Case Note September 2007

Transcription

1 Case Note September 2007 CGU Limited v AMP Financial Planning Pty Ltd On Wednesday 29 August 2007 Chief Justice Gleeson and Justices Kirby, Callinan, Heydon and Crennan handed down the judgement of the High Court in the long running matter between CGU Insurance Limited (CGU) and AMP Financial Planning Pty Limited (AMP). The Court examined the: (a) duty of utmost good faith implied into any insurance contract (b) consequences of instructing an insured to act as a "prudent uninsured" and (c) steps an insured must take to secure coverage for settlements with third parties entered into before indemnity is confirmed by the insurer. The Facts For the relevant periods, AMP was a licensed securities dealer. CGU insured AMP under a professional indemnity policy. AMP authorised two financial advisers, Messrs Pal and Howarth, to operate on its behalf. Importantly, Pal and Howarth were also authorised by other licensed securities dealers. On the basis of advice given by Pal and Howarth, several of the investments failed. The Australian Securities and Investments Commission (ASIC) investigated and quickly found certain investments sold by Pal and Howarth were unsuitable. ASIC applied considerable pressure to AMP to settle the investors' claims adequately and promptly, noting that a failure to do so would put at risk AMP's securities dealer's license. Following a meeting with ASIC, AMP created a protocol for handling the claims by investors (Protocol). On 26 March 2001, AMP wrote to CGU, enclosing the protocol and material relevant to its claims for indemnity. Under the protocol AMP would notify CGU of any potential claim, prepare a report on liability and recommendations for settlement and obtain instructions from CGU for settling or defending the claims. CGU was to communicate its instructions within 14 days of receiving the report. CGU agreed to the protocol 'in principle' but refused to confirm indemnity. It informed AMP that it reserved its rights under the policy and instructed AMP to act as a prudent uninsured. Prior to CGU informing AMP of its declinature, AMP had dealt with claims by 63 investors under the protocol, settling claims worth $3.2M and deferring settlement of a further $3M. On 14 November 2002, CGU formally denied AMP indemnity under the policy. For reasons unknown, AMP did not receive that letter until 7 January AMP issued proceedings against CGU on 13 June The CGU policy provided cover for 'Claims for Civil Liability'. Claim was defined as: [a]ny originating process (in a legal proceeding or arbitration), cross claim or counter claim against or served on an Insured. CGU relied upon this clause, noting that no claims had been made on AMP under that definition. CGU informed AMP that it would be required to prove its liability to the investors in order to claim indemnity

2 for its settlements. In view of the provision of s54 of the Insurance Contracts Act 1984 (Cth), CGU did not rely on other clauses that stated that AMP must not settle without CGU's written consent. AMP had a potential defence Under s819 (4) of the Corporations Law to some of the investors' claims. The essence of this defence was that AMP was not responsible for loss resulting from advice received from Pal and Howarth in their role as authorised representatives of another licensed securities dealer. By failing to consider this 'defence', AMP's settlement of those claims may not have been reasonable. The Federal Court On 18 October 2004, Justice Heerey in the Federal Court found against AMP on the following grounds: (a) AMP was bound by the definition of Claim, and needed to prove its liability to the claimant investors by admissible evidence. (b) CGU had not wrongfully repudiated the contract. Consequently, AMP was not entitled to conclude that it was in its best interests to compromise and settle the investors' claims. (c) AMP had not acted to its detriment in reliance upon CGU's representations because AMP had not believed that CGU had accepted liability. Accordingly, there was no reliance upon CGU's representations by AMP. (d) CGU had not breached its duty of utmost good faith because breach requires proof of want of honesty. Heerey J found that CGU had not acted dishonestly. (e) AMP should have had regard to the defences under the Corporations Law when assessing its liability to the investors. (f) Reasonableness of settlement was to be determined by having regard to the positions of both the insurer and the insured. By having regard to factors such as pressure by ASIC upon AMP's securities dealer license and to the adverse publicity of a trial and failing to have sufficient regard to the Corporations Law defences, the settlements AMP reached were unreasonable. The Full Court of the Federal Court AMP appealed Justice Heerey's decision. On 2 September 2005, the majority of the Full Court reversed Justice Heerey's decision and remitted the matter back to the Federal Court for determination. The Full Court found in favour of AMP on the following grounds: (a) AMP understood CGU's instructions to act as a prudent uninsured, and other conduct, to mean that AMP would not need to prove its liability to each investor by admissible evidence. As a result AMP suffered detriment, in that AMP entered into settlements in circumstances where it was far less able to prove that liability to investors by admissible evidence. (b) Heerey J's view of the duty of utmost good faith was correct but not complete. It is correct, of course, that dishonesty is sufficient to prove a breach of the duty of utmost good faith. However, so is an insurer's 2

