Annual Review of Insurance & Reinsurance Law 2011 · decided to investigate the viability of seeking compensation from the directors of Penrice for suspected deficiencies in the discharge

Annual Review of Insurance & Reinsurance Law 2011

© Allens Arthur Robinson 2012Written and published by Allens Arthur RobinsonDeutsche Bank Place, Corner of Hunter and Phillip Streets, Sydney NSW 2000www.aar.com.au

The summaries in this review do not seek to express a view on the correctness or otherwise of any court judgment. This publication should not be treated as providing any definitive advice on the law. It is recommended that readers seek specific advice in relation to any legal matter they are handling.

IntroductionFor the insurance and reinsurance industries in the Asia region, 2011 was one of the more noteworthy years on record. This was largely due to a series of major catastrophe loss events, including Cyclone Yasi and severe flooding in Queensland, major earthquakes in New Zealand and Japan, and flooding in Thailand. Remarkably, the events in New Zealand, Japan and Thailand were the three largest natural catastrophes in the world in 2011 in terms of overall losses.

Aside from the obvious impact on the cost and availability of insurance and reinsurance products in property lines, the major catastrophe events of 2011 have also had significant public policy implications for the insurance and reinsurance industries. The Queensland floods have raised questions about planning and flood mapping, while there has been a major focus on building standards as a result of the Christchurch earthquakes. The Queensland floods also led to the Natural Disaster Insurance Review and a proposed standard definition of ‘flood’ for the purpose of home insurance policies.

The catastrophe events of 2011 have already started to have an impact on case law. The High Court of New Zealand considered the question of when reinstatement occurs under Earthquake Commission cover in EQC v The Insurance Council of NZ; Tower Insurance v EQC. The result in that case has significant implications for reinsurers’ exposure to the Christchurch earthquakes. It is a case of ‘watch this space’, with the catastrophe events of 2011 likely to lead to other important insurance and reinsurance law developments over the next 12 to 24 months, as coverage disputes are escalated.

Aside from the EQC decision, the other major reinsurance law development in 2011 was the High Court of Australia’s judgment in Westport v Gordian Runoff. That case considered the application of section 18B of the Insurance Act 1902 (NSW) to exclude liability, and the requirement to provide adequate reasons for an arbitrator’s award under the Commercial Arbitration Act 1984 (NSW).

As is often the case, the UK courts have delivered a number of judgments centred on policy construction, which may have implications for how policies are construed in Australia and other jurisdictions in the Asia region. The types of issues that have been considered over the past year include:

• whena‘liability’accruesforaninsuredunderaliabilitypolicy(William McIlroy v Quinn Insurance);

• theorderinwhichclaimsshouldbeconsideredindeterminingwhetherprimaryorexcesslayersofinsurancehave been exhausted (Teal v WR Berkley); and

• theextenttowhichmarketpracticeandindustrytermsshouldbeconsideredoverandabovetheordinaryandnatural meaning of terms in sophisticated insurance contracts (Gard Marine v Tunnicliffe).

Over the past 12 months, the UK courts have also provided useful guidance in areas such as non-disclosure of a ‘moral hazard’ (Sharon’s Bakery v AXA), and the possible scope of brokers’ duties (Jones v Environcom).

In the past year, the doctrine of contribution has been closely considered by a number of Australian courts. In HIH Claims v Insurance Australia Limited, the High Court considered the scope of the doctrine of contribution, and whether it should apply in circumstances where contribution was sought by the administrator of the HIH policyholder relief scheme against an insurer. While the scheme administrator was unsuccessful in that case, the High Court has left open the possibility of extending the application of the doctrine in appropriate circumstances. The issues of contribution and double insurance were also considered in Vero v QBE and Zurich v GIO.

The High Court of New Zealand’s judgment in Bridgecorp in September 2011 is one of the most important decisions affecting the D&O industry in recent years. In that case, the court considered whether a charge can be created on the proceeds of a D&O insurance policy in favour of third-party claimants, and if so, when that charge is created. The case involved similar legislation to that which exists in a number of Australian jurisdictions. The decision could have significant implications for directors seeking the advancement of defence costs under a D&O policy, and could also have implications for other forms of liability insurance.

Some of the most important developments in insurance and reinsurance law over the past 12 months have been in the area of insolvency. The Federal Court decision in APRA v ACN 000 007 492 (Rural and General) provided clarity on the relatively new judicial management scheme in Australia.

In Amaca v McGrath, the New South Wales Supreme Court considered the application of s562A(4) of the Corporations Act 2001 (Cth) and whether amounts received from reinsurers could be applied exclusively towards applicable third-party claims.

Looking ahead to the remainder of 2012, we continue to see cases arising from the onset of the global financial crisis. We also expect to see important case law emerge from contentious domestic and commercial property claims, and associated recoveries, as a result of last year’s regional catastrophes.

On the regulatory front, the Australian Securities and Investments Commission (ASIC) has made it clear that there will be increasing focus on the advertising of financial products, including general insurance products.

The Australian Prudential Regulation Authority (APRA) is continuing its review of capital standards for general and life insurers, as part of the Life and General Insurance Capital (LAGIC) review. APRA released a series of new prudential standards in 2011, with further prudential standards due to be released later this year, ahead of scheduled implementation on 1 January 2013.

The Future of Financial Advice reforms introduced by the Federal Government are likely to have significant impacts on the distribution of life insurance products. The reforms aim to improve the quality and objectivity of investment advice by, among other things, establishing a statutory best interest duty for providers of personal advice, as well as banning conflicted remuneration structures for advisers. Legislation to implement the reforms was introduced into Parliament in August and September 2011, and, if passed, will become law on 1 July 2012.

The Government is also continuing with its implementation of the Stronger Super reforms arising from the 2010 Cooper Review into superannuation. The legislation establishing the core aspects of the My Super default product were introduced into Parliament in November 2011, with further tranches of legislation expected that will be dealing with, among other things, the death and total permanent disability insurance requirements that the Minister has foreshadowed. The Government has stated that its present focus in the Stronger Super reforms are on the pre-retirement phase but has foreshadowed the possibility of further reform dealing with the post-retirement phase, which may include measures to increase the attractiveness of lifetime annuities, to address the growing concern around longevity risk.

The Insurance Council of Australia has recently approved revisions to the General Insurance Code of Practice, which are due to come into effect by 1 July 2012. The revisions relate to claims-handling issues, such as the timing of a decision on liability in cases involving exceptional circumstances, and the timing of external expert reports. They have been prompted, in part, by the insurance industry’s experiences with the major catastrophes of 2011.

A large number of people have contributed to this 14th edition of the Allens Arthur Robinson Annual Review of Insurance & Reinsurance Law. While it is not possible to thank them all, I would particularly like to acknowledge and thank Amanda Taylor, Gareth Horne, Jonathon Dooley, Patricia Abordo and Ishwar Singh for their assistance. Amanda and her team, together with our Publications group, have done a fine job in producing this review of one of the more significant years in insurance and reinsurance law in the region.

John EdmondNational Practice LeaderPartner, Sydney T +61 2 9230 4287 [email protected]

John Morgan EditorPartner, Sydney T +61 2 9230 4953 [email protected]

ContributorsAinsley Reid

Alexander Edwards

Alice Armit

Alice Mok

Amanda Taylor

Andrew Byrne

Andrew Lazzaro

Andrew Murn

Danielle Rossitto

Gareth Horne

Greg Stirling

Isabelle O’Connor

Ishwar Singh

James Kearney

Janis Dunnicliff

Joanne Howie

John Rainbird

Jonathon Dooley

Katherine Hayes

Keiran Humphrey

Larissa Chu

Monisha Sequeira

Mun Yeow

Patricia Abordo

Paul Annabell

Philip Hopley

Rebecca Kelton

Rhiannon Eagles

Sikeli Ratu

Simon Lewis

Simon McConnell

Further informationThis publication is available online at http://www.aar.com.au/pubs/ari/index.htm

For more information about Allens Arthur Robinson’s Insurance & Reinsurance practice, including publications, recent experience and current team details, please go to: www.aar.com.au/services/insur

We would very much like your feedback on this Review. If you would like further information about our regular Forums on Insurance & Reinsurance Law, please contact Business Development Manager Sophie Caples on +61 3 9613 8871 or Business Development Adviser Nadine Bairle on +61 2 9230 4360.

http://www.aar.com.au/pubs/ari/index.htm

Contacts

Louise Jenkins

Partner, Melbourne T +61 3 9613 8785 [email protected]

Bill Magennis

Partner, Hanoi T +84 4 3936 0990 [email protected]

John Morgan

Partner, Sydney T +61 2 9230 4953 [email protected]

Michael Quinlan


John Edmond National Practice Leader


Jamie Wells

Partner, Brisbane T +61 7 3334 3268 [email protected]

Simon McConnell

Partner, Hong Kong T +852 2840 1202 [email protected]

Andrew Maher

Partner, Melbourne T +61 3 9613 8022 [email protected]

Dean Carrigan


Oscar Shub

Consultant, Sydney T +61 2 9230 4305 [email protected]

Malcolm Stephens


Matthew Skinner

Partner, Singapore T +65 6535 6622 [email protected]

Jenny Thornton

Partner, Perth T +61 8 9488 3805 [email protected]

Mun Yeow


David Wenger


Contents

Access to documents

General insurance law

Construction of insurance policies

Fraudulent non-disclosure

Life insurance

Insurance brokers and agents

Reinsurance

Judicial management and liquidations

Legislative and regulatory developments

Asia review

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Further support for shareholder access to D&O insurance policies

Public companies, their boards and insurers should be aware of a Federal Court decision that has again confirmed that aggrieved shareholders may use section 247A of the Corporations Act 2001 (Cth) to apply for access to a company’s insurance policies to help them decide whether to pursue litigation against it.

London City Equities Ltd (LCE) was an institutional investor in Penrice Soda Holdings Limited (Penrice). LCE decided to investigate the viability of seeking compensation from the directors of Penrice for suspected deficiencies in the discharge of their statutory duties. It applied for orders to access certain categories of documents, including Penrice’s directors’ and officers’ (D&O) liability insurance policies, under s247A of the Corporations Act.

Under this provision, a court has the discretion to order the inspection of a company’s books if it is satisfied that the applicant is acting in good faith and the request is made primarily for a proper purpose. One recognised purpose of s247A is to enable shareholders to determine both whether to commence legal proceedings against directors and their likely prospects of success.

Until 2009, this statutory provision had not been used to access a company’s insurance policies. Its use in this way is contentious because it is well established that a defendant’s insurance policy is irrelevant to any cause of action that is pleaded against it, and so is not discoverable in proceedings.

Consistent with this established position, Penrice argued that access to documents under s247A should be limited to those relevant to investigating the facts potentially in issue. Therefore, access should not extend to its insurance policies, as these were relevant only to the commercial issue of whether a cause of action was worth pursuing economically.

Justice Robertson granted the application for access to Penrice’s D&O policies. In doing so, he referred to the previous decisions of Merim Pty Limited v Style Ltd [2009] FCA 314 and Snelgrove v Great Southern Managers Australia Ltd (in liq) [2010] WASC 51 (see notes in our 2009 and 2010 Annual Reviews), where it was held that allowing a potential plaintiff to inspect a company’s insurance policies to determine whether it is economically viable to commence litigation is a ‘proper purpose’ that prevents the waste of public and private resources.

Justice Robertson expressed understanding of Penrice’s position but took the view that, unless he were persuaded that the approach of both courts was clearly wrong, he should follow it.

Case Name:London City Equities Ltd v Penrice Soda

Holdings Ltd

Citation:[2011] FCA 674, Federal Court of Australia per

Robertson J

Date of Judgment:17 June 2011

Issues:•Useofsection247Aofthe Corporations Act 2001

(Cth) to gain access to a company’s insurance policies

http://www.aar.com.au/pubs/ari/archive.htm

http://www.aar.com.au/pubs/pdf/ari/2011/PrintAccesstodocuments.pdf

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This decision further establishes the position that aggrieved shareholders are entitled to apply to seek access to their company’s D&O policies under s247A. It is, however, worth bearing in mind that the court’s powers under s247A are discretionary; a court may grant access, but it is not obliged to do so. Having said that, there is now a body of authority in which a third party has been able to use s247A to access insurance policies. It is fairly likely that such further applications will continue to succeed unless there is an appellate decision to the contrary.

A complete case report can be found at:

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2011/674.html?stem=0&synonyms=0&query=London%20City%20AND%20Penrice

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The Supreme Court of NSW considered whether a lender to the Babcock & Brown Group could require it to produce copies of its D&O policies as evidence of its financial position.

BOS International (Aust) Ltd (BOSI) was the manager of a facility of lenders who loaned $3 billion to Babcock & Brown International Pty Ltd (Babcock) under a syndicated facility agreement (the agreement). Under the agreement, Babcock made a series of undertakings, including to:

• clause10.1(h):‘…insure, and maintain insurance in relation to, its business and assets against those risks and to the extent as is usual for companies carrying on the same or substantially similar business…’; and

• clause10.1(l):‘…provide the Facility Agent with any other information the Facility Agent or a Lender requests relating to the assets, operations, accounting methods or financial position of [Babcock] or any other member of the Borrower Group promptly on being requested to do so’.

In accordance with clause 10.1(h), Babcock took out D&O policies that contained a confidentiality clause preventing Babcock from disclosing the existence of the policies to any third party.

Under clause 10.1(l), BOSI requested that Babcock provide copies of all D&O policies for the Babcock Group that would respond to a claim for any notification that may have been made between 1 January 2006 and 1 January 2011, as well as certificates of currency for such policies. BOSI requested the policies as part of its assessment of the Babcock Group’s financial position, in order to ascertain whether the policies might respond to claims brought against the insured, and to quantify the prospects of recovering the value of such claims.

Babcock refused to provide the policies and BOSI commenced proceedings against it, seeking an order that Babcock be required to hand over the policies.

The issue to be decided before the NSW Supreme Court was whether Babcock was required to hand over the policies under the agreement. Justice Rein recognised that this was a matter of construction of the terms of the agreement; in particular, clause 10.1(l). In finding in favour of BOSI, his Honour considered the following issues.

Insurance policies and potential claims as ‘assets’ of a company

BOSI argued that an insurance policy was an ‘asset’ of Babcock, in respect of which BOSI could request information under clause 10.1(l). His Honour found that the bundle of rights that an insured has under an insurance policy is a chose in action and therefore an asset of the company. He also found that the policy itself was an asset, even though the right to indemnity it provided was contingent upon an event occurring that might never occur.

Case Name:BOS International (Aust) Ltd v Babcock & Brown

International Pty Ltd

Citation:[2011] NSWSC 1382, Supreme Court of New South

Wales per Rein J

Date of Judgment:11 November 2011

Issues:•Insurancepoliciesandpotentialclaimsas‘assets’of

a company

•Insurancepoliciesasinformationrelatingtoacompany’s financial position

•Statusofconfidentialityprovisionsasstandardprovisions of D&O insurance policies so as to prevent

disclosure of coverage to third parties

At last, some recognition: insurance policies are an asset to the company

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Justice Rein then considered whether potential claims under these D&O policies could also be considered a chose in action and therefore an asset. Babcock argued that unless there was a concrete claim against it or one of its group members, or by Babcock as against one of its directors, the policies were not a ‘real’ asset in respect of which information should be provided. However, Justice Rein rejected Babcock’s argument, finding that BOSI did not need to establish that claims existed as a precondition of enquiry about the value of claims against directors and officers.

Insurance policies as information relating to Babcock’s financial position

Justice Rein also considered whether an insurance policy was information relating to Babcock’s financial position. His Honour held that if a potential claim against Babcock existed, an insurance policy covering that liability would affect its financial position. This was because, if Babcock had suffered loss or was liable to a third party and had no insurance cover, its financial position would have been materially worse than if it held that cover. Accordingly, the existence of an insurance policy was information relating to Babcock’s financial position.

Confidentiality provisions in D&O policies

Babcock argued that BOSI ought to have known that any D&O policies Babcock held would require it to maintain confidentiality in respect of the cover, and that disclosing the policies to BOSI would amount to a breach of confidentiality and might lead to loss of cover. Justice Rein noted that no evidence was presented to support the assertion that the inclusion of confidentiality provisions was a ‘notorious’ practice within the insurance market. Accordingly, his Honour declined to treat the existence of confidentiality provisions in D&O policies as a matter that could be presumed to have been known to both parties.

