Proportionate liability and a case on denial of indemnity

JANUARY 2005 INSURANCE & REINSURANCE www.aar.com.au Inside: Proportionate liability provisions have now commenced in a number of Australian jurisdictions and their practical effects will be of great interest to the insurance industry Your publication: If you would prefer to receive our publications in electronic format, please email: publications@aar.com.au VISIT OUR WEB SITE TO READ ALL FOCUS EDITIONS Proportionate liability and a case on denial of indemnity Partner Michael Quinlan, Senior Associate Mark Lindfield and Lawyer Stephen Sander report on proportionate liability provisions commencing in New South Wales and Western Australia and a case dealing with the settlement of third parties claims by an insured where the decision on indemnity by the insurer is still outstanding. Proportionate liability Brief background to proportionate liability As part of the tort law reform process in Australia, most Australian jurisdictions have introduced legislation intended to apply proportionate liability to claims other than personal injury claims. Legislation applying proportionate liability principles has now been commenced by the Commonwealth, NSW, Victorian and WA parliaments. The Australian Capital Territory and Queensland parliaments have passed legislation that contains proportionate liability provisions but those provisions have not yet commenced. Proportionate liability legislation has also passed through the lower House in the Tasmanian Parliament and the South Australian Government has announced its intention to introduce similar legislation. Proportionate liability provisions commencing in NSW and WA The proportionate liability provisions passed in NSW and in WA commenced on 1 December 2004. 1

JANUARY 2005 NSW The NSW proportionate liability provisions are set out in Part 4 of the Civil Liability Act 2002 (NSW). Under the NSW provisions, proportionate liability applies to claims for economic loss or damage to property in an action for damages arising from: a failure to take reasonable care (whether the claim is made in contract, tort or otherwise); or a contravention of section 42 of the Fair Trading Act 1987 (NSW). Any claim arising out of personal injury is expressly excluded from the scope of the proportionate liability provisions. Under the proportionate liability provisions, the liability of a defendant who is a concurrent wrongdoer in respect of a claim will be limited to an amount that reflects the proportion of the damage or loss claimed that the court considers just having regard to the extent of that defendant s responsibility for the damage or loss. A concurrent wrongdoer is defined as a person who is one of two or more persons whose acts or omissions... caused, independently of each other or jointly, the damage or loss that is the subject of the claim (s34(2)). In NSW, any claim arising out of personal injury is expressly excluded from the scope of the proportionate liability provisions. Subsection 34(1A) states that there is a single apportionable claim in proceedings for the same loss or damage even if the claim for that loss or damage is based on more than one cause of action. This means that an economic loss claim that alleges negligence, breach of contract and breach of statutory duty against several concurrent wrongdoers will attract the operation of the proportionate liability provisions regardless of the different causes of action. Exemptions from the provisions apply to intentional and fraudulent wrongdoers and the legislation also expressly does not displace the law in relation to vicarious liability, the several liability of partners or several liability imposed by any statute. Under s35a, the provisions impose an obligation on a defendant to give notice to the plaintiff of other concurrent wrongdoers where the defendant has reasonable grounds to believe that a particular person may be a concurrent wrongdoer. It is notable that the plaintiff is not obliged to join such a concurrent wrongdoer, nor does the court have the power to order a joinder. The NSW proportionate liability provisions do not apply for proceedings commenced before 1 December 2004 or any civil liability that arose before 26 July 2004 (which was the date of commencement of proportionate liability provisions under the Trade Practices Act 1974 (Cth)). WA The WA provisions have also come into force on 1 December 2004 and do not apply to causes of action that accrued prior to that date. The WA provisions also impose an obligation on defendants to give notice to the plaintiff of other concurrent wrongdoers. The WA proportionate liability provisions are contained in Part 1F of the Civil Liability Act 2002 (WA). The WA model adopts a similar approach to the NSW proportionate liability provisions. Apportionable claim, concurrent wrongdoer and the application of the provisions by the courts are set out substantially on the same terms in the WA legislation as in NSW. One point of difference is that the WA legislation requires the court to have regard to the proportionate liability of persons who are not joined to an action. In NSW, the court may have regard to the liability of those persons. The importance of this distinction may not be made clear until the courts are asked to determine this issue. The WA provisions also impose an obligation on defendants to give notice to the plaintiff of other concurrent wrongdoers. Some issues to be considered Obligation to notify plaintiff of concurrent wrongdoers The obligation imposed on a defendant by the legislation in NSW and WA to provide details in relation to concurrent wrongdoers has significant potential to create controversy and further dispute. For example, where a defendant provides a plaintiff with the identity of an alleged concurrent wrongdoer and also provides details of the basis for the allegation of wrongdoing, there are potential reputational issues for the named 2