3 failure to make a prompt decision on indemnity (unless actively seeking more information to make that determination) and an insurer's failure to make prompt payment. The majority held that the duty goes beyond good faith alone, otherwise no meaning attaches to the word "utmost". (c) CGU's position was irrelevant to the reasonableness of AMP's settlement. In addition, it did not follow that, because investors' demands were dealt with expeditiously under pressure from ASIC, any of the settlements of the claims were unreasonable, judged objectively. Gyles J, in dissent, held that CGU's instruction to AMP to act as a prudent uninsured estopped CGU from relying upon the terms of the policy and therefore demanding that AMP prove its liability to the investors by admissible evidence. He then focused on the reasonableness of the settlements and found against AMP, holding that AMP's settlements were not objectively reasonable because they did not have enough regard to the Corporations Law defences. CGU appealed the decision to the High Court. The hearing took place on 7 and 8 February The High Court In its long awaited 30 August 2007 judgement, the High Court analysed the proceedings in the discrete terms of the proposed remitter from the Full Court to Justice Heerey. The majority upheld the appeal. We set out the issues addressed and the High Court's reasoning. 4.1 Estoppel Questions addressed: (a) whether AMP was induced by CGU's conduct to assume that, if it settled [an investor's] demand on reasonable terms, it would not be required to establish by admissible evidence that it was legally liable to that investor in order to be reimbursed by CGU for the amount paid pursuant to such settlement. (b) if so, whether AMP settled that demand in reliance upon that assumption. Crennan found that there were no representations by CGU that AMP would not have to prove their liability to the claimants in order to secure indemnity. Their Honours also found that Justice Heeley was correct in finding that there was no reliance by AMP on representations by CGU that AMP would not have to prove its liability to the claimants whose claims it had settled. Justices Callinan and Heydon held that the grounds of estoppel pleaded at trial and before the High Court were a marked departure from that found by Emmett J in the Full Court. They found that "in those circumstances the appeal to the Full Court should have been dismissed: the questions remitted by the Full Court had not been litigated at trial, and were not open on appeal". They also held that AMP did not alter its position on the basis of any assumption or belief induced by CGU and therefore suffered no detriment. 3

4 In dissent, Justice Kirby agreed with the majority of the Full Court that the estoppel relied upon by AMP was within the pleadings. His Honour implied that, although the particular estoppel relied on was strictly outside the pleadings, it was "essential that the claim be addressed accurately and determined on the available evidence" because "the claim was crucial to the foothold of AMP's recovery against CGU". Justice Kirby held that by delaying its decision on indemnity, CGU led AMP to believe that it would be indemnified for the settlements. Thus, CGU succeeded on this issue. 4.2 Section 13 Duty of Utmost Good Faith Question addressed: (a) whether, in the light of the answers to questions (a) and (b) above, CGU is estopped from asserting that, or it would be a want of utmost good faith for CGU to assert that, AMP is required to establish by admissible evidence that it was legally liable to that investor. Section 13 of the Insurance Contracts Act imposes on both insureds and insurers a duty of utmost good faith. The section is implied as a provision of any contract of insurance and requires each party to the contract to act towards the other with the utmost good faith. Crennan stated that s13 of the Act does not "empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith". A conclusion that the insurer has breached its duty of utmost good faith does not, through a "principled process of reasoning", lead to the conclusion that the insurer is liable to indemnify the insured. Their Honours' reasoning did not state what are the ramifications of a breach of the s13 duty of utmost good faith in this context, nor was it necessary for them to decide. In the second majority judgement, Justices Callinan and Heydon stated that whilst CGU "cannot fully justify, or for that matter explain, the long delay that occurred before it denied liability [i]f that were all there were to the case, [their Honours] might have been inclined to hold that the appellant did fail in its duty of utmost good faith". Their Honours, however, found that the failure of AMP to "do equity" and it's lack of "clean hands" precluded AMP from being granted equitable relief in response to CGU's actions. In dissent, Justice Kirby found that CGU's delay in determining indemnity breached the duty of utmost good faith that it owed to AMP. He would deny the appeal and uphold the remitter. Again, CGU succeeded on this issue. 4.3 Reasonableness of the settlements Question addressed: (a) whether AMP settled that demand on reasonable terms. Crennan held that it was open to the Court at first instance to conclude that the settlements were not reasonable, 4