This case provides useful guidance as to the circumstances where an insured may be required to provide details of its insurance cover to a third party and the scope of confidentiality provisions to prevent disclosure. It adds to the growing body of case law in which third parties have successfully obtained access to insurance policies (see eg Merim Pty Limited v Style Limited [2009] FCA 314; Snelgrove v Great Southern Managers Australia Ltd (in liq) [2010] WASC 51; and – also summarised in this year’s Annual Review – London City Equities Ltd v Penrice Soda Holdings Ltd [2011] FCA 674).


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2011/1382.html?stem=0&synonyms=0&query=title(“2011%20NSWSC%201382”)

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Case Name:Korda (Receiver and Manager), in the matter of

South Eastern Secured Investments Ltd (Receivers and Managers Appointed)


Finkelstein J

Date of Judgment:10 December 2010

Issues:•Receiver’srighttoexamineanemployeeofthe

Victorian Legal Practice Liability Committee where that committee had issued professional indemnity

insurance to a law firm

This case arose in the context of an examination under section 596B of the Corporations Act 2001 (Cth). It considered whether such examinations are exempt from the secrecy obligation imposed on the Victorian Legal Practice Liability Committee. It also considered whether a company’s examinable affairs extend to information about the insurance position of a third party against which the company might have a claim.

South Eastern Secured Investments (SESI) lent $19.7 million to Premier Village Developments Pty Ltd (PVD). Birch Ross and Barlow were the lawyers acting for SESI. PVD defaulted on the loan and, as a result, receivers were appointed to SESI.

The receivers commenced proceedings against SESI’s lawyers, alleging that the firm was negligent in performing its retainer. The receivers sought information to find out whether it was worth suing the law firm. In particular, they sought information about professional indemnity policies issued by the Legal Practice Liability Committee of Victoria (the committee) to the law firm.

The receivers issued a summons to Ms Macmillan, an employee of the committee, under s596B of the Corporations Act 2001 (Cth) to attend an examination before a registrar regarding the affairs of SESI and to produce books and documents.

Ms Macmillan applied to have the examination summons set aside on two grounds.

First, she argued that she was prohibited from disclosing the information under s6.6.13(1) of the Legal Profession Act 2004 (Vic) (the LPA), which required her not to disclose information (the secrecy section). In response, the receivers argued that the case fell within an exception to the secrecy section (relating to the production of documents for a proceeding in relation to a contract of professional indemnity insurance). Ms Macmillan said that this case did not fall within the exception because the examination did not constitute a ‘proceeding’, and (if that were wrong) that the proceeding did not ‘relate’ to a contract of professional indemnity insurance.

Secondly, Ms Macmillan argued that the proposed examination and production of documents were not part of the examinable affairs of SESI, and therefore the summons had not been validly issued under s596B of the Corporations Act.

In relation to Ms Macmillan’s first ground, Justice Finkelstein was satisfied that her examination did constitute a ‘proceeding’ for the purposes of s6.6.13(2)(a) of the LPA. His Honour also held that the information sought by the receivers ‘related to’ the law firm’s contract of professional indemnity insurance.

Sounds like a Grisham novel: when can a receiver examine an insurer’s employee about a third party’s policy?

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As to Ms Macmillan’s second ground, his Honour found that the proposed examination did relate to the examinable affairs of SESI. That was because a company’s examinable affairs includes information about the company’s property, including its rights of action against third parties. This extends to information that would allow some estimation of the value of the company’s rights of action and would assist the receivers or liquidators in deciding whether to prosecute such actions.

Accordingly, Ms Macmillan’s application was dismissed.

This case confirms that an examination under s596B of the Corporations Act constitutes a ‘proceeding’. By permitting employees of insurers to be examined about the insurance policies issued by that insurer, it seems that courts are increasingly taking a view towards allowing third parties to access information about insurance policies in order to assess the viability of claims against an insured.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2010/1417.html?stem=0&synonyms=0&query=title(“2010%20FCA%201417”)

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Case Name:Samenic Ltd & Anor v APM Group (Aust)

Pty Ltd & Ors

Citation:[2011] VSC 194, Supreme Court of Victoria per

Mukhtar AsJ

Date of Judgment:12 May 2011

Issues:•Whetherlegaladviceprivilegeattachesto

investigator reports that insurers have requested before retaining lawyers

The Victorian Supreme Court recently considered whether legal advice privilege attached to an investigator’s report that had been requested by an insurer before retaining lawyers.

The plaintiffs sued for loss caused by a fire at the Melbourne Central cinema complex while it was under construction.

A subpoena was filed by the second defendant, a subcontractor responsible for electrical installation work on the site. The subpoena in question was issued on a forensic consulting company that had prepared an expert report in relation to the incident for the project manager’s insurer.

The third defendant was the project manager for the redevelopment of the site. It objected to the subpoena on the basis that the documents it sought were subject to legal advice privilege under section 118 of the Evidence Act 2008 (Vic) (the Act).

The circumstances leading to the preparation of the expert report were that, immediately after the fire, the project manager’s insurer appointed loss adjusters, who contacted the forensic expert and requested he attend the scene of the fire and investigate the cause. At the insurer’s request, the loss adjuster asked the expert to prepare a report on the cause of the fire, which, the expert was told, was for the lawyers who would be appointed by the insurer. A few days later, the insurer retained lawyers. The lawyers then contacted the loss adjuster and requested the expert report be prepared so they could advise the insured in relation to claims that might be made against it.

Associate Judge Mukhtar found that the report was produced for the dominant purpose of obtaining legal advice and was therefore protected by legal advice privilege under s118 of the Act.

He made the following relevant findings:

• Thereportwasconfidentialbyitsnatureandinlightoftheprivateinterestsforwhichitwascommissioned.

• Foranincidentofthisnatureandmagnitude,theinsurerhadtoactveryquickly,anditwasonlynaturaltoexpect it to hire loss adjusters and investigators before bringing lawyers on board, so his Honour was not concerned that the loss adjuster and expert were engaged two days before the lawyers. The relevant time for assessing the purpose of a document is when the document is actually produced.

• Therewassufficientevidencetofindthatthelawyerswereengagedgenuinelyandnotasadevice.

• Althoughtherewasnospecific‘legalproblem’atthetimetheexpertreportwasprepared,itwasbothplausible and reasonable that the insurer would engage lawyers for advice, or for legal management and strategy according to the expert’s report.

Risky business: legal advice privilege protects investigator’s report

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The legal advice privilege that attaches to documents produced for the dominant purpose of a lawyer providing legal advice may attach, in fairly exceptional circumstances, to an expert report requested to be prepared before lawyers are retained. It is important, however, to recall that the onus is on the party claiming the privilege to prove that the dominant purpose of the document’s preparation is legal advice (or litigation). If claiming privilege over a report is intended, careful thought needs to be given to the timing of, necessity for, and purposes of that report.


http://vsc.sirsidynix.net.au/Judgments/VSC/2011/T0194.pdf


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Case Name:AXA Seguros S.A. DE C.V. v Allianz Insurance Plc

(t/as Allianz Global Risks) & Ors

Citation: [2011] EWHC 268 (Comm) England and Wales High

Court per Clarke J

Date of Judgment:2 March 2011

Issues:•Litigationpriviledgeoverexpertreports

•Dominantpurposetest

In this case, the High Court of England and Wales denied a claim for litigation privilege over engineers’ reports to prevent a reinsured from obtaining access. The court considered whether the reports were prepared for the dominant purpose of anticipated litigation.

Axa Seguros S.A. de CV (Axa) is an insurance company registered in Mexico. Axa participated in an insurance policy that provided cover to Banobras, a Mexican bank, for physical damage to a ‘Toll Road Network concession’ in Mexico, and had obtained a facultative reinsurance contract with Allianz Insurance Plc (Allianz) in respect of that risk (the reinsurance contract).

The reinsurance contract included a condition precedent that the roads comprising the Toll Road Network concession (the roads) were constructed to ‘internationally acceptable standards’ (the condition precedent).

In 2001, Hurricane Juliette damaged one of the roads. Axa and Allianz appointed Cunningham Lindsey as their loss adjusters to investigate the loss. Allianz also engaged Halcrow, an expert, to conduct an inspection of the damaged road, and to provide a report.

The claim made on the primary layer policy by Banobras was rejected. The matter proceeded to arbitration where an award of approximately US$15 million was made in favour of Banobras. Axa, as one of the primary layer insurers, pursued a claim under the reinsurance contract in respect of the loss; however, the reinsurance claim was also rejected. This resulted in proceedings being commenced by Axa against Allianz (the reinsurance proceedings).

Issues in dispute

This case considered the following issues:

• Whether,inthecircumstances,thereinsurercouldclaimlitigationprivilegeinrespectofengineers’reportsso as to prevent the reinsured from obtaining access to those reports?

• Whatwasthedominantpurposeforwhichtheengineers’reportswereprepared?

The decision

In the reinsurance proceedings, Allianz claimed common law litigation privilege over expert reports that had been prepared by Halcrow in 2002-03. In support of that position, Allianz asserted that the reports were obtained and prepared for the dominant purpose of obtaining legal advice in connection with reasonably anticipated litigation.

Litigation privilege over expert reports

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Axa submitted that the Halcrow reports were not created for the predominant purpose of anticipated litigation, but rather, they had a dual purpose. That is to:

• assesswhethertherelevantroadhadbeenconstructedto‘internationallyacceptablestandards’–thiswasrelevanttothe application of the condition precedent, and therefore Axa’s ability to claim under the reinsurance contract; and

• determinetowhatextentanydamagehadbeencausedbyHurricaneJuliette,andverifythecorrectnessofquantumfiguresforremedialwork–thecourtheldthatthiswasrelevanttoassessingconstructionstandardsoftheroadandestablishing the quantum of loss in respect of which there was a common interest between Axa and Allianz.

The court accepted evidence from Allianz that coverage was in dispute and litigation was contemplated at the time that the Halcrow reports were prepared. However, it ultimately held that the reports were prepared for a dual purpose of equal importance (one of which was in the ordinary course of Allianz’s business rather than anticipated litigation), and therefore the Halcrow reports were not prepared for the predominant purpose of anticipated litigation.

The decision of the England and Wales High Court turned on the facts of this case. While it does not change the law on common law litigation advice, it provides a practical reminder of the difficulties associated with establishing a claim for privilege over the contemporaneous reports of loss adjusters and experts.

The decision also highlights that, even where they are involved in their own coverage dispute, reinsurers and cedants will often have a common interest in respect of an underlying claim. That common interest may be relevant in ascertaining whether or not certain communications such as expert reports were prepared for the dominant purpose of litigation.


http://www.bailii.org/ew/cases/EWHC/Comm/2011/268.html

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Fight for your right to (be a) party – limits on claims for contribution

Case Name:Vero Insurance Ltd v QBE Insurance (Australia) Ltd


Wales per Einstein J


Issues:•Dualinsuranceandcontribution

•Constructionoftheterm‘effected’inan insurance policy

A New South Wales Supreme Court decision highlights the importance of assessing the limits on rights of contribution when issuing insurance policies.

The plaintiff, Vero Insurance Ltd (Vero), issued a policy of contract works and public liability insurance to the then NSW Department of Commerce for all works contracts awarded by it during the policy period.

This type of insurance is commonly used in the construction industry, and is known as a ‘floater’ or ‘open cover’ policy because it describes the insurance in general terms. The insurance only operates once an individual works contract has been issued and then included within the policy cover, which can occur automatically or by way of an endorsement.

Such policies, which may cover dozens of separate works contracts, usually contain wide categories of persons involved in the works, such as contractors and sub-contractors, who are not parties to the original insurance but are still treated as insureds.

In this case, an employee of a sub-contractor was injured during the course of a construction project and he later received an award of compensation against the relevant contractor in a District Court proceeding. Vero indemnified the contractor and then sought contribution from the contractor’s own public liability insurer, QBE Insurance (Australia) Ltd (QBE), for this compensation award, as well as Vero’s legal defence costs.

QBE argued that it was not liable to make any contribution because of the presence of an ‘other insurance’ clause in its policy. This provided that QBE would not be liable if the insured effected separate insurance protection.

Vero argued in response that the ‘other insurance’ clause did not apply here because:

• theVeropolicywasnot‘effectedby’thecontractor–itwasplacedonitsbehalfbytheDepartment’sinsurance broker; or

• alternatively,thecontractorshouldbetreatedasbeingapartytotheVeropolicybecauseitfellwithinthecategory of persons who were defined in it as ‘Named Insureds’, which included contractors, sub-contractors, workmen and ‘all like disciplines’ associated with the works contract.

As a result, the provisions of section 45(1) of the Insurance Contracts Act 1984 (Cth) (the ICA) voided the ‘other insurance’ clause, in accordance with the High Court decision in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50.

http://www.aar.com.au/pubs/pdf/ari/2011/PrintGeneralinsurancelaw.pdf

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The proceedings were referred to a senior barrister for determination. The referee found that Vero was not entitled to claim contribution from QBE, on the following basis:

• the‘otherinsurance’provisionappliedbecauseVero’spolicywas‘effectedby’thecontractor,actingthroughtheagency of the Department and the broker who placed the insurance;

• thecontractorwasnot,however,apartytotheVeropolicy.Althoughpersonsarecommonlyreferredtoasa‘NamedInsured’ when the intention is that they be parties to the contract of insurance (as opposed to those referred to as ‘the Insured’) the sheer width of the class of entities defined as ‘Named Insureds’ under the Vero policy made that interpretation untenable here. Properly construed, the contractor’s position was equivalent to that of a non-party insured. Following Zurich, s45(1) of the ICA did not apply to void the ‘other insurance’ provision.

Justice Einstein adopted the referee’s report. His Honour referred to the well-known propositions that the court is only permitted to reject a referee’s findings where, for example, these can be shown to have adopted an incorrect approach, failed to consider evidence, or the referee has not given the parties an opportunity to present their arguments. Here, Vero had not demonstrated any error by the referee.

This decision is a reminder of the difficult issues of construction that can arise in determining whether a named insured should be treated as a contracting party to a policy when an insurer is faced with an ‘other insurance’ provision as a bar to a claim for contribution. Insurers who wish to maximise their potential rights of contribution should carefully consider whether their policy wordings protect their interests for those insureds who are most exposed to losses where this is likely to be a consideration, and to seek legal advice if in doubt.


http://www.caselaw.nsw.gov.au/action/pjudg?jgmtid=152715


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The ‘extended’ contribution principle

Case Name:Zurich Australian Insurance Ltd v GIO

General Ltd

Citation:[2011] NSWCA 47, New South Wales Court of Appeal per Allsop P and Giles and Young JJA


Issues:•Doubleinsurance

•Contributionbetweeninsurers

•Extendedcontributionprinciple

In a case involving a workplace accident in which both a third party and workers’ compensation policy responded, the New South Wales Court of Appeal considered the issue of double insurance and the extended contribution principle.

The plaintiff, Mr McLellan, was employed by Tiger Tours (Management) Pty Ltd (Tiger), which is a company that provides coach services. On 13 October 2002, Mr McLellan injured his shoulder at work. All of the coaches used by Tiger in its business were registered in the name of a related company, Caringbah Bus Service Pty Ltd (Caringbah). Mr McLellan successfully sued Caringbah as owner of the defective coach under the Motor Accidents Compensation Act 1999 (NSW) (the Act) in the District Court and was awarded $429,360 in damages. Mr McLellan did not sue Tiger.

Zurich Australian Insurance Ltd (Zurich) was the third party insurer of the coach. Zurich insured ‘the owner’ of the coach against liability for personal injury. GIO General Ltd (GIO) was the workers’ compensation insurer for Tiger. Zurich paid Mr McLellan $265,525, which was Mr McLellan’s entitlement to damages, less the workers’ compensation payments made to him by GIO.

Zurich sought a contribution from GIO, based on the principle of double insurance, so that the liability for damages to Mr McLellan would be shared equally between them. Contribution may be sought on the basis of double insurance when an insured is entitled to indemnity from two different insurers for the same liability.