party. Potentially damaging allegations may be made in the course of the hearing and, unless the named party is joined to the proceedings or unless the plaintiff brings a subsequent action against it, the named party will not have an opportunity to defend those allegations and yet, in apportioning liability to the defendant, the court will be required to make a finding as to the comparative responsibility of the named party for the plaintiff s loss. Intentional wrongdoers As we have noted above, intent on the part of a wrongdoer disqualifies that wrongdoer from relying on the operation of the proportionate liability provisions. It is not clear, however, what, if any, affect proof of dishonesty on the part of one concurrent wrongdoer will have on the proportion of loss allocated to any other (non-fraudulent) concurrent wrongdoers. Other things being equal, the extent of responsibility attributable to an innocent wrongdoer would be diminished where another party is proven to have acted dishonestly. It remains to be seen how this will be applied in practice, given that the court has considerable discretion in the allocation of responsibility. The extent of responsibility attributable to an innocent wrongdoer would be diminished where another party is proven to have acted dishonestly. In some cases, defendants may have an incentive to prove dishonesty on the part of co-defendants so that they are able to reduce their proportions. However, a consequence of proving the dishonesty will generally be that any directors and officers or other applicable insurance that is held by the wrongdoer will be able to be avoided by the insurer. Accordingly, in practice, plaintiffs may be reluctant to allege dishonesty. Consequence of not joining all concurrent wrongdoers The consequence of not joining all concurrent wrongdoers is that the plaintiff will risk not being able to recover fully the extent of its loss or damage. Plaintiffs may seek to address this issue by: attempting to establish that the proportionate liability provisions do not apply to the defendant such as by proving there was intentional or fraudulent conduct, or by showing that there are no other concurrent wrongdoers; or making thorough enquiries at an interlocutory stage in relation to potential future parties to the litigation on this point, it might be expected that a consequence will be the wider use of devices such as preliminary discovery, interrogatories and so on, which is likely to add to the cost of claims and can further delay their resolution. Under proportionate liability, a plaintiff will have greater incentive to join all potentially liable defendants to an action. However, it will not be obliged to do so. From the defendant s perspective, it will not necessarily be in its interest to join a concurrent wrongdoer. The defendant may instead prefer to wait until the hearing and then seek to adduce evidence that a party who is not present (and for whom the defendant previously provided details to the plaintiff but with no joinder following) bears a greater share of the liability for the plaintiff s loss. The absent party will not be present at the hearing to counter such arguments and it is notable that the court cannot compel a joinder. AMP Financial Planning v CGU Insurance In AMP Financial Planning Pty Ltd v CGU Insurance Ltd ([2004] FCA 1330), Justice Heerey of the Federal Court of Australia was called upon to consider the following issues: whether an insured is required to prove its legal liability before claiming indemnity, or whether evidence of a reasonable settlement and belief of probable liability is sufficient in circumstances where the insured settled claims against it by third parties while liability to indemnify was still reserved by the insurer; and whether the principles of estoppel, waiver or unconscionable conduct are relevant in the circumstances. The facts The insured, AMP Financial Planning Pty Ltd (AMP), was a licensed securities dealer. Two financial advisers operating under authorities from AMP gave inappropriate financial advice, as a result of which a number of people made investments that subsequently failed. This in turn led to a number of claims against AMP. Following an Australian Securities & Investment Commission (ASIC) investigation of the financial advisers which showed that certain investments they had recommended were extremely unsuitable, AMP 3