5 stating that the "objective reasonableness of the settlements could not be divorced from the question whether AMP was liable to the investors. Justices Callinan and Heydon held that, given their earlier decisions on estoppel and duty of utmost good faith, they did not need to determine whether the settlements were reasonable. They held that whether or not the settlements were reasonable, AMP needed to prove to CGU its liability under each claim. In doing so, their Honours referred to AMP's failure to have regard to its defence to liability under the Corporations Law. Justice Kirby disagreed with the majority of the Full Court that the settlements are to be objectively reasonable only having regard to the interests of the insured. His Honour found that the reciprocal nature of the s13 duty of utmost good faith required the settlements to have regard to both parties. His Honour nonetheless held that CGU's interests were taken into account. His Honour explained that the settlement protocol gave CGU ample opportunity for presentation, discussion and consideration of its interests. He would deny the appeal and uphold the remitter. CGU succeeded on this issue as well and succeeded in the case. What can be drawn from this case? This case was largely decided upon its facts. However, the judgement as a whole provides useful guidance for insureds and insurers faced with similar situations. The background facts are a familiar scenario for insurers and are not uncommon across all classes of professional indemnity insurance. The appeal was upheld, not particularly in CGU's favour, but not in AMP's favour. 5.1 The statutory duty of utmost good faith Crennan agreed that the duty of utmost good faith encompassed more than just want of honesty and "may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured... and "may well affect the conduct of the insurer in making a timely response to a claim for indemnity". Justice Kirby interpreted the duty to require efficient, reasonably prompt, candid and business-like conduct in determining indemnity. Justices Callinan and Heydon stated that the duty "will usually require something more than passivity: it will usually require affirmative or positive action on the part of a person owing the duty". Each of the judges found or may have found that CGU's conduct was in breach of its duty of utmost good faith. Whilst not binding, Justice Kirby's judgement and the other judges' comments on the scope of the duty of utmost good faith owed by insurers (above) constitute highly persuasive authority and effectively require insurers to act promptly and reasonably on all aspects. The consequences of a breach of the duty of utmost good faith remain to 5

6 be defined to the Court's satisfaction. The duty may yet be interpreted to give rise to an estoppel, a breach of contract remedied by equitable relief or may require legislative intervention. 5.2 Acting as a "prudent uninsured" Crennan and Justice Kirby cited with approval the view of Justice Gyles, that instructing an insured to act as a prudent uninsured was to place the insured in a position "similar to the position of an insured denied cover in breach of contract. A prudent uninsured might arrive at an objectively reasonable settlement in the light of its potential liability and pay accordingly". This is not to say that the insurer is estopped from requiring the insured to prove its liability the settlements must be objectively reasonable in light of the insured's obligations under the contract. It can be inferred from this reasoning that the insured is prevented from requiring that the third party claimant brings the claims against the insured or that specific consent is granted. 5.3 The reasonableness of settlements Notably, Justices Callinan and Heydon agreed with Justice Kirby that insurers should have in mind the commercial, competitive and regulatory environment in which insureds operate. Consequently, issues such as a regulator's pressure on the insured's licence are valid concerns for the insured to address when attempting settlement of third party claims. 5.4 Lessons for insurers reserving rights It is worth noting that, but for AMP's lack of clean hands, the Court may have found against CGU. The Court was otherwise inclined to find that CGU's delay and lack of positive actions were in breach of its duty of utmost good faith. Additionally, Justice Kirby and Justices Callinan and Heydon may have found that CGU was prevented from requiring that AMP prove that it was liable to the claimants and that the settlements were reasonable. Robert Dunworth Solicitor T: E: rnd@cbp.com.au The author acknowledges and thanks Mr Keith Bethlehem, Senior Associate at CBP for his invaluable assistance. T F E law@cbp.com.au I MACSheet Level 42, 2 Park Street Sydney NSW 2000 Australia DX 280 Sydney Advoc Asia member Colin Biggers & Paisley ABN LAWYERS 6