The primary judge found against Zurich. The Court of Appeal reversed that decision, and made the following important findings relating to double insurance:

• thechoiceoftheinjuredparty(inthiscase,MrMcLellan)tosueoneinsured(Caringbah)andnottheother(Tiger) should not leave the whole burden, or a disproportionate amount of the burden, on the one insurer (Zurich)–thisisknownastheextendedcontributionprinciple;and

• theextendedcontributionprincipleapplieseveniftwoormoreinsurershaveseparateliabilities,providedthey relate to the same injury (in this case, to Mr McLellan).

32

Double insurance is a very complex area of the law, especially when two different types of policies (in this case, third party and workers’ compensation) respond to the one incident. This case stands for the important proposition that, where a person could recover damages from two different insureds, each of which has a separate insurer, no matter which insured is found to be liable, the two insurers might have to share the liability (as was the case here). This case could have application in scenarios that would not ordinarily spring to mind as circumstances in which the double insurance/contribution argument would be available.




33

Assessment of when liabilities will be coordinate

Case Name:HIH Claims Support Limited v Insurance

Australia Limited

Citation:[2011] HCA 31, High Court of Australia per Gummow

ACJ and Hayne, Heydon, Crennan and Kiefel JJ

Date of Judgment:22 August 2011

Issues:•Coordinateliabilities

•Equitableprinciplesunderlying the doctrine of contribution

The High Court has determined that the doctrine of equitable contribution should not be extended to allow contribution claims to be made against an insurer by the administrator of the federally funded HIH policyholder relief scheme. The High Court held that the administrator’s obligations were not coordinate with an insurer’s liability to pay a claim under an insurance policy it had issued for the liability giving rise to a payment the scheme made.

Background

Following the collapse of HIH, the Federal Government set up the policyholder relief scheme to assist HIH policyholders. Under the scheme, certain qualifying HIH policyholders could apply to HIH Claims Support Ltd (HCSL). If an application was accepted and the relevant HIH policy would have provided indemnity for the claim, HCSL would pay the policyholder 90 per cent of the claim value (and in certain cases 100 per cent). The policyholder was required to assign its rights under its HIH policy to HCSL. HCSL would then submit a proof of debt in the winding up of HIH in the amount of the payments it had made.

In this case, Mr Steele was an HIH policyholder, who was contracted to erect scaffolding to support a large video screen for use at the 1998 Australian Grand Prix. The structure supporting the screen collapsed and the screen was destroyed. Mr Steele was found liable and ordered to pay $1.4 million in damages. He made a claim on his HIH policy and, following HIH’s collapse, applied to HCSL for assistance. HCSL made the payment and Mr Steele assigned his HIH policy rights to it.

The Australian Grand Prix Corporation held a separate insurance policy (the IAL policy) with a predecessor of Insurance Australia Limited (IAL), which, on its terms, would also have responded to a claim by Mr Steele for the damages awarded against him. Having made a payment to Mr Steele under the terms of the scheme, HCSL sought a contribution from IAL, arguing that its liability to Mr Steele under the scheme was coordinate with IAL’s liability to Mr Steele under the IAL policy.

Procedural history

At first instance, the Victorian Supreme Court determined that the respective liabilities of HCSL and IAL to Mr Steele were not coordinate. (Our 2009 Annual Review contains a note on that decision.)

HCSL appealed the decision. The Victorian Court of Appeal dismissed the appeal. (See an article on the appeal in our 2010 Annual Review.)

HCSL appealed to the High Court.



http://www.aar.com.au/pubs/ari/ari2011pdfs/PrintGeneralinsurancelaw.pdf

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The High Court decision

The High Court unanimously dismissed HCSL’s appeal (Justice Heydon delivered a minority but consenting judgment). The High Court confirmed that the essential test in determining whether liabilities are coordinate is whether they are ‘of the same nature and to the same extent’, and that relevant obligors must have a common legal burden to a party.

The court determined that, as there was no common interest or common burden between HCSL and IAL, their respective liabilities were not truly coordinate. In this respect, the court noted that, had Mr Steele originally made a claim on the IAL policy and been paid out, IAL would not have had any right of recourse against HCSL for contribution.

The court also noted that the obligations and benefits HCSL assumed in making payment to Mr Steele were different from the obligations and benefits IAL assumed under the IAL policy because, unlike IAL, HCSL had been assigned the right to recourse in the proof of debt process in the winding up of HIH. This assignment of rights meant that HCSL was a step removed from the original insurance HIH provided, and HCSL had a chance of recouping part or all of its payment asanassigneecreditorintheHIHliquidation–ieviatheproofofdebtprocess.Further,thecourtreiteratedthattherightof contribution works both ways and, given IAL was not in a position to seek contribution from HCSL, the doctrine did not operate in these circumstances. Accordingly, the court determined that HCSL had not, as IAL contended, simply stepped into HIH’s shoes, and held that the parties’ liabilities were not coordinate.

The High Court declined to extend the doctrine of contribution to this unusual set of circumstances but has not shut the door on an expansion of the doctrine in appropriate circumstances. The Financial Claims Scheme legislation attempts to address any potential lack of ‘coordinate liability’ by providing that payments made under that scheme are taken to be payments by the insurer under the terms and conditions of the relevant policy.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2011/31.html?stem=0&synonyms=0&query=title(“2011%20HCA%2031”)

35

Case Name:CGU Insurance Ltd v Bazem Pty Ltd

Citation:[2011] NSWCA 81, New South Wales Court of Appeal

per Beazley, Hodgson and Macfarlane JJA

Date of Judgment:7 April 2011

Issues:•Whetheraninsurershouldbejoinedto

proceedings at the plaintiff’s request, where the defendant is the insured and the plaintiff

is a third party

The New South Wales Court of Appeal has upheld a discretionary decision in which a plaintiff was granted leave to join the defendant’s insurer as an additional party to proceedings.

Bazem Pty Ltd (Bazem) carried on business as a property developer. Bazem retained an architect, and later sued the architect for breach of contract and negligence.

The architect was a named insured under a professional indemnity insurance policy. The insurer initially ran the architect’s defence and learned that the architect had not disclosed that its director had entered into a personal insolvency agreement under the Bankruptcy Act 1966 (Cth). The insurer then denied indemnity on the grounds of non-disclosure, and stopped running the architect’s defence.

On learning of the insurer’s denial of indemnity, Bazem sought leave to join the insurer as a party to the proceedings, and sought (as final relief) a declaration against the insurer that it was obliged to indemnify the architect. The primary judge granted Bazem leave to join the insurer under rule 6.19 of the Uniform Civil Procedure Rules 2005 (NSW). That rule gives a very wide discretion to the court to allow a party to be joined.

The insurer sought leave to appeal from that decision.

The NSW Court of Appeal dismissed the insurer’s application for leave to appeal. It found that the primary judge had the power to join the insurer as a defendant in the proceedings. Their Honours said that the court’s ability to grant leave to join the insurer was expressed in unqualified terms, and that the power could be exercised even if the matters set out in rule 6.19(a) and (b) were not satisfied.

This case may arguably be seen as part of a continuing trend by courts to make it easier for insurers to be joined to proceedings as a party. However, as the discretion to join a person as a party is almost unfettered, each case will likely turn on its particular facts.



The more the merrier: joining an insurer as an additional party


36

Case Name:Sciacca & Ors v ACE Insurance Ltd


Wales per Schmidt J

Date of Judgment:28 July 2011

Issues:•Applicationforleavetojoinaninsurerto

proceedings

•Construingthedefinitionof‘claim’

•Timingoftheloss

In granting leave to proceed against an insurer, the New South Wales Supreme Court found that the plaintiff only needed to demonstrate an arguable case that the policy responded.

In 2005, the plaintiffs invested money through Primrose Financial Group Pty Ltd (Primrose). The loan was secured by a second registered mortgage over a property. In June 2006, the securities over the property were restructured, and the plaintiffs’ security was transformed into a third unregistered mortgage and a mortgage over shares. Those shares were sold in April 2008 and, in October 2008, the first mortgagee foreclosed on the property.

As Primrose was in liquidation, the plaintiffs sought leave to bring a negligence claim against Primrose’s insurer under section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Law Reform Act). For leave to be granted, the plaintiffs needed to establish an arguable case for joining the insurer given the construction of the policy and the timing of the plaintiffs’ loss. The policy defined ‘claim’ as ‘a written demand for, or an assertion of a right to, civil compensation or civil damages’ or a written intimation of an intention to seek the same.

During meetings attended by a Primrose director, the plaintiffs threatened to sue Primrose for professional negligence. Primrose acknowledged those threats in writing. The court accepted that it was arguable that the written acknowledgment was sufficient, given the drafting of the clause and the application of the contra proferentem rule in cases of ambiguity.

There was also some dispute as to when the relevant event for s6(1) of the Law Reform Act occurred. The insurer argued that the relevant time was when the registered mortgage was transformed in June 2006. However, his Honour held that it was at least arguable that the plaintiffs’ cause of action did not accrue until the shares and property were sold and the loss materialised.

In this case, the plaintiffs only had to demonstrate an arguable case that the policy responded in order to join the insurer to the proceedings. It highlights the relatively low hurdle for plaintiffs to overcome in joining insurers, and indicates the willingness of courts to assist them.



Leave to proceed against an insurer: a claim properly made and formed?


37

Case Name:Genworth Financial Mortgage Insurance Pty Ltd v

KCRAM Pty Ltd (in Liquidation) (No.2)


Perram J

Date of Judgment:4 October 2011

Issues:•Abilityofvaluer’sprofessionalindemnityinsurer

to be joined as a party, due to the statutory charge imposed by s6 of the Law Reform (Miscellaneous

Provisions) Act 1946 (NSW)

•Whetherthatinsurercouldbejoinedforthepurposes of obtaining declaratory relief

This case considers the circumstances in which a party may join a professional indemnity insurer to proceedings to pursue a claim against it under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). It also examines the circumstances under which a party may join an insurer for the purposes of obtaining declaratory relief.

The applicant, Genworth Financial Mortgage Insurance Pty Ltd (Genworth), sold insurance policies to lenders under which it indemnified them against the risk that the security they held might be insufficient to discharge a borrower’s debt. Genworth obtained valuations of the properties over which lenders proposed to take security. The respondent, KCRAM Pty Ltd (KCRAM), was a valuer that issued valuations for four properties located at Tweed Heads, Surfers Paradise, Bundall and Burleigh Waters that Genworth had relied on when issuing insurance policies to lenders who had issued loans secured by mortgages over the properties.

The borrowers defaulted and the properties were sold. The price for which each property was sold, however, was less than the valuations that KCRAM had provided and, in each case, there was a shortfall between the proceeds of the sale and the amount secured by the mortgages. The lenders claimed on Genworth for the differences, and Genworth met those claims. Genworth sued KCRAM, claiming that the valuations had been issued negligently. Liquidators had been appointed to KCRAM, but it had a professional indemnity policy issued by the International Insurance Company of Hannover Limited (PI insurer).

Genworth sought to join the PI insurer to the proceedings, on two distinct bases:

• first,thatitwasentitledtorelyupons6oftheLaw Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Act), which, in certain circumstances, creates a charge over insurance funds that may be enforced by a party that benefits from, but is not a party to, an insurance contract; and

• secondly,thatitwasentitledtoadeclarationthatthePIinsurerwasliabletoKCRAMundertheprofessionalindemnity policy.

Genworth succeeded in obtaining leave to proceed against the PI insurer under s6 of the Act in relation to the Tweed Heads property. This was because Genworth had paid the lender’s claim in relation to the Tweed Heads property during the period of the professional indemnity policy, and that payment constituted an event during the policy period that gave rise to a claim against the insured. Genworth’s claim under s6 failed in relation to the other three properties because the relevant payments occurred before the policy was in force.

Genworth succeeded in joining the PI insurer to obtain a declaration against it in relation only to the Surfers Paradise property. That was because there was a dispute between the PI insurer and KCRAM as to whether that property was covered under the policy, and Genworth had an interest in that dispute. Genworth’s claim to join

What happens when valuations are not worth the paper they are written on?

38

the insurer in respect of the other three properties failed, because (in relation to Tweed Heads) it was going to be joined anyway, and (in relation to Bundall and Burleigh Waters) there was no utility because the PI insurer had already accepted liability.

Justice Perram followed a line of NSW Supreme Court decisions (including the Court of Appeal decision of Owners of SP 50530 v Walter Construction Group Ltd (in Liq) [2007] NSWCA 124 at [30]) in finding that no charge will arise under s6 of the Act where the insurance policy commences after the event that gives rise to the claim for damages. In the case of a lenders mortgage insurer, the time of that event is when recoupment of the loss becomes impossible. The judgment also emphasises the uncontroversial position that parties will not be joined for seeking a declaration against them when that declaration has no utility.



39

Case NameLois Nominees Pty Ltd & Ors v Hill

Citation:[2011] WASC 53, Supreme Court of Western Australia

per Beech J


Issues:•Attempttojointhedefendant’sinsurerstoan

existing action under the WA Supreme Court Rules

•Applicationfordeclarationthattheinsurersareliable to indemnify the defendant against

the plaintiffs’ claim

In a case of an alleged breach of trust by a solicitor, the Supreme Court of Western Australia considered whether the court had the power to join the solicitor’s insurers to an existing proceeding under the Rules of the Supreme Court 1971 (WA). The court also considered whether the plaintiff was entitled to obtain a declaration that the insurers were obliged to indemnify the defendant against the plaintiff’s claim.

Each plaintiff paid money into the defendant solicitor’s trust account. The plaintiffs claimed that the defendant paid money out of his trust account in breach of trust. The defendant made a claim under a policy of professional indemnity insurance. The insurers denied liability. The plaintiffs and their trustees in bankruptcy failed to join the insurers at the commencement of the proceeding, due to a lack of available funds.

Justice Beech dismissed the plaintiffs’ subsequent application to join the defendant’s insurers and determined that Order 18 Rule 4 did not empower the court to join a party to an existing action.

Although Justice Beech did not necessarily have to determine the issue, his Honour stated that, if permitted by the Court Rules, he would have exercised the court’s discretion to permit the plaintiffs to join the insurers. In holding that the plaintiffs’ case for a declaration that the insurers were obliged to indemnify the defendant solicitor was arguable, his Honour gave consideration to a number of factors, including that:

• therewouldbeutilityinhavingallmattersdeterminedinoneproceeding;

• topermitjoinderwouldeffectivelydeterminethequestionoftheliabilityoftheinsurerstothedefendant–therewouldbegenuineconsequencesfortheplaintiffsinthemakingofsuchadeclaration;and

• therearevariouspowersthatmaybeexercisedbythecourttoovercomeanyproceduraldisadvantagesthatmay be encountered by the insurers through being joined as defendants to the proceedings.

This case provides useful guidance on factors that a court may consider in determining whether to exercise its discretion to join an insurer as a party to an existing proceeding, in jurisdictions where the court rules allow such discretion, such as the Federal Court, and the New South Wales, Victoria and South Australia Supreme Courts.


http://decisions.justice.wa.gov.au/supreme/supdcsn.nsf/PDFJudgments-WebVw/2011WASC0053/$FILE/2011WASC0053.pdf

Court’s discretion to join defendant’s insurer



40

Case Name:Smart v Westpac Banking Corporation

Citation:[2011] FCA 829, Federal Court of Australia

per Jagot J


Issues:•Interpretationofsection13ofthe Insurance

Contracts Act 1984 (Cth)

•Whetheranon-partyinsuredisowedadutyofutmost good faith under s13 of that Act

The Federal Court of Australia has considered whether a person who is not a party to a contract of insurance, but is an insured person under section 48 of the Insurance Contracts Act 1984 (Cth), is owed a duty of utmost good faith imposed by s13 of that Act.

Westpac was a party to a directors’ and officers’ liability policy with Chubb Insurance Company of Australia Limited and Allianz Australia Limited (the insurers). Various former employees brought claims against Westpac and Westpac cross-claimed against some of its former officers, including Mr Fitzgerald.

