for building defects, Allianz settled the claim and brought proceedings against the directors to enforce the indemnity and recover the amount of the settlement sum plus legal costs and interest.

The court awarded Allianz $1.8 million, rejecting the directors’ argument that the insistence on the deeds of indemnity was unconscionable conduct under Trade Practices Act 1974 (Cth) ss 51AA or 51AC. The deeds were held to be reasonably necessary to protect the commercial interests of Allianz in circumstances where it was faced with an insurance application from an inexperienced builder/developer, and where there was evidence that the insistence was based on reasonable financial concerns. The decision contains a useful discussion of the concept of unconscionable conduct, as well as the Home Building Act 1989 (NSW). It indicates that where an insurer requires a deed of indemnity before it will issue insurance, an inequality of bargaining power between the parties will not necessarily make the insurer’s conduct unconscionable.

An appeal against this decision was dismissed (see Vitale v Allianz Australia Insurance Limited [2014] NSWCA 358).

You can access the reasons for judgment here.

Sam Monk, Summer Clerk

Allianz Australia Insurance Ltd v BlueScope Steel Ltd [2014] NSWCA 276

How often have you come across section 18 of the Insurance Act 1902 (NSW)? Regularly overlooked, the section allows the court to excuse breaches of an insurance contract by an insured where the insurer was not prejudiced by the breach. This was a case where an insured successfully argued that its breach should be excused because it had not prejudiced the insurer. The case also raised complex issues regarding the insurer’s conduct following notification of the claim, and the insured’s conduct in settling the claim without the insurer’s authority.

An insurer refused to take over a claim by the insured’s former employee, and refused to indemnify the insured, because of late notification of the claim. The insurer later failed to respond to the insured when asked about settlement negotiations. The insured settled the claim and then sought to recover the settlement amount from the insurer. The insurer argued that the insured had breached the insurance contract by not advising it of the claim as soon as practicable, and by settling the claim without the insurer’s authority.

The NSW Court of Appeal, hearing the matter on appeal from the Dust Diseases Tribunal, agreed with the Tribunal’s decision under s 18 to excuse the insured’s late notification. The Court rejected the insurer’s argument that it suffered prejudice by being denied the opportunity to cross-examine the former employee. As the window of opportunity in which to obtain any cogent evidence from the former employee could have been only small and his answers in the previous cross-examination were ‘by no means expansive’, this opportunity was ‘of no more than speculative value’ and its loss did not result in anything more than theoretical prejudice. However, the Court also concluded that, with a policy of this kind, the insurer had no legal obligation to take over conduct of proceedings once notified of the claim, and was not required to confirm its agreement to indemnify until its liability to do so had been established. The Court sent the matter back to the Tribunal to consider whether, in the circumstances, the insured’s failure to obtain the insurer’s authority to settle was a breach of the contract and, if so, whether it could be excused under s 18. The Tribunal must also consider whether, in its opinion, the insurer’s conduct breached its obligation of utmost good faith.

You can access the reasons for judgment here.

Laurice Elten, Solicitor

Graham v Colonial Mutual Life Assurance Society Limited (No 2) [2014] FCA 717

This case considered the insured’s duty of disclosure in relation to a life policy. The insurer, Comminsure, sought to avoid the policy because of an alleged misrepresentation and failure to disclose particular information, within the meaning of s 29 of the Insurance Contracts Act 1984 (Cth).

The deceased had a history of non-serious illness which included weight problems (treated by lap band surgery), stress and anxiety, and some minor fainting episodes, but failed to disclose this information when applying for the policy. The court found that the deceased was not suffering from any mental illness that he was required to disclose, and the answer he gave was not a misrepresentation, as the wording of the question could lead one to reasonably interpret ‘depression or mental disorder’ differently from normal stress and anxiety not uncommon in everyday life. However, the court found that at the time that he signed the declaration of good health, the deceased must or should have known that the correct answer to the question about fits or fainting episodes was ‘yes’. The court held that this answer was reckless and fraudulent within the meaning of s 29.

Despite this, the court came to the conclusion that Comminsure would have still entered the contract, even if the insured had not breached its duty of disclosure, and so the beneficiary was entitled to succeed in her claim. While the underwriter had said that, if she had received the full medical history she would have rejected the application, internal memos within Comminsure showed that others within the company would still have granted the application.

You can access the reasons for judgment here.

Tyson Beckman, Summer Clerk

ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65

These proceedings involved claims against a number of respondents involved in marketing, rating and selling highly sophisticated financial products to NSW local councils. One of the respondents, Local Government Financial Services Pty Ltd (LGFS), was insured under a policy issued by American Home Assurance Company (AHAC). LGFS sought indemnity from AHAC in respect of both a settlement it reached with one claimant and its liability to other claimants. AHAC denied that LGFS was entitled to indemnity. Apart from arguments about the proper construction of the policy and the meaning of references to ‘financial planning advice and services’ and ‘financial advice and services’ in the policy’s exclusion clauses, AHAC also argued that the effect of Insurance Contracts Act 1984 (Cth) (ICA) section 48(2) was that LGFS owed AHAC a duty of disclosure under ICA section 21, and had breached that duty. AHAC also argued that the settlement LGFS had reached with one of the parties was not reasonable.

The Full Court rejected all of AHAC’s arguments. The obligations that s 48(2) imposed on LGFS, as a third-party beneficiary, were confined to obligations ‘in relation to the third-party beneficiary’s claim’, and did not extend to pre-contractual obligations such as those in ICA s 21. Even if LGFS had owed a duty of disclosure to AHAC, that duty was not breached by LGFS’ failure to disclose a matter that it did not actually know. AHAC’s argument about the settlement that LGFS had made was rejected. On an objective view, having regard to the material available at the time and the uncertainty of litigation, and balancing the prospect of complete success against the substantial risks of failure, the settlement was a reasonable one.

You can access the reasons for judgment here.

Megan Smith, Senior Associate

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