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was under pressure to respond adequately to the investors claims or risk losing its dealer s licence. AMP reported the claims to its insurer, CGU Insurance Limited (CGU), which agreed in principle to a protocol proposed by AMP whereby AMP would provide CGU with liability reports for each claim it proposed to settle. CGU, however, stated that the question of indemnity under the relevant policies was reserved and the insured should act as a prudent uninsured until a decision about indemnity was reached. In the meantime, primarily because of the pressure from ASIC, AMP settled a number of claims totalling $3,242,668.40 and deferred another $3,067,550 worth of claims. Subsequent to these settlements, CGU denied indemnity. AMP claimed the amounts paid under the settlements less the policy excess of $6,500 per claim, plus costs and an indemnity for unpaid claims from CGU under the policies for the 1999 and 2000 policy years. AMP argued that the settlements reached were reasonable. CGU claimed that the correct question was whether AMP had become legally liable to the investors and that AMP could not make out its case merely by showing that it reached settlements, whether reasonable or not. Settling a claim made by a third party is not, in itself, sufficient proof of liability on which an insured may base a claim for civil liability indemnity there must be admissible evidence of liability. The insuring clause of the policies agreed to provide cover... for Claims for Civil Liability (including contractual liability) arising from the conduct of the insured Professional Business Practice. Civil liability was defined in clause 12.1 as: Liability for the damages, costs and expenses which a civil court orders the Insured to pay on a Claim (as opposed to criminal liability or penalties). It includes the legal costs of the person making the Claim, for which the Insured become liable. Claim was defined in clause 12.2 as follows: Any originating process (in a legal proceeding or arbitration), cross claim or counter claim or third party or similar notice claiming compensation against or served on an Insured. The decision The key questions considered by the court were: 1. Must AMP establish by admissible evidence its legal liability to investors, rather than merely by proof of the settlements? 2. Is CGU liable in damages for the settlement payouts made by AMP, provided those settlement were reasonable, in circumstances where the settlements were made before any breach of the policies by CGU? 3. If yes to 1 and no to 2, could AMP avoid that result in the circumstances on the basis of estoppel, waiver, unconscionable conduct, misleading and deceptive conduct and/or breach of CGU s obligation of utmost good faith? The court held: for the first question, that settlement between AMP and an investor did not answer the description of Claims for Civil Liability within the meaning of the policies. CGU insured AMP against claims, not settlements. Justice Heerey held that under the policies AMP was required to prove its liability to investors by admissible evidence, however, it has not done so (ie all that had been proven was that AMP believed it was, or might be, liable); for the second question, that had there been a breach by CGU of the insurance policy, AMP could have recovered in damages the amount of a reasonable settlement reached as a consequence of that breach. However, the alleged breach, namely the repudiation of liability by CGU, had not occurred at the time the settlements were reached; therefore AMP could not recover in damages amounts paid out before any such breach occurred; and for question three, that AMP could not avoid the conclusions reached in questions one and two for any of the reasons proposed. Justice Heerey held that: estoppel was not available as AMP had no belief that CGU had accepted, or would accept liability at the time the settlements were made (and thus there could be no reliance on that belief). Further, AMP had not acted to its detriment in reliance on any such belief as CGU had specifically advised AMP to proceed as a prudent uninsured ; waiver could not apply as this required an election 4

between two inconsistent rights. There was no inconsistency between CGU on the one hand accepting that AMP could proceed to settle claims and, on the other, reserving its rights under the policies; CGU s behaviour was not unconscionable conduct, as AMP did not suffer from any special disadvantage, nor did CGU make any representations that could amount to misleading or deceptive conduct; and an allegation of the breach of the obligation of utmost good faith requires proof of some want of honesty and fairness would have required that any such allegation be put to CGU s witnesses; however, this did not happen. Further, any argument put by AMP based on CGU s delay in making a decision on indemnity was undermined by the fact that it was actually in AMP s interests to finalise as many settlements as possible before CGU made a decision on indemnity. This was because if CGU accepted indemnity it would have wanted to handle the claims itself and may not have done so in a way that was acceptable to ASIC (thus potentially jeopardising AMP s dealer s licence). The court also gave its opinion on a number of other issues, including whether the settlements were, in fact, reasonable ; and on this issue the court was not satisfied that they were reasonable. In his Honour s view, the level of settlements reached were motivated more by AMP s (albeit valid) wish or need to placate ASIC than by an objective assessment of the prospects of the success of the claims. Conclusion Key conclusions reached in this case include: settling a claim made by a third party is not, in itself, sufficient proof of liability on which an insured may base a claim for civil liability indemnity there must be admissible evidence of liability; and damages cannot be recovered for settlements made by an insured before any breach of contract by the insurer (regardless of whether such a breach subsequently occurs). 5