Mr Fitzgerald sought indemnity under the contract of insurance, which was denied. Mr Fitzgerald then sought leave from the Federal Court to amend his cross-claim to include a claim for damages based on an alleged breach of the insurers’ duty to act in the utmost good faith under s13 of the Insurance Contracts Act 1984 (Cth) (the ICA).

The insurers contended that there was no legal basis for the claim. They argued that s13 of the ICA applied only to parties to the contract of insurance and not to those persons deemed to be covered by it by reason of s48 of the ICA (being persons who are referred to in the contract as a person to whom the insurance cover extends).

Mr Fitzgerald submitted that the purpose of s48 is to place a non-party insured in the same position as the parties to the contract of insurance. Therefore, s48 contemplates a non-party insured having the right to claim against an insurer for a breach of the duty of utmost good faith implied by s13.

The court refused Mr Fitzgerald’s application and found that s13 of the ICA does not apply as between an insurer and a non-party insured. In reaching that conclusion, the court noted that s13 of the ICA implies a statutory duty of utmost good faith into an insurance contract, but only as between the contracting parties. The court also found that s48 of the ICA does not deem an insured person to have the same rights as a party to the insurance contract.

This case demonstrates that the duty of utmost good faith imposed by s13 of the ICA only applies between parties to the contract. It further establishes that s48 does not deem a non-party insured to have the same rights as a party to a contract of insurance.



Section 13 – No duty of utmost good faith owed to non-parties

41

Case Name:Sahin & Anor v National Australia Bank Ltd & Anor

Citation:[2011] VSCA 64, Victorian Court of Appeal per Harper

and Hansen JJA and Hargrave AJA


Issues:•Customercreditinsurance–insurednotproperly

informed of coverage position

•Consequencesofinsurerfailingtocomplywithitsown internal policies

In this case, the Victorian Court of Appeal unanimously found two borrowers had been misled by a lender and an insurer into believing that they were covered by a credit insurance policy. The court focused on the confusion created by the insurer’s correspondence and the failure of the insurer and the lender to follow their own internal policies.

Mr and Mrs Sahin borrowed $110,000 from the National Australia Bank (NAB) in 2003 to build a house (the first loan). At the time they took out the first loan, the Sahins also purchased a credit insurance policy from an insurer that was then a subsidiary of NAB (the policy). The following year, after the first loan had been fully drawn-down, the Sahins sought additional finance to complete building works on the house. NAB agreed to lend the Sahins an additional $133,000 (the second loan). Most of the second loan was used to repay the outstanding balance on the first loan, with the balance used to finance the remaining building works. Some months after the second loan, the Sahins attempted to claim on the policy. They were told that the policy had terminated when the first loan had been paid out.

At trial in the Victorian County Court, the Sahins argued that they believed that the policy was to remain on foot during the term of the second loan. NAB claimed:

• thatithadexplainedthatthepolicywouldterminate;

• thatithadofferedtheSahinstheopportunitytopurchaseanewcreditinsurancepolicy;and

• thattheSahinshadexpresslydeclinedthatoffer.

The trial judge favoured NAB’s evidence and found in its favour. The Sahins appealed to the Victorian Court of Appeal.

The Court of Appeal disagreed with some of the trial judge’s key factual findings, holding that:

• whileNABhadgivenafullandunambigiousexplanationofthepolicywhenitwasfirsttakenout,NABhadfailed to give a similarly clear explanation of the effect of the refinancing arrangement on the policy;

• correspondencesentfromtheinsurerreferringtoautomaticrenewalofthepolicyshortlybeforethesecondloan was made was likely to confuse;

• theinsurerfailedtosendcorrespondenceconcerningtheterminationofthepolicytotheSahins’correctaddress; and

• duringtherefinancing,NABhadfailedtofollowitsownproceduresbynotobtainingsignedacknowledgements from the Sahins regarding credit insurance.

Miscommunication between bank and insurer creates a ‘recipe for misunderstanding’

42

As a whole, the Court of Appeal found that this conduct was misleading and deceptive and had led the Sahins into error. The Court of Appeal used its powers under section 87(2)(b) of the Trade Practices Act 1974 (Cth) (now contained in s243 of the Australian Consumer Law) to vary the policy to provide coverage in respect of the second loan.

This case is a useful example of the potential consequences of failing to provide clear and unambiguous information to insureds.


http://vsc.sirsidynix.net.au/Judgments/VSCA/2011/A0064.pdf

http://vsc.sirsidynix.net.au/Judgments/VSCA/2011/A0064.pdf

43

Case Name:Steigrad & Ors v BFSL 2007 Ltd & Ors

Citation:HC AK CIV-2011-404-611, High Court of New

Zealand, Auckland Registry, per Lang J

Date of Judgment:15 September 2011

Issues:•Paymentofdefencecoststodirectorsandofficers

•Availabilityofachargeundersection9oftheLaw Reform Act 1936 (NZ) over monies payable

under a policy

An insurer was prevented from paying defence costs under a directors’ and officers’ insurance policy to the directors of several New Zealand companies because of the attachment of a charge over monies payable under the policy imposed by New Zealand legislation.

The Bridgecorp Group (the group) was a group of companies, primarily based in New Zealand, that was placed into receivership and/or liquidation in 2007. The receivers of certain companies within the group (the companies) advised the relevant directors (the directors) that they intended to commence civil proceedings against them alleging various breaches of duty to the companies and seeking orders requiring payment in excess of NZ$450 million.

The group maintained a directors’ and officers’ insurance policy (the policy). The policy indemnified the directors against loss arising from civil and criminal liability that they may incur in their service as directors. As is common, the policy also provided cover for the directors in respect of costs they incurred in defending proceedings seeking to establish their liability.

The directors had exhausted their other insurances in defending criminal proceedings relating to the group’s collapse and sought to claim on the policy. The companies asserted a charge over monies payable under the policy arising under section 9 of the Law Reform Act 1936 (NZ) (the Act) in light of the amounts they intended to claim in the civil proceedings. Section 9 of the Act creates a statutory charge in favour of a third party to an insurance contract on the happening of an event that gives rise to a claim for damages or compensation.

The insurer advised the directors that it would not advance monies for their defence costs under the policy until the directors and the companies reached agreement on the allocation of funds under the policy. The directors sought a declaration from the High Court of New Zealand that s9 of the Act did not prevent the insurer from paying its defence costs under the policy.

The High Court found that there was a ‘conditional’ charge under s9 of the Act in favour of the companies which prevented the directors from accessing the policy to meet their defence costs. Under the legislation’s terms, the charge attaches to monies payable under policies in which the insured has ‘indemnity against liability to pay any damages or compensation’. The policy in this case combined both indemnity for liability and indemnity for defence costs, and so all monies payable under the policy, including defence costs, were subject to the charge.

Charge over insurance monies leaves Bridgecorp directors without access to defence costs

44

Equivalent statutory provisions exist in certain Australian jurisdictions: namely, New South Wales, the Australian Capital Territory and the Northern Territory1.

The key elements of the High Court of New Zealand’s reasoning in reaching this decision are:

• caselawinAustraliaandNewZealandwasoflimitedassistanceindeterminingwhetherthedirectorscouldaccessthe pool of money under the policy for their defence costs and so it was necessary to have regard to the nature and purpose of s9 of the Act;

• thepurposeofs9istoensurethatthepoolofinsurancemoniesavailabletomeetcivilclaimsisnotdepleted.Ifthedirectors were able to access funds under the policy to meet their defence costs, that would defeat the purpose of the statutory charge;

• s9(1)expresslycharges‘allinsurancemoney’thatis,ormaybecome,payableinrespectofliabilitytopaydamagesor compensation. If the level of cover is less than the claim, then the charge applies to the whole amount for which cover is available. Conversely, if it is clear that the value of the claim is less than the amount of cover, the charge would only attach to part of the amount payable under the policy;

• thechargewas‘conditional’inthesensethatthecompaniesneededtoestablishthatthedirectorswereinfactliableunder the proposed civil proceedings; however, that did not prevent the charge from attaching immediately, as s9 of the Act provides that the charge attaches on ‘the happening of the event giving rise to the claim’; this is so ‘notwithstanding that the amount of such liability may not then have been determined’.

• theinsurerwasboundtokeepthefundsunderthepolicyintactforthecompanies(andanyotherpersonswhomayhave a charge in priority to them under s9(3)); and

• iftheinsurermadepaymentsoutofthepoolofinsurancefundsunderthepolicyforanypurposeotherthansatisfying the companies as civil claimants, then the insurer would be liable to restore that money to the pool of insurance funds.

While this decision is not binding on courts in Australia, it is likely that Australian courts would consider the decision carefully if a similar case were to be brought in an Australian jurisdiction in which equivalent legislation to s9 of the Act exists.

A notice of appeal has been filed in the New Zealand Court of Appeal in this matter, and an update will be provided on our website when the decision is handed down.


http://jdo.justice.govt.nz/jdo/GetJudgment/?judgmentID=197407

1 Section 6 Law Reform (Miscellaneous Provisions) Act 1946 (NSW); ss 206-209 Civil Law (Wrongs) Act 2002 (ACT); and ss 26 to 29 Law Reform (Miscellaneous Provisions)

Act 1956 (NT).


45

Application of credit risk policy where insurer has not confirmed that it is ‘on risk’

Case Name:Leading Synthetics Pty Ltd v Adroit Insurance

Group Pty Ltd & Anor


Macaulay J


Issues:•Contractformationandestoppelwhereinsurerfails

to confirm whether it is ‘on risk’

•Disclosureobligationswhenobtaining credit risk insurance

In this case, the Victorian Supreme Court was required to consider whether a credit risk policy was binding in circumstances where, although key terms had been agreed, the insurer had failed to confirm that it was ‘on risk’ and policy documentation was never issued. The court also considered the extent of disclosure obligations when obtaining credit risk insurance.

The insured, Leading Synthetics Pty Ltd, instructed a broker to arrange credit risk insurance for a particular customer of the insured. The broker and insurer engaged in negotiations and agreed key terms, but no policy documentation was issued. The customer later became insolvent and the insured made a claim under the policy. The insurer rejected the claim, on the basis that there was no binding contract between it and the insured. Matters upon which the insurer relied included that it had never confirmed that it was ‘on risk’ for the cover, policy documentation was never issued or exchanged, no premiums were paid and the broker never issued invoices to the insured.

The court rejected the insurer’s submission and determined that there was a binding contract brought about by the parties agreeing all essential terms of the policy. The court also accepted the insured’s submission that, as a result of the insurer’s failure to deny that it was ‘on risk’ when expressly asked by the broker in writing, the insurer was estopped from denying that it was in fact on risk (that is, that the contract was binding). In this respect, the court accepted that the broker and the insured had assumed the cover sought was in place and, on the basis of that assumption (and induced by the insurer’s silence), the insured had not sought alternative insurance cover. In reaching this view, the court noted that a reasonable person in the insurer’s position would have realised that the broker and insured believed that cover was in place.

A further issue determined by the court was the relevance of a failure by the insured to disclose to the insurer, before the inception of the policy, that it had experienced a declining trend in the relevant customer’s payment history. In this respect, the insurer relied on section 21 of the Insurance Contracts Act 1984 (Cth) and asserted that evidence of a declining trend in the customer’s payment history was relevant to its decision whether to write the risk and the terms on which it would have done so. However, the court rejected the insurer’s non-disclosure case, and determined that:

• theinsuredwasnotnecessarilyawareofthedecliningtrendinthecustomer’spaymenthistory;

• evenifithadbeensoaware,theinsuredwasnotawarethatsuchinformationwasrelevanttotheinsurer’sdecision to accept the risk or the terms on which it would be prepared to do so; and

• areasonablepersonintheinsured’spositioncouldnotbeexpectedtoknowthatthatinformationwassorelevant.

46

In addition, the court held that, even if the trading history of the customer had been disclosed, the relevant officer at the insurer would, in the court’s view, have proceeded to write the risk on the same terms.

This case underlines the importance of clarity in correspondence when negotiating a policy, to prevent a party proceeding on an incorrect assumption as to whether cover, or the terms of the policy, has been agreed. It also highlights that insurers should be clear in proposal forms as to the scope of information that they require, in order to assess properly whether to write a risk, and if so, on what terms.




47

The Full Court of the Federal Court has upheld a decision in which an insurer’s liability to indemnify was reduced to nil on the basis of non-disclosure and misrepresentation by its insured.

Background

In our 2010 Annual Review we reported on the first instance decision of Justice Rares in which it was held that a failure to disclose previous driving convictions on an application for motor vehicle insurance amounted to a misrepresentation and a breach of the insured’s duty of disclosure.

In the circumstances Justice Rares found that the insurer was entitled to refuse indemnity under the policy where a nominated driver who had twice been disqualified from driving (following convictions for driving under the influence of alcohol) was involved in a serious accident while driving the insured car, again under the influence of alcohol.

Justice Rares considered that, as the insurer would not have written the policy had it known about the previous convictions / disqualifications, the insurer was entitled under section 28(3) of the Insurance Contracts Act 1984 (Cth) to reduce its liability under the policy to nil.

On appeal, the Full Federal Court upheld Justice Rares’ decision and rejected Sagacious’ argument that a time limit should be read into the question about past convictions for driving offences. It held that, as one conviction had been disclosed, an insurer could reasonably assume that the nominated driver’s full driving record had been disclosed.

The decision reaffirms the importance of full disclosure by a prospective insured. An insured who is uncertain whether or not to disclose a relevant factor should err on the side of disclosure. The insured is in an even worse position where, as in this case, the court finds that it has tailored its responses to proposal form questions to keep a pertinent fact from an insurer.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCAFC/2011/53.html?stem=0&synonyms=0&query=title(“2011%20FCAFC%2053”)

Case Name:Sagacious Legal Pty Ltd v Wesfarmers General

Insurance Ltd

Citation:[2011] FCAFC 53, Federal Court of Australia, Full

Court, per Besanko, Perram and Katzmann JJ


Issues:•Insureds’dutyofdisclosureundersection21ofthe

Insurance Contracts Act 1984 (Cth)

•Whetherindemnitycostscanbereducedunders28(3) of that Act.

Just answer the question – insureds fail to disclose at their peril


http://www.aar.com.au/pubs/pdf/ari/2011/PrintConstructionofinsurancepolicies.pdf

48

A Queensland Court of Appeal decision raises questions about the scope of section 54 of the Insurance Contracts Act 1984 (Cth).

Triple C Furniture & Electrical Pty Ltd (Triple C) owned an aircraft, which crashed in 1999. Mr and Mrs Johnson, both employed by the company, were on board. Mr Johnson, the pilot, died, and Mrs Johnson was seriously injured. Mrs Johnson commenced proceedings against Triple C, claiming damages for personal injury, and alleging that Triple C was vicariously liable for her husband’s action. Mr Johnson was found to have operated the aircraft negligently and Mrs Johnson was awarded damages of $846,030.

Triple C had taken out aviation insurance. The insurer declined to indemnify Triple C on the basis that the circumstances of the accident fell within one of its exclusions. The relevant exclusion provided that the policy would not operate while the aircraft was being operated in breach of the Civil Aviation Regulations 1988 (Cth). Regulation 5.81 required the pilot to complete satisfactorily a mandatory flight review within two years of any proposed flight. No review had been done.

Triple C sought to rely on section 54 of the Insurance Contracts Act 1984 (Cth) (the ICA). Section 54 may assist where a claim is made under a policy and the effect of the policy is that the insurer may refuse to pay that claim as a result of the act or omission of the insured or some other person. Assuming this threshold issue is satisfied, s54 will operate to forgive an insured who breaches a term of its policy, unless it can be shown that either:

• theinsurerhassufferedprejudice(s54(1));or

• theinsured’sactoromissionhascausedallorpartoftheloss(s54(2),(4)).

The Queensland Court of Appeal found that the insurer was not liable to indemnify Triple C.

It found that, because Mr Johnson had not undertaken the requisite flight review, the exclusion in the policy operated to exclude cover.

Triple C argued that the pilot’s failure to undertake the necessary flight review constituted an omission under s54(1) and that the insurer should be prevented from denying liability. However, the court held that s54 of the Act did not apply, for two reasons.

First, the court held that a failure to undergo a mandatory flight review did not constitute an ‘omission’ for the purposes of s54. It considered that an ‘omission’ requires that the thing omitted should be within the power of the omitter. That was not the case here because whether or not Mr Johnson completed the review depended not just on his actions, but also on an instructor’s assessment of his performance.

Case Name:Johnson v Triple C Furniture & Electrical P\L

Citation:[2010] QCA 282, Queensland Court of Appeal per

Holmes, Chesterman and White JJA


Issues:•Meaningandapplicationofsection54ofthe

Insurance Contracts Act 1984 (Cth)

•Whethervalidexclusionsininsurancepolicieslimitthe application of s54

When section 54 can’t help

49

Second, the court held that if the claim were for indemnity not covered by the policy, s54 will not apply. The court stated that, if an act or omission is found, it cannot operate to convert a claim from a scenario where the loss was caused by the pilot who had not completed the mandatory flight review into a claim where the loss was caused by a pilot who had completed a flight review. The court held that the omission Triple C relied on gave rise to a claim that it could otherwise not make because of the exclusion under the policy. The omission could not change the exclusion’s existence and the court held that it was not an omission of the kind with which s54 is concerned.

Triple C was refused special leave to appeal to the High Court.

According to this decision, in circumstances where insurers are conscious of not accepting certain classes of risk, a valid exclusion in a policy may limit the court’s ability to decide questions under s54. This position may be at odds with the intent of s54 being remedial legislation.


http://archive.sclqld.org.au/qjudgment/2010/QCA10-282.pdf

http://archive.sclqld.org.au/qjudgment/2010/QCA10-282.pdf

50

Case Name:Dargham v Kovacevic


Wales per Hislop J

Date of Judgment:31 January 2011

Issues:•Whetheraninsurerwasentitledtorelyonan

insured’s failure to take reasonable steps or comply with statutory requirements in seeking

to enliven an exclusion clause

In a case involving a workplace accident, the New South Wales Supreme Court held that an insurer could not refuse indemnity because the insured failed to take ‘all reasonable steps’ and breached the Home Building Act 1989 (NSW).

On 4 July 2005, Mr Dargham (the plaintiff) fell through a void while working on a construction site. Mr Dargham was a subcontractor hired by a carpenter. The carpenter, in turn, was hired by the owner of the premises. Mr Dargham successfully sued the owner in negligence.

The owner sought an indemnity from his insurer, Mechanical and Construction Insurance Pty Limited (Mecon), under a contract works policy (the policy). Mecon refused indemnity on the basis that liability was excluded because the owner failed to take ‘all reasonable steps’ to prevent the loss, and that the owner had failed to comply with all legal requirements (particularly those in the Home Building Act regarding safety).

In respect of the ‘all reasonable steps’ submission, the court held that the policy must be read down in order to give effect to its commercial purpose, which was to indemnify the owner against liability for negligence. The court held that the owner had taken steps to avoid the danger, and therefore the insurer was not entitled to rely on the exclusion clause. In relation to the ‘legal requirements’ argument, the court found that the provisions of the Home Building Act were not properly categorised as ‘legal requirements regarding the safety or maintenance of property’ or ‘relevant workplace authority regulations regarding safety and maintenance of property’. Accordingly, the court held that Mecon could not refuse indemnity under the policy.

This case emphasises the need to consider exclusion clauses with considerable care. An insurer might not be able to rely on an exclusion clause referring to ‘all reasonable steps’ even if an insured has not necessarily taken every step available to it. Further, a failure to comply with certain provisions of home building legislation may not always constitute a failure to comply with a legal requirement regarding safety and / or maintenance.



Falling through the cracks: whether failure to take ‘all reasonable steps’ enlivens exclusion clause


51

Case Name:William McIlroy (Swindon) Limited & Ors v Quinn

Insurance Limited

Citation:[2011] EWCA Civ 825, England and Wales Court

of Appeal per Rix and Hooper LJJ and Sir Henry Brookes


Issues:•Determiningwhenaninsuredhasa‘liability’in

circumstances where a dispute in relation to ‘liability’ is subject to arbitration

The Court of Appeal of England and Wales was asked to determine the proper construction of a public liability provision as a preliminary issue, and whether the clause provided a time bar to the substantive proceedings.

Rannoch Investments Ltd (Rannoch) owned premises in Lewes, England. The premises were leased by William McIlroy (Swindon) Ltd (McIlroy) and were occupied by Mackays Stores Ltd (Mackay). Mackay engaged Cathedral Works Organisation (Chichester) Ltd (CWO) to do roof work and remove paint. CWO subcontracted that work to A Lenihan Ltd (Lenihan).

Lenihan was insured by Quinn Insurance Ltd (Quinn) under a public liability policy (the policy). Clause 16 of the policy provided that any dispute in relation to Quinn’s liability should be referred to an arbitrator within nine months of the dispute.

Lenihan caused a fire and the premises were damaged. In February 2009, Quinn declined to provide indemnity to Lenihan.

Rannoch sued McIlroy, Mackay, CWO and Lenihan. Lenihan did not defend the proceedings. The proceedings between Rannoch and the other three defendants settled in November 2009.

Damages against Lenihan were assessed in December 2009 (for McIlroy, Mackay and CWO) and in January 2010 (for Rannoch) (the claimants). In February 2010, Lenihan was wound up and its rights against Quinn were vested in the claimants.

The claimants sued Quinn to recover the damages that had been assessed against Lenihan.

At the trial, Quinn relied on clause 16 of the policy to assert that the action was time barred because the dispute had not been referred to an arbitrator within nine months of the denial of cover (that is, February 2009). This argument was tried as a preliminary issue and Quinn succeeded at first instance. The claimants appealed.

The Court of Appeal held that ‘liability’ under an indemnity policy does not accrue until the liability to the relevant third parties has been established and the amount of loss ascertained. That did not occur until damages were assessed in December 2009 and January 2010. Similarly, the court held that a ‘claim’ in the context of this public liability policy was a claim for indemnity after liability to a third party was established. As the proceedings by the claimants were commenced within nine months of the liability accruing and a claim being established, the action was not time barred. The court noted that Quinn took no point of the fact that court proceedings, as opposed to arbitration proceedings, were commenced in order to enforce the claims.

The quick and the dead: when does an insured have a ‘liability’?

52

Parties to insurance policies should be aware that the word ‘liability’ may only refer to an established liability for which the amount of loss has been ascertained, and may not contemplate a potential liability. Care needs to be taken in the case of each policy.


http://www.bailii.org/ew/cases/EWCA/Civ/2011/825.html

53

Case Name:Oakland Investments (Aust) Limited v ‘Certain

Underwriters at Lloyds’ & Ors

Citation:[2011] QSC 55 Supreme Court of Queensland

per Martin J


Issues:•Constructionofmortgageindemnitypolicywording

•Thresholdforobtainingsummaryjudgment

The Supreme Court of Queensland considered whether an insured had satisfied the requirements for summary judgment against its insurers under the Uniform Civil Procedure Rules 1999 (Qld) in relation to payments under mortgage indemnity policies.

The insured conducted a business of lending money to property developers and purchasers of agricultural businesses and land. The insured had obtained mortgage indemnity cover, and subsequently suffered a number of loan defaults and claimed the associated losses under its policies. The insurers denied liability and the insured issued proceedings in relation to the payments it alleged were due to it. There were two grounds upon which the insured based its claims:

• overpaymentofpremium;and

• paymentstobemadeunderthepolicy.

The insured then sought summary judgment against the insurers. Under Rule 292 of the Uniform Civil Procedure Rules 1999 (Qld), summary judgment is granted where:

• adefendanthasnotbeenabletoestablishthatithadarealprospectofsucceedingatatrial;and

• thereisnoneedforatrialofaclaimorpartofaclaim.

Overpayment of premium

The insured argued that it had mistakenly continued to pay premiums after the borrowers had defaulted. According to the insured, the policy did not require premiums to be paid from the time that a borrower defaults under an insured loan. The insurers denied that this policy construction was correct and said it was ‘arguable’ that premiums remained payable until a valid claim was due and payable under the policy. After considering the policy wording, the court held that the insured had not satisfied the test in Rule 292, as there was a need for trial on the issue of the construction of the policy. As such, the insured’s application for summary judgment on this point was denied.

Payments made under the policy

The insured claimed the insurers were obliged to indemnify it for losses suffered as a result of loan defaults. The insurers admitted indemnity but disputed the amount claimed, as certain payments received by the insured had been incorrectly characterised as additional interest, and should instead have gone towards reducing the principal.

Satisfying the threshold for obtaining summary judgment

54

The court examined the policy wording and the parties’ pleadings, and found that the matter raised by the insurers was not supported by their pleadings or affidavit material. As such, the insurers had not resisted the insured’s application for summary judgment, which was granted by the court.

While the outcome of this case turned on the specific policy wording, the threshold for summary judgment requires that there be no need for a trial of the claim, or part of a claim, and that the defendant have no real prospect of success.


http://archive.sclqld.org.au/qjudgment/2011/QSC11-055.pdf

http://archive.sclqld.org.au/qjudgment/2011/QSC11-055.pdf

55

Case Name:Vero Insurance Ltd v Owners of Strata Plan

No. 69352 & Ors

Citation:[2011] NSWCA 138, New South Wales Court of

Appeal per Allsop P, Basten JA and Sackville AJA


Issues:•Whetherahomewarrantyclaimattractedoneormultiple excesses for damage to common property

The New South Wales Court of Appeal has confirmed that an owners’ corporation making a claim for damage to common property under a New South Wales statutory home warranty insurance policy will only be liable for the payment of one excess in total, rather than one excess for each residential unit in a strata scheme.

Vero Insurance Limited is the insurer of a Meriton Group company under a statutory home warranty insurance policy issued in 2001 (the policy). Meriton constructed the residential component of a building complex that included 201 residential apartments (the property). Vero issued a certificate of insurance to Meriton in respect of each of the 201 apartments; however, no certificate of insurance was issued to the relevant owners’ corporation, which was created after the policy’s inception.

In 2006, the owners’ corporation made a claim under the policy for rectification of defective building work in the common area of the property (the claim). The claim was worth approximately $85,000. The policy included a $500 excess, and provided that ‘You must pay the first $500.00 of each claim’. The term ‘You’ was defined in the policy as: ‘The person on whose behalf the work under the contract is being done, together with any successor in title to that person.’ Vero rejected the claim on the basis that the excess was payable for each of the 201 residential apartments, and the combined value of the excesses exceeded the claim’s value.

The owners’ corporation took the matter to the Consumer, Trader and Tenancy Tribunal (the Tribunal). The Tribunal found in favour of the owners’ corporation and held that only one excess was payable under the policy. Vero’s subsequent appeal of that decision to the District Court of New South Wales was dismissed. Vero then appealed to the New South Wales Court of Appeal.

On appeal, Vero submitted that the claim in respect of loss or damage to the common property could only be made by the several lot proprietors in the strata scheme, and therefore 201 excesses should apply. The court rejected that submission and held that the statutory strata scheme contemplates that an owners’ corporation is responsible for common property, and therefore is entitled to make a claim in its own right under a statutory home insurance policy in respect of risks to common property.

In reaching the conclusion that only one excess was payable, the court noted, among other things, that the owners’ corporation had responsibility for the management, control, maintenance and repair of the common property of the strata scheme under the Strata Schemes Management Act 1996 (NSW). The court also found that the owners’ corporation had become Meriton’s successor in title, and the effect of the Home Building Act 1989 (NSW) was that the policy had to insure the owners’ corporation as the successor in title to the common property.

Consideration of the number of excesses payable by an owners’ corporation

56

The decision reinforces that an owners’ corporation is a successor in title, and therefore entitled to make a claim, even though the owners’ corporation may not have been established at the time of the policy’s inception. The decision also clarifies that only one excess will apply to a claim made by an owners’ corporation under a New South Wales statutory home warranty insurance policy in respect of damage to common property, rather than one excess for each unit in the strata scheme.




57

Case Name:Major Engineering Pty Ltd v CGU Insurance Ltd

Citation:[2011] VSCA 226, Victorian Court of Appeal per

Bongiorno and Hansen JJA and Kyrou AJA


Issues:•Operationofcostextensionclauses

•Constructionofexclusionclauses

•Characterisingabusinesssellingabespokeproductas a ‘professional service’

The Victorian Court of Appeal considered whether a professional risks exclusion clause had the effect of excluding an insurer’s liability to indemnify an insured for its legal costs under a costs extension clause.

Major Engineering Pty Ltd (Major) was insured under a public and product liability policy (the policy) issued by CGU Insurance Ltd (CGU), and claimed indemnity under the policy’s costs extension clause for legal costs it incurred in successfully defending a claim brought against it by Timelink Pacific Pty Ltd (Timelink). Timelink’s claim was for damages arising from the failure of two hydraulic cylinders supplied to it by Major for a racing yacht that capsized.

The costs extension clause provided cover for legal costs in the case of ‘Public Liability or Products Liability’ or ‘a claim of Public Liability or Products Liability …for which indemnity is, or would be, available under this policy.’

The first instance decision

The trial judge held that Timelink’s claim was not a product liability claim for which cover would have been availableunderthepolicybecauseTimelinkdidnotarguethecylindersweredefective–rather,itcontendedthey were unsuited for their intended purpose. Further, even if it was a product liability claim, cover for Major’s costs would have been excluded under clause 19 of the policy, which provided that CGU would not indemnify Major for liability caused by or arising out of its performance or failure to perform:

…(a) the rendering of professional advice or service…[or] (c) making or formulating of a design or specification within the domain of the… engineering profession.

The appeal

The Court of Appeal held that the purpose of the costs extension clause was to cover Major for its costs where:

• itincurredalegalliabilityasdeterminedbyacourt;or

• aclaimwasmadeagainstMajor,andthatclaim,wereittobesuccessfullyprosecutedinthefuture,wouldbe indemnified under the policy.

During the course of the appeal, CGU admitted that Timelink’s claim against Major was a product liability claim. Accordingly, the only issue for determination by the Court of Appeal was the application of exclusion clause 19.

Recovery of legal costs under a costs extension clause

58

To determine whether Timelink’s claim against Major, if successful, would have given rise to an indemnity under the policy, the court cautioned against relying too heavily on pleadings when characterising a claim, given they are often framed more widely in pleadings than at trial. Instead, focus should be on the substance of the claim and the underlying facts ultimately adjudicated upon. The court concluded that, if Timelink’s claim had succeeded, the liability imposed on Major would have related to a breach of contract for failure to supply hydraulic cylinders that met required specifications.

As to the application of exclusion clause 19(a), the court held it did not apply, as, when Major supplied the hydraulic cylinders to Timelink, it was selling a product that could not be sensibly characterised as rendering professional advice or, as argued by CGU, a professional service. Exclusion clauses must be construed in light of the purpose of the policy and the specific business that the policy describes. To hold, in this case, that the supply of the hydraulic cylinders was excluded by the policy would severely compromise the purpose of the policy. Similarly, exclusion clause 19(c) did not apply because Major did not design the cylinders and could not be said to have incurred liability relating to the making or formulating of a design or specification.

Based on these findings, the court unanimously overturned the trial judgment and held that CGU was required to indemnify Major for the costs of defending Timelink’s claim.

This case is relevant to insurers in determining whether an insured may be covered under a costs extension clause for legal defence costs in successfully defending a claim. It demonstrates that courts will look to characterise that claim not just by reference to the pleadings but to its substance, the underlying facts and the case ultimately adjudicated upon at trial. The case also serves as a reminder that exclusion clauses must be read in light of the purpose of the policy and the specific business that the policy describes.

59

Case Name:Miskovic v Stryke Corporation Pty Ltd t/as KSS

Security (No.2)


Wales per Rothman J

Date of Judgment:22 December 2010

Issues:•Insurer’sliabilitytoindemnifyaninsuredfor the insured’s legal costs of defending both a

negligence claim and a claim under the Trade Practices Act 1974 (Cth)

The Supreme Court of NSW was asked to determine the proper construction of a clause relating to the provision of defence costs in proceedings where a plaintiff sued for damages in both negligence and for a contravention of the Trade Practices Act 1974 (Cth).

In earlier proceedings, a plaintiff brought proceedings against his employer in negligence and for contravention of the then Trade Practices Act 1974 (Cth) (the TPA) seeking damages for psychiatric injury or breach of representations made prior to his entry into employment. The court found against the plaintiff in relation both to the negligence claim and for the contravention of the TPA.

This proceeding related to an insurance policy the employer held. The policy provided that the insurer would indemnify the employer for costs and expenses incurred ‘in connection with the defence of any legal proceeding’ in which it was alleged that the employer was liable to pay compensation for an ‘injury’ to an employee.

The employer sought indemnity for its defence costs for both the negligence claim and the TPA claim. The insurer refused indemnity for defence costs relating to the breach of the TPA on the basis that the policy only covered defence costs for claims relating to an ‘injury’. The insurer argued that, because the plaintiff’s claim was for a contravention of section 53B of the TPA, which did not require a prerequisite ‘injury’ as the basis of a claim, the indemnity did not extend to the employer’s costs of defending that claim.

Justice Rothman held that the indemnity covered all the employer’s legal costs. That was because the plaintiff (in the negligence claim) had alleged the existence of an ‘injury’, and the effect of the clause was that all costs were covered, regardless of whether they were incurred for the negligence claim or the allegation of a contravention of the TPA.

This case demonstrates that care must be taken when drafting insurance policies to ensure that clauses providing for defence costs are not open to a wider interpretation than intended.


http://www.lawlink.nsw.gov.au/scjudgments/2010nswsc.nsf/00000000000000000000000000000000/fb887fe2610caaf1ca2577ff0015f835?opendocument

Defence costs: an indemnity catches all



60

Case Name:Mainstream Aquaculture Pty Ltd v Calliden

Insurance Ltd

Citation:[2011] VSC 286, Supreme Court of Victoria

per Croft J


Issues:•Meaningof‘damage’inthecontextofbusiness

interruption insurance

The Victorian Supreme Court considered the meaning of ‘damage’ under a business interruption insurance policy and held that a fuse tripping to prevent a power surge (as it was designed to do) constituted property damage.

Mainstream Aquaculture Pty Ltd (Mainstream) conducted a commercial fish breeding business. Electricity was supplied to the business by a sub-station located on Mainstream’s property. A power surge caused a fuse to trip, switching power at Mainstream’s premises from the mains to a generator. The generator failed to operate and, as a result, electrically powered pumps supplying oxygen to the fish stopped working, and the fish died.

Mainstream made a claim under its business interruption policy (the policy), which provided cover for, among other things, ‘Failure of Supply from Public Utilities’ resulting from property damage. It was accepted that the fuse comprised property for the purposes of the policy but its insurer rejected Mainstream’s claim on the basis that the fuse was not damaged because it operated to fulfil its designed purpose of ‘tripping’ to stop a potentially damaging overload of current. The insurer also relied on an electrical breakdown exclusion in the policy.

Justice Croft referred to the well established principle that policy construction is to be determined by what a reasonable commercial person in the position of the parties would have understood at the time of contracting. This requires consideration of the words of the policy and the commercial purpose and object of the agreement. Where possible, such interpretation should be undertaken in a common-sense, non-technical way to provide a commercially sensible construction. To this end, particular terms should be construed in light of the whole of the contract to render a ‘harmonious interpretation’ of the provisions.

Justice Croft revisited the oft-cited authorities of Ranicar1 and Dundean2, which respectively held that damage occurs when property is subject to ‘a physical alteration or change, not necessarily permanent or irreparable which impairs the value or usefulness of the thing said to be damaged’ or where ‘interfered with in such a way as to render it less useful or valuable and in consequence time and money are required to restore that use or value…’.

His Honour held that the tripped fuse was damaged under the policy, despite the fact that it was designed to operate in this manner. The tripped fuse was damaged on the basis that it was physically altered, could no longer fulfill its protective function, and time (and resources) needed to be expended to repair and replace it.

The policy excluded cover for: ‘Interruption or interference with [Mainstream’s] Business arising from loss or damage caused by….Mechanical, Electrical or Electronic Breakdowns or Breakages.’ The insurer contended

1 Ranicar v Frigmobile Pty Ltd [1983] Tas R 113 at 116.

2 Switzerland Insurance Australia Limited v Dundean Distributors Pty Ltd [1998] 4 VR 692 at 714.

Don’t blow your fuse: considering the meaning of ‘damage’ under a business interruption insurance policy

61

that the exclusion applied on two grounds: first, the failure of the generator to provide alternative power to the premises constituted an electrical breakdown and, second, that damage to the fuse comprised an electronic breakage.

Justice Croft held that these grounds were uncommercial interpretations of the policy. The insured was not obliged to install a generator under the policy and should not be placed in a worse position than if it had not. Further, he did not consider damage to the fuse was an ‘electronic breakage’ on the basis that any electrical failure giving rise to damaged property would necessarily be mechanical or electrical in nature. As such, the insurer’s construction would have the effect that the exclusion clause would operate to prevent all claims under the Failure of Supply from Public Utilities clause.

This case demonstrates the importance of clearly defining the scope of ‘damage’ intended to be covered under business interruption policies. Further, the commercial context, including the nature of an insured’s business and its principal areas of risk (in this case uninterrupted electricity supply) may influence a court in construing policy terms.




62

Case Name:JSM Management Pty Ltd v QBE Insurance

(Australia) Ltd


Osborn J


Issues:•Meaningof‘wearandtear’inpolicyexclusion

•Breadthof‘reasonableprecautions’conditionsinproperty insurance policies

In this case – an appeal from the Victorian Civil and Administrative Tribunal – the Supreme Court of Victoria was required to determine the proper construction of the expression ‘wear and tear’ in the context of an exclusion in an industrial special risks policy, and whether ‘reasonable precautions’ conditions in property insurance policies should be construed more broadly than in liability policies.

The insured, JSM Management Pty Ltd (JSM), leased a depot to Gaffney Logistics Pty Ltd (Gaffney) that included a ‘hardstand’ area with a load bearing weighting of 40 tonnes. JSM informed Gaffney that it would not be able to use its forklift (with a weight of approximately 100 tonnes) on the hardstand because it would cause it to fail. Gaffney nevertheless used the forklift on the hardstand over a period of eight months and the hardstand became damaged. JSM made a claim under its industrial special risks policy for the damage. The insurer, QBE Insurance (Australia) Ltd (QBE), rejected the claim, on the basis of a ‘wear and tear’ exclusion and a ‘reasonable precautions’ condition in the policy.

At first instance, the Victorian Civil and Administrative Tribunal found in favour of QBE, on the basis that the expression ‘wear and tear’ in the exclusion was intended to cover a ‘progressive situation rather than a “one-off incident”’ and that the damage to the hardstand had been progressive. In reaching this conclusion, the tribunal drew contradistinction with the expression ‘fair wear and tear’ and determined that, without the qualifier ‘fair’, ‘wear and tear’ simply indicated use. On appeal, the court rejected this construction and found that the exclusion did not apply because:

• ‘wearandtear’,construedbyreferencetotheplainwordsinthepolicy(andwithabusiness-likeinterpretation), was intended to capture damage caused by ordinary events; and

• theoperationofamassivelyoverweightforkliftonthehardstandcouldnotobjectivelybedescribedas‘ordinary’.

A further issue on appeal was whether JSM had breached a policy condition requiring it to take reasonable precautions to prevent the damage to the hardstand. At the appeal hearing, QBE conceded that authority established that ‘reasonable precautions’ conditions should be construed extremely narrowly (against a recklessness standard) in liability policies, but submitted that a wider construction should apply in policies of property insurance. The court rejected this submission, and held that it was desirable that the recklessness standard apply across insurance policies with a commercially common form. In this way, the court adopted the approach of the New South Wales Court of Appeal in Legal and General Insurance Australia Limited v Eather (1986) 6 NSWLR 390.

Wear and tear exclusions and reasonable precautions conditions

63

Notwithstanding its rejection of QBE’s submissions as to the scope of the ‘reasonable precautions’ condition, the court determined that the tribunal had not properly applied the test imposed by the condition and had failed to consider the possible application of section 54 of the Insurance Contracts Act 1984 (Cth). Given that resolution of these matters required determination of contentious factual matters, the court remitted the proceeding to the tribunal for reconsideration of the application of the ‘reasonable precautions’ condition.

The decision confirms that a ‘wear and tear’ exclusion will typically be construed to apply only where there is damage caused by ordinary use. The court also confirmed that a ‘reasonable precautions’ condition should be construed extremely narrowly, irrespective of whether it is contained in a property risk policy or liability policy.




64

Case Name:Orica Australia Pty Ltd v Limit (No 2) Ltd


per Pagone J


Issues:•Whethertheword‘include’inaninsurancepolicy

was used to add to or elaborate upon a preceding paragraph, or to identify exhaustively the coverage

•Aninsured’sobligationtomitigateitsloss and the extent to which it can act in its own

commercial interests

This case reiterated the established principle that the word ‘include’ in a policy of insurance will be construed by reference to its ordinary meaning. The case also considered whether an insured took reasonable steps to mitigate its loss, and whether its loss was caused by a failure to mitigate.

In 2004, Orica Australia Pty Ltd (Orica) chartered a cargo ship to transport bagged ammonium nitrate from Quebec to Queensland. Containers used to stow the cargo were not properly secured by Orica and during the voyage the cargo shifted, causing the ship to list. The ship made port in America, where it was prohibited from sailing by the coast guard until the cargo was either discharged or re-stowed. The ship’s owner proposed that Orica discharge the cargo, so it could repossess the ship in exchange for waiving a foreshadowed detention claim against Orica. Orica refused the owner’s offer, on the basis that the cargo was required in Australia without delay, to avoid financial and business losses to the insured. As such, Orica re-stowed the cargo and the ship continued with its voyage.

Orica paid compensation to the ship’s owner and in turn claimed under an insurance slip for charterer’s liability. The insurer indemnified Orica for about one-third of the claim, but disputed any further obligation to pay under the policy, on grounds including that Orica either failed to mitigate its loss by not accepting the owner’s offer, or had failed to establish that the amount claimed was caused by the insured event.

Meaning of ‘include’

The first paragraph of the policy provided cover for payments made in settlement of compensation claims arising from the charter of a vessel. The second paragraph stated: ‘For the purpose of this policy the Compensation referred to in the immediately preceding paragraph shall include:’ and then specified a number of liabilities.

Orica argued that, as its claim came within the first paragraph of the policy there was no need to consider the specified liabilities after ‘include’. In effect, ‘include’ meant ‘including but not limited to’. The insurer argued that the cover provided by the first paragraph was limited to the specified liabilities set out after the word ‘include.’ As the balance of Orica’s claim did not fall under one or more of the specified liabilities, it was not covered by the policy.

Justice Pagone held there was no authority to construe ‘include’ narrowly in a policy of insurance, to limit cover. The word should be given its ordinary meaning (and a business-like interpretation as well) unless there is a reason to do otherwise. The parties could have used ‘being’, ‘namely’ or ‘meaning’ at the end of the first paragraph if they intended to limit cover to the specified liabilities.

What does loss ‘include’ and how must it be mitigated?

65

Mitigation of loss

Another issue for determination was whether Orica was required to accept the ship owner’s offer, to Orica’s commercial detriment. Further, was policy coverage precluded on grounds that Orica’s loss was caused by a decision not to accept the offer rather than from the insured event (cargo movement)?

Justice Pagone held that:

• Orica’sobligationtomitigateitslossdidnotrequireittosacrificeitscommercialinterestsinfavouroftheinsurer;and

• toavoidindemnityunderthepolicy,theinsurerwasrequiredto:

• showthattheproximatecauseofthelosswas‘nottheperilinsuredagainst,butthefailureoftheinsuredtotakereasonable steps to protect it’; and

• establishthattheindemnitysoughtbytheinsuredflowedfromsomethingotherthantheinsuredeventthatcaused the loss.

Justice Pagone held that in circumstances where it was arguably not physically possible to carry out the owner’s offer and that in doing so the insured would have incurred substantial financial losses, including the cost of shutting down part of its Australian operations, Orica dealt with the incident in a commercial and expeditious way. The costs Orica claimed were caused by the insured event and flowed reasonably from its attempt to mitigate its losses.

This case reaffirms the established principle that the word ‘include’ in an insurance policy should be given its ordinary meaning, which is expansive rather than restrictive. The case also demonstrates that an insured is entitled to have regard to its own commercial interests, at least to some extent, when considering how to mitigate its insured losses.




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The New South Wales Supreme Court considered whether a non-party was entitled to recover loss under an insurance policy, and held that the policy did not extend to persons who were not specified or referred to in it.

The plaintiff was seriously injured in a boating accident and the boat’s driver was killed. The boat’s owner was insured to cover a legal liability to pay compensation to third parties under a policy of insurance issued through Club Marine Ltd (Club Marine).

The plaintiff claimed that she was entitled to sue Club Marine, by virtue of section 48 of the Insurance Contracts Act 1984 (Cth). Broadly speaking, that section allows a beneficiary who is named or specified in an insurance policy, but who is not directly a party to it, to sue the insurer.

Here, the insurance policy did not name or specify the plaintiff as a beneficiary.

Justice Harrison rejected the plaintiff’s argument. His Honour stated that s48 was unambiguous, in that it operated in favour of a person who was entitled to indemnity under the contract; that is, specified or referred to in the contract. He held that s48 did not extend to giving rights to the plaintiff, whose only relation to the policy was that she had suffered loss at the hands of a named insured. As the plaintiff was not mentioned or referred to in the Club Marine policy, she was not able to sue the insurer on the basis of s48.

This case demonstrates that s48 will only operate to extend cover to a person named or specified in a policy of insurance who is not otherwise a party.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2011/168.html?stem=0&synonyms=0&query=Nicol%20AND%20Whiteoak

No more Mr McNice guy – s48 is not the next Trident

Case Name:Nicol v Whiteoak


Wales per Harrison J


Issues:•Whethers48oftheInsuranceContracts Act 1984

(Cth) extends to a plaintiff suing an insurer when the plaintiff is not a beneficiary or insured

under the policy.

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The English Court of Appeal considered whether an insurer was prevented from raising the issue of fraud in fresh proceedings against the claimant, after a claim had been settled out of court.

In 1998, Mr Hayward injured his back at work. His employer carried employers’ liability insurance with Zurich Insurance Company Plc (Zurich). In 2001, Mr Hayward brought proceedings against his employer and claimed damages of £420,000. In its defence, his employer (instructed by Zurich’s solicitors) argued that the claimant had exaggerated his difficulties in recovery and his current physical condition. Medical experts concluded that the nature and extent of Mr Hayward’s injuries required further clarification, by way of judicial determination at trial. However, in 2003, the claim settled for £135,000 in the form of a Tomlin order.1

Evidence was later presented to Zurich that Mr Hayward had, in fact, made a full recovery by mid-2002. Zurich subsequently commenced proceedings, alleging that Mr Hayward had made fraudulent representations that resulted in loss and damage to Zurich. The court struck out Zurich’s claim, on the basis that the Tomlin order created an estoppel by res judicata.2 His Honour made this finding on the ground that Zurich had already raised the issue of fraud in the first action. Zurich appealed the decision.

In allowing the appeal, the court considered whether Zurich was prevented from bringing its claim against Hayward:

• duetotheprincipleofestoppelbyres judicata; and/or

• becausetodosowouldamounttoanabuseofprocess.

The court held that estoppel by res judicata did not apply so as to prevent Zurich from bringing its claim against Mr Hayward. For an estoppel by res judicata to be established, it must be clear that the allegation of fraud in the first action was the same as the allegation in the second action. The court held that, although the two allegations of fraud were similar, they were not the same. Accordingly, it was open for a court to determine the second allegation of fraud.

The court also did not accept that the second action was an abuse of process. The public interest in protecting the administration of justice from fraud outweighed the public interest of ensuring finality of proceedings. The court could not see anything harassing about Zurich’s conduct in bringing its action, and it was acting on fresh information of which it was previously unaware.

1 A Tomlin order is, in the event of a settlement of a dispute, an order by consent to stay proceedings that are kept alive for the purpose of a party being able to enforce the terms

of a settlement. The terms of settlement are agreed in advance and attached to the order.

2 As explained in this case by Justice Moore-Bick on appeal, estoppel by res judicata is the principle whereby judicial decisions, once made, must be accepted as final and are

not open to challenge.

Case Name:Zurich Insurance Company Plc v Colin

Richard Hayward

Citation: [2011] EWCA Civ 641, England and Wales Court of Appeal per Maurice Kay, Smith and Moore-Bick LJJ


Issues:•Applicationofestoppelbyres judicata

•Abuseofprocess

Re-examination of settlement where fraud is later suspected

http://www.aar.com.au/pubs/pdf/ari/2011/PrintFraudulentnondisclosure.pdf

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This case demonstrates English courts’ willingness to ensure that insurers are not prevented from pursuing claimants for damages if fresh evidence of fraud comes to light after a settlement is reached.


http://www.bailii.org/ew/cases/EWCA/Civ/2011/641.html

69

Case Name:Sharon’s Bakery (Europe) Ltd v AXA Insurance UK

Plc & Anor

Citation:[2011] EWHC 210 (Comm), England and Wales High

Court per Blair J

Date of Judgment:9 February 2011

Issues:•Non-disclosureofmoralhazard

Here, the English High Court considered the effect of an insured’s non-disclosure of a hazard following its presentation of a claim for indemnity.

In 2007, Mr Nassim and Mr Caplin established the claimant company, Sharon’s Bakery (Europe) Ltd (Sharon’s Bakery). Mr Nassim had bakery equipment available and Mr Caplin had premises from which the business could operate. The new company used Mr Caplin’s premises and Mr Nassim transferred some of the equipment to the new entity in return for a 50 per cent shareholding of the new company.

As part of the agreement, Mr Caplin was to obtain finance from Lombard North Central Plc (Lombard). During this process, Mr Caplin provided two documents to Lombard:

• aninvoice,dated15November2007,purportingtoshowthatBakequip(UK)Ltd,abakeryequipmentsupplier, had sold various items to Mr Nassim’s previous business, Sharon’s Bakery (Wholesale & Retail) Ltd (SB Wholesale & Retail); and

• aninvoice,dated3February2008,fromSBWholesale&RetailtoSharon’sBakery,listingthesamebakeryitems, serial numbers and amounts as the invoice of 15 November 2007.

It was agreed between the parties that the transaction documented in the 15 November 2007 invoice did not occur. Mr Caplin and Mr Nassim issued an amended version of the 15 November 2007 invoice to Lombard, re-addressing the invoice to the new entity, Sharon’s Bakery.

An accidental fire occurred at the premises of Sharon’s Bakery. The invoice of 3 February 2008 was provided to loss adjusters, to prove that the title of the bakery equipment had been transferred from Mr Nassim’s previous business to Sharon’s Bakery. In the course of investigating the claim, Mr Levy, of Bakequip, intervened and faxed the two different iterations of the 15 November 2007 invoice to the loss adjuster. These documents were forwarded to the insurers. The insurers avoided the policy and Sharon’s Bakery commenced proceedings. The insurers denied liability on two grounds:

• therewasnon-disclosureofamaterialfacttoLombard–namely,thedishonestyoftheinsured,ormoralhazard–inrelationtothepreparationofthefalsecreditapplicationrisk;and

• theclaimantsubmittedaninvoicetotheinsurerthatitknewtobefalseandthisamountedtousinga‘fraudulent means or device’ in order to secure payment of the claim.

The court held that the insured’s fraudulent documentation of its credit application for finance demonstrated dishonesty and that this moral hazard was a material risk that should have been disclosed to the insurer prior to the policy cover incepting.

The danger of presenting half-baked supporting claims documents

70

In addition, the court held that the fraudulent invoicing constituted a fraudulent means or device, which triggered a policy exclusion to deny the claim.

This English case is consistent with the effect of the Insurance Contracts Act 1984 (Cth), in holding that the non-disclosure of a moral hazard may be fatal to an otherwise legitimate claim, even where a third party has initiated the moral hazard but the insured has ‘adopted and perpetrated the lie’. Although it should be recognised that the test of materiality is judged in Australia by reference to the insured’s position, rather than by reference to the prudent insurer test in England, there is no reason to think that this would have produced anything other than the same result here.



71

In a case concerning an insurer’s liability to indemnify an insured, the English High Court has demonstrated the English common law’s strict approach in applying the non-disclosure rule to avoid a policy from its inception.

On 26 November 2008, a fire occurred at a property owned by the insured plaintiff, Joseph Fielding Properties (Blackpool) Limited (JFP). JFP submitted a claim exceeding £2 million to the insurer, Aviva Insurance Limited (Aviva). After conducting investigations, Aviva denied the claim on the following three grounds:

• duringthecurrencyofthesamepolicy,JFPhadmadeafraudulentclaimfordamagetoadrainonthesameproperty, which Aviva paid;

• JFPfailedtodisclosetoAvivapriortotheinceptionofthepolicythatitsdirector,MrLeonard,andhiswifehad made a previous fraudulent claim against another insurer for water damage to another property the couple owned; and

• JFPfailedtodisclosethatMrLeonardhadpreviouslymademisrepresentationsandnon-disclosuresonmultiple occasions to other insurers.

Aviva sought to avoid the policy and recover the monies paid for the drainage claim and an amount paid in respect of an earlier fire claim. In doing so, it relied in part on a provision in the policy that gave Aviva the discretion to avoid the policy if a claim were fraudulent or exaggerated or if a false statement were made in support of a claim.

First, the court held that the drainage claim was made fraudulently by JFP in submitting an invoice to Aviva that was intentionally exaggerated. Even though the insured could have made a legitimate claim for the damage to the drain at a lesser amount, the effect of the fraud was to taint the whole of the claim.

Second, the court found that Mr and Mrs Leonard had made a previous fraudulent claim with another insurer. The judge found that the Leonards had taken out an earlier policy after they had discovered their property had been flooded and had represented that the damage had occurred only after entering into the policy.

Third, the court held that a series of 12 previous non-disclosures made to other insurers, taken as a whole, would have been material information that Mr and Mrs Leonard were obliged to disclose to Aviva and would have been sufficient to prevent Aviva from accepting the risk.

As a consequence of the court upholding Aviva’s avoidance of the policy, it was not liable to indemnify JFP for the fire claim, and was entitled to avoid the policy and to recoup the settlement payments for the drainage claim and the previous fire claim (even though the genuineness of this claim was not impugned).

Case Name:Joseph Fielding Properties (Blackpool) Ltd v Aviva

Insurance Ltd

Citation:[2010] EWHC 2192 (QB), England and Wales High

Court per Waksman J


Issues:•Strictapplicationofthecommon

law non-disclosure rule

Honesty is best under the policy

72

While section 56 of the Insurance Contracts Act 1984 (Cth) does not permit an insurer to avoid a policy in response to a fraudulent claim, as English common law does, the same effect of avoidance for fraudulent non-disclosure would have been the result under both English and Australian law.


http://www.bailii.org/ew/cases/EWHC/QB/2010/2192.html

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Fraudulent misrepresentation: The doctor who took his own medicine

Case Name:Moore v National Mutual Life Association of

Australasia Ltd


Wales per Ball J


Issues:•Fraudulentnon-disclosureandavoidanceofa

contract of life insurance under section 29 of the Insurance Contracts Act 1984 (Cth)

•Restitutionandchangeofposition

The New South Wales Supreme Court recently upheld a life insurer’s avoidance of a policy in light of the insured’s fraudulent pre-contractual non-disclosure. Nevertheless, the insured was permitted to retain all of the payments the insurer made to him.

In late 1993, Dr Moore took up a position as a psychiatric registrar at Launceston General Hospital and shortly afterwards took out income protection insurance with Australian Casualty & Life (ACL).

Dr Moore’s completed application form stated that he had been a self-employed psychiatrist for 21 years, his net income was $90,000 per annum, and that he never had received treatment for drug dependency. Each of these statements was incorrect at the time they were made: Dr Moore was a psychiatric registrar, his actual income was $52,000 and he had a long history of treatment for drug dependency. Dr Moore was issued with an income protection policy in December 1993.

In late 1994, Dr Moore started to develop a major depressive illness that led him to resign. On 3 May 1995, he made a claim on his income protection policy. On 19 November 2002, ACL ceased paying any benefits to Dr Moore, following which he commenced proceedings for indemnity in 2008.

By that time, ACL had been taken over by National Mutual. National Mutual ultimately defended the proceedings on the basis that the policy was avoided in light of the fraudulent misrepresentations and non-disclosures made in the application form.

The court agreed that Dr Moore had, indeed, fraudulently misrepresented his medical history, drug addiction, income and occupation before the policy was issued and that National Mutual was entitled to avoid the policy as a result, under section 29 (2) of the Insurance Contracts Act 1984 (Cth).

Despite the court also finding that National Mutual had not affirmed the policy cover and that Dr Moore had not made out an estoppel defence, he was nevertheless able to retain almost $500,000 of benefits that had been paid to him. The reason for this, at first glance unexpected outcome, was Dr Moore being able to rely successfully on a defence of change of position in answer to the claim for restitution of the benefits paid. By this principle, a recipient of money who, acting in good faith, spends it may not be required to repay it where the injustice of the repayment outweighs the injustice of denying the claim for restitution.

Here, the court held that Dr Moore had changed his position on the face of the receipt of benefits paid to him, on the basis that:

• claimmonieswerespentonlivingexpensesthatwouldotherwisenothavebeenincurred(astheinsuredwould have lowered his standard of living had he not received the policy benefits);

http://www.aar.com.au/pubs/pdf/ari/2011/PrintLifeinsurance.pdf

74

• incometaxwouldhavebeenpaidontheclaimmonies;and

• hadhenotreceivedanyclaimmonies,DrMoorewouldhavebeenentitledtoreceiveCentrelinkbenefits,whichcouldnot now be claimed in arrears.

The key findings so far as change of position is concerned was the court’s consideration of whether there was any evidence either of bad faith or wrongdoing on Dr Moore’s part that disqualified him from relying on a change of position defence. Justice Ball dealt with these issues as follows:

Finally, I do not think that it could be said that Dr Moore knew that Australian Casualty & Life was entitled to the return of the money or that he was a wrongdoer. National Mutual only became entitled to a return of the money when it elected to avoid the policy; and Dr Moore did not know that would happen.

The fact that Dr Moore was guilty of fraudulent misrepresentation does not make him a wrongdoer in relation to the receipt of the payments. There is no suggestion, for example, that he misled Australian Casualty & Life in relation to the payment of his claim. [emphasis added]

The effect of this finding would appear to be that an insured will only disqualify himself or herself from being able to rely on a defence of change of position in response to a claim for restitution where the fraudulent behaviour occurs at the timewhenaclaimforindemnityisactuallymadeorthemoniesarereceived–andnotifthefraudoccurspriortothepolicy incepting.

This is a significant case for life insurers, who can expect to see this defence being raised by insureds who are seeking to resist the effects of avoidance following a non-disclosure. In particular, there will, no doubt, be many insureds in a similar position to Dr Moore, who have income protection policies and will be spending claim monies on living expenses that would not otherwise have been incurred.

If so, then there is likely to be more debate around the issue of whether pre-contractual fraudulent non-disclosure should be relevant to the questions of bad faith and wrongdoing when considering defences of change of position. Certainly, this would appear to be consistent with the acknowledged policy objective in denying fraudulent claims.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2011/416.html?stem=0&synonyms=0&query=title(Moore%20and%20National%20Mutual%20Life%20)

75

In an interlocutory proceeding, the Supreme Court of NSW determined that it was reasonably arguable that a life insurance policy could be avoided from inception under section 29 of the Insurance Contracts Act 1984 (Cth) in circumstances where the policy had already been terminated.

The plaintiff, Mr Hitchens, suffered injury and sought payment of benefits under a life insurance policy issued by Zurich Australia Limited (Zurich). Benefits were initially paid to the plaintiff; however, Zurich reduced, and then ceased, payments following concerns about the information the plaintiff had provided when entering into the policy.

The plaintiff alleged that the non-payment constituted a repudiation of the policy by Zurich and, by letter, sought to accept the repudiation and terminate the policy. Zurich subsequently sought to avoid the policy from inception under s29 of the Insurance Contracts Act 1984 (Cth) (the ICA).

The plaintiff commenced proceedings, seeking (among other orders) a declaration of the amounts due under the policy. Subsequent to filing its defence, and after the issue of subpoenas, Zurich sought to amend its defence to include a ground of avoidance under s29(2) of the ICA for fraudulent non-disclosure, and filed a notice of motion accordingly.

Associate Justice McCready, at first instance, found that it was not possible for a policy to be avoided under s29 of the ICA when it had already been terminated. Zurich appealed this decision.

Chief Justice Bergin granted leave and found that, on a proper construction of s29 of the ICA, read with the definition of ‘avoid’ in s11 of the ICA1, it was reasonably arguable that:

• aninsurerisnotprohibitedfromavoidingacontractofinsurancethathascometoanend;and

• accruedrightsandobligationsundertheterminatedcontractareamenabletoavoidanceunders29oftheICA.

In making this finding, the judge referred to the decision in Tyndall Life Insurance Co Limited v Chisholm [1999] SASC 445, in which the Supreme Court of South Australia found that an insurer was able to avoid a policy under s29 of the ICA after a claim had been paid and the policy had come to an end.

1 Section 11 of the ICA defines ‘avoid’ as ‘in relation to a contract of insurance, means avoid from its inception’.

Case Name:Hitchens v Zurich Australia Limited

Citation: [2011] NSWSC 1198, Supreme Court of New South

Wales per Bergin CJ


Issue:•Whetheraninsurercanavoidalifeinsurancepolicy

from inception under section 29 of the Insurance Contracts Act 1984 (Cth) after the policy has already

been terminated

Avoiding a life insurance policy that has already been terminated

http://www.aar.com.au/pubs/ari/ari2011pdfs/PrintAccesstoinsurancepolicies.pdf

76

This decision was on an interlocutory proceeding and so the point was not definitively determined. However, the finding that it was ‘reasonably arguable’ that a policy could be avoided under s29 of the ICA after it was terminated is likely to be persuasive.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2011/1198.html?stem=0&synonyms=0&query=title(“2011%20NSWSC%201198”)

77

The Court of Appeal considered the interpretation of an insuring clause in a policy providing disability benefits to superannuation fund members, which has been used in various life insurance policies, and found that the member did not satisfy the requirements of the clause when he could undertake work on a part-time, but not full-time, basis. In obiter, the court found that sections 52(2)(b) and (c) of the Superannuation Industry (Supervision) Act 1993 (Cth) did not extend the general law duties of trustees of superannuation funds.

The appellant was a former employee of the Commonwealth Bank of Australia and a member of a superannuation fund of which the respondent, Commonwealth Bank Officers Superannuation Corporation Pty Ltd, was the trustee.

For a number of years, the fund held a policy of insurance with Hannover Life Re of Australasia, which provided disability benefits to its members. In 2003, the trustee replaced the Hannover policy with one issued by CommInsure Pty Limited, which, it considered, provided materially similar benefits but at a lower premium.

The appellant suffered injuries and was only able to work on a part-time basis until 2003, when he accepted a redundancy. He made a claim for payment of a disability benefit under the CommInsure policy, which was denied.

The appellant contended that he would have been entitled to the disability benefit under the Hannover policy, and alleged that, by replacing the Hannover policy with the CommInsure policy, the trustee was in breach of its fiduciary duties to members and the covenants included in the governing rules of the fund, by virtue of subsections 52(2)(b) and (c) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act).

Was the member ‘totally and permanently disabled’?

The key factual issue was whether the appellant was ‘totally and permanently disabled’ for the purpose of the relevant policies, given that he could work part-time but not full-time.

Under the CommInsure policy, a member is ‘totally and permanently disabled’ if the member ‘will not ever be able to resume any occupation, whether or not for reward’, with ‘occupation’ defined to mean:

an occupation that the person can perform, on a full or part time basis, based on the skills and knowledge the person has acquired through previous education, training or experience. [emphasis added]

The appellant did not satisfy this definition, given that he was able to work on a part-time basis.

Case Name:Manglicmot v Commonwealth Bank Officers

Superannuation Corporation Pty Ltd

Citation:[2011] NSWCA 204, New South Wales Court of

Appeal per Giles, Young, and Whealy JJA


Issues:•Whetherapersonis‘totallyandpermanently

disabled’ under the terms of a TPD policy if they are able to undertake work on a part-time basis

•Whetherthecovenantsimpliedintotherulesofasuperannuation fund by the Superannuation Industry (Supervision) Act 1993 (Cth) extend the general law

obligations of a fund trustee

The availability of disability benefits for superannuation fund members

78

Under the Hannover policy, a member is ‘totally and permanently disabled’ if:

having been absent from all employment for six consecutive months and in our opinion being incapacitated to such an extent as to render the Insured Person unable ever to engage in or work for reward in any occupation or work in which he or she is reasonably capable of performing by reason of education, training or experience. [emphasis added]

As there is no express widening of the definition to include part-time work, whether the appellant would satisfy this definition was a matter of interpretation.

The formulation in the Hannover policy has been used widely by insurers and judicially considered. The appellant sought to rely on the NSW Supreme Court’s judgment in Chammas v Harwood Nominees Pty Ltd (1993) ANZ Ins Cas 61-175, in which Justice Hodgson found that the definition of disablement should be satisfied when the insured is simply unable to undertake work on a full-time basis, regardless of whether they are able to undertake work on a part-time basis. The reasoning in Chammas has been considered and, in some instances, applied in other cases.

The court declined to follow Chammas, finding that the formulation needed to be viewed in the context of the policy, and considering it significant that the policy in Chammas dealt with ‘disablement’, whereas the Hannover policy dealt with ‘total and permanent’ disablement. The court found that there was no reason to qualify the scope of the Hannover policy to full-time work and that, instead, it should simply be given its plain meaning, such that the appellant would not have satisfied the definition.

Extension of duties of superannuation fund trustees

Section 52(1) of the SIS Act provides that eight covenants are taken to be included in the governing rules of a superannuation fund. The relevant covenants in this case are set out in subsections 52(2)(b) and (c):

(b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;

(c) to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries.

The appellant contended that these statutory provisions were obligations of strict liability, drawing support, in part, from the fact that s323 of the SIS Act provided various defences, including for mistake, that could be argued in relevant proceedings and that subsection 52(2)(c) was framed as an obligation to ‘ensure’.

The court did not accept the appellant’s arguments and, in obiter, confirmed that the obligations under ss52(2)(b) and (c) of the SIS Act did not materially extend the trustee’s respective general fiduciary duties to exercise reasonable care and act in the best interests of the fund members.

79

The decision provides guidance to insurers as to whether an insured is ‘totally and permanently disabled’ for the purpose of common wording in life insurance policies. It also highlights the need for trustees of superannuation funds to exercise care when making changes to insurance providing benefits to fund members.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWCA/2011/204.html?stem=0&synonyms=0&query=title(“2011%20NSWCA%20204”)

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The Victorian Supreme Court considered the construction of an investment-linked life insurance policy that enabled the policyholder to switch its investment between cash and equity portfolios. The policyholder sought to exploit a delay in processing an instruction by the defendant, to enable it to use hindsight to make arbitrage profits. The insurer sought to eliminate this delay in processing, depriving the policyholder of the arbitrage profit.

This judgment followed on from several proceedings in this matter that were heard by the Victorian Court of Appeal, which remitted certain matters to the Supreme Court for a decision.

The plaintiffs were holders of ‘prosperity bond’ policies, being ‘investment linked contracts’ for the purpose of section 14 of the Life Insurance Act 1995 (Cth) (the Life Insuarance Act), issued by the defendant. The policy wording included an ability to transfer units between cash and equity portfolios on the giving of three days’ notice, framed in the following way:

1.8 Large Withdrawals

We reserve the right to delay for up to 30 days any cash withdrawal or any transfer between the investment portfolios which would otherwise require the cashing within any 30 day period of Units valued at more that [sic] $100,000. We will then use the Unit Price(s) applicable at the end of the period of delay.

[Insurer] will waive its right to delay withdrawals and switches for 30 days, providing the investor gives three working days notice of its intention to switch or withdraw. The unit price will be the price on the day when the notice is given. [Insurer] also agrees that should the investor change their mind prior to completion of the portfolio switch or withdrawal transaction and not proceed with the switch or withdrawal, no penalty will be involved.

The plaintiffs interpreted clause 1.8 so as to implement a strategy whereby they would issue a switch notice and lock in a unit price, wait three days to see how the market moved, and then either accept the switch if it were advantageous to do so, or withdraw the switch notice and return to the previous asset allocation at the original prices; in doing so, the plaintiffs could use hindsight to make arbitrage profits.

The defendant proceeded to undertake the switch of assets immediately upon receipt of the switching notice, rather than at the end of the three-day period. The defendant claimed that the earlier switch of assets was needed to enable proper asset matching and to facilitate the plaintiffs’ instruction.

A consequence of the defendant switching the assets as soon as it received the instruction was that the plaintiffs would no longer be restored to the position they were in before issuing the switch notice when issuing a revocation notice, as the then current, rather than historical, asset pricing would be used to restore the previous portfolio. The plaintiffs alleged this was a breach of clause 1.8, as well as being in breach of s32(1)(b) of the Life

Holder of an investment-linked policy not entitled to arbitrage profits

Case Name:ACN 074 971 109 (as trustee for the Argot Unit

Trust) & Pegela Pty Ltd v The National Mutual Life Association of Australasia Limited


per Croft J


Issue:•Whetherspeciallynegotiatedtermsofan

investment-linked life insurance policy can be interpreted to enable the policyholder to enjoy

arbitrage profits at the insurer’s expense

81

Insurance Act, in that the defendant failed to give ‘priority to the interests of owners and prospective owners of policies referable to the fund’.

The court found that it was appropriate for the defendant to process switch notices as soon as they were received, and that the issuance of a revocation notice did not require the defendant to restore the plaintiffs to the precise position they were in before issuing the switch notice; that is, the revocation notice did not have the effect of making the switch void ab initio.

In earlier proceedings, the plaintiffs alleged that the defendant had preferred its own interest over that of the plaintiffs, in depriving the plaintiffs of the arbitrage opportunity, in breach of ss 32 and 48 of the Life Insurance Act. The Court of Appeal found that the requirement to give priority to the interests of policyholders was framed by the entitlements given by the policy’s wording, rather than their interests more generally. The court also found that the prosperity bonds did not include the plaintiffs’ right to profitable arbitrage, and that the terms of the policies enabled the defendant to exercise powers ‘to frustrate the hope and expectation of profits on the part of the plaintiffs’.

The decision provides guidance on the court’s approach to interpreting the terms of investment-linked life insurance policies and to dealing with parties that attempt to interpret such terms so as to produce arbitrage profits.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2011/519.html?stem=0&synonyms=0&query=ACN%20074%20971%20109

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A New South Wales Supreme Court decision has highlighted the potential pitfalls for insurance brokers who give unqualified advice on the legal effect of policy provisions.

Prosperity Advisers Pty Ltd (Prosperity) was a financial planner considering obtaining professional indemnity insurance.

One of Prosperity’s directors wished to know whether multiple claims arising out of a single failed investment Prosperity had recommended would be treated as a single claim under the aggregate deductible provision. The director asked the broker whether, in a hypothetical example of 100 clients who invested $40,000 each in an investment that failed, and in which Prosperity was found to be negligent, that would constitute one claim or 100 claims. The broker replied that it would be regarded as one claim. Prosperity purchased the insurance cover shortly afterwards.

Subsequently, around 160 clients of Prosperity sued it for negligently advising them to invest in mezzanine finance products that resulted in losses of around $17 million. Prosperity made a claim for indemnity. Prosperity’s insurer informed it that the claims could not be aggregated because they arose out of specific, tailored advice given to each client. As a result, it asserted that the claims could not be said to arise out of a single act, error or omission by Prosperity, and that a $40,000 deductible should apply to each investor’s claim.

Prosperity then sued its brokers in negligence. Prosperity argued that, had it received accurate advice, it would have obtained a different policy.

The trial judge found that there had been no qualification to the broker’s advice and that the broker was negligent. Despite this finding of breach of duty against the broker, Prosperity’s claim in negligence did not succeed because it could not identify an alternative insurance cover available in the market at the time and for the same premium that would have imposed one deductible.

An alternative argument that Prosperity should be compensated to reflect its lost opportunity to obtain a policy of that type, which required evidence showing there was a substantial prospect of its acquisition, even if this were less than the balance of probabilities, was also unsuccessful.

Case Name:Prosperity Advisers Pty Ltd and Anor v Secure Enterprises Pty Ltd t/as Strathearn Insurance

Brokers Pty Ltd


Wales per Ball J


Issues:•Whetherprovidingunqualifiedmisleading

advice to insureds constituted a negligent act by the insurance broker

•Whethertheinsuredhadproveddamage

Risks of brokers providing unqualified advice concerning insurance policies

http://www.aar.com.au/pubs/pdf/ari/2011/PrintInsurancebrokersandagents.pdf

83

Although the broker emerged from this case without having to pay damages, this was only because Prosperity was unable to prove it had suffered loss. Brokers cannot assume that this will always be the case, and must be mindful not to place themselves in a position where they provide legal advice to their clients, especially since this may jeopardise their own insurance cover. If in doubt, a broker should always seek legal advice on the operation of a policy or direct its client to do so.




84

Case Name:Nicholas G Jones v (1) Environcom Limited & Ors

Citations:[2010] EWHC 759 (Comm), High Court of England

and Wales per Steel J

[2011] EWCA Civ 1152, Court of Appeal of England and Wales per Rix and Hooper LJJ

and Sir Anthony May

Dates of Judgments:15 April 2010

13 October 2011

Issues:•Brokers’dutiestoclientsregarding

disclosure obligations

•Limitsofbrokers’dutiestotheirclients

The High Court of England and Wales has warned brokers to adequately inform their clients regarding their disclosure obligations to insurers. The Court of Appeal considered whether a broker has an obligation to advise its clients with respect to the conduct of their business, in order to eliminate risks.

The first and second respondents (Environcom) were recyclers of electrical goods. Miles Smith Insurance Brokers (Miles Smith) was Environcom’s broker, who assisted them in obtaining insurance for property damage and business interruption from Woodbrook (comprising various Lloyd’s syndicates). In 2007, a fire destroyed Environcom’s plant and equipment. Woodbrook sought to avoid the policy, claiming that Environcom had failed to adequately disclose their use of a highly dangerous recycling process. Environcom used hot, spark-producing plasma guns to disassemble refrigerators, some of which contained a highly flammable gas, pentane. Woodbrook further claimed that Environcom had failed to disclose the true number of previous fires at the plant.

Woodbrook commenced an action against Environcom, seeking a declaration of non-liability. Environcom counterclaimed for indemnification under the insurance policy. They also commenced a third-party action against their insurance brokers, Miles Smith, for breach of duty in failing to properly advise them of their duty to disclose. Woodbrook and Environcom reached a mediated agreement settling their dispute. Environcom’s action against Miles Smith continued.

The High Court’s decision

Justice Steel outlined the elements of a broker’s duty to its clients, which included to:

• informclientsabouttheirdisclosureobligationstoinsurersandoftheconsequencesoffailingtoadequatelydisclose (including the denial of coverage);

• provideguidanceregardingthetypesofmattersthatshouldbedisclosed;and

• takereasonablecareinelicitinginformationaboutmattersthatmightbematerialandshouldbedisclosed.

The court considered that standard form warnings in contracts, proposals and policy documents are insufficient.Brokersmustensurethattheirclientsfullycomprehendtheirdisclosureobligations–thiswillusually require a specific oral or written exchange on the topic, both at the time of the original placement and at renewal, particularly when there has been a change in client personnel. They must also seek to understand their clients’ business processes so that they are able to adequately advise their clients regarding material matters.

English courts consider brokers’ duties to their clients

85

Justice Steel held that Miles Smith had failed to provide Environcom with adequate advice regarding their disclosure obligations to Woodbrook. He further found that Miles Smith had failed to make sufficient enquiries regarding disclosable matters. Nevertheless, his Honour determined that, even if Miles Smith had not been negligent, it was unlikely that Environcom would have disclosed the use of plasma guns or taken appropriate risk management steps. Even if full disclosure had been made, it was unlikely that Environcom would have obtained adequate cover from Woodbrook or any other insurer. In short, Environcom was uninsurable. Miles Smith’s breach of duty did not cause Environcom’s loss. As such, despite Miles Smith’s negligence, the court dismissed Environcom’s claim for contribution.

Finally, in addressing an argument made for the first time in closing submissions, Justice Steel commented that Environcom had not pleaded that Miles Smith’s breach of duty had caused the fire to occur. In the court’s judgment, even if it had done so, Miles Smith would not be liable for such a loss.

The Court of Appeal’s decision

On appeal, Environcom attempted to claim that, had Miles Smith not breached its duty to advise Environcom about the conduct of the business to eliminate the risk of fire, the fire would never have occurred in the first place (the ‘no fire’ claim).

Lord Justice Rix, writing for the Court of Appeal, dismissed this action on procedural grounds by finding that the ‘no fire’ claim was an entirely new argument and therefore improperly raised on appeal. His Honour further stated that Environcom was attempting to do so without adequately defining the duty owed, its scope or how Miles Smith had breached any such duty. Permission to re-plead was denied.

English cases such as this give useful guidance in defining a broker’s duty of care. They provide a cautionary directive to brokers to ensure that they adequately inform their clients of their disclosure obligations, and encourage brokers to understand their clients’ businesses so they can provide such advice. Furthermore, brokers should be aware that clients may attempt to hold them liable not only for failing to assist them in obtaining adequate insurance coverage but for failing to prevent the ensuing loss. Whether or not Australian courts would accept such claims remains to be seen.



86

Insured’s entitlement to reinsurance recoveries held by HIH liquidators

Case Name:Amaca Pty Ltd and Ors v McGrath & Anor as

Liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd

Citation:[2011] NSWSC 90 Supreme Court of New South

Wales per Barrett J


Issues:•Ordersundersection562A(4)oftheCorporations

Act 2001 (Cth)

•Groundsformakingordersforthediversiontospecific creditors of reinsurance recoveries

•Whetherordersmaybemadeunders562A(4)forfuture reinsurance recoveries

Members of the former James Hardie Group insured by HIH have established their entitlement to payment of reinsurance recoveries held by the liquidators of HIH.

The case arose in relation to claims made under insurance policies providing cover against liability for asbestos injury in the business carried on by Amaca Pty Ltd (formerly James Hardie & Co Pty Ltd) and Amaba Pty Ltd (formerly Hardie-Ferado Pty Ltd) (the plaintiffs). These insurance policies were issued by HIH Underwriting and Insurance (Australia) Pty Ltd (HeathUI) and arranged by CE Heath Underwriting Agencies Australia Pty Ltd (Heath Australia).

Heath Australia placed insurance in the London market on behalf of the plaintiffs. In some instances, the plaintiffs were directly insured by London insurers. In others, HeathUI acted as insurer, but obtained facultative reinsurance from London reinsurers for the whole of its risk. HeathUI retained no premium, although Heath Australia received a commission.

The plaintiffs sought recovery under the insurance policies as a result of asbestos claims made against them. Following the collapse of HIH, the liquidator of HeathUI held monies received from the London reinsurers. As asbestos liabilities were expected to continue to eventuate in claims for many decades to come, the plaintiffs anticipated that the liquidator of HeathUI would, in future, receive additional monies from the London reinsurers.

The plaintiffs sought orders that the liquidators be permitted and required to apply amounts received from the London reinsurers exclusively towards the plaintiffs’ claims. The plaintiffs also sought similar orders for future recoveries under relevant reinsurance agreements not yet received by the liquidators.

The application was made under section 562A of the Corporations Act 2001 (Cth). That section applies relevantly where:

• acompanyisinsured,underacontractofreinsuranceenteredintobeforetherelevantdate,againstliabilityto pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and

• anamountinrespectofthatliabilityhasbeen,oris,receivedbythecompanyortheliquidatorunderthecontract of reinsurance.

Such amounts must normally be distributed pro rata by the liquidator to all creditors to whom an insurance debt is owed. However, s562A(4) grants the court a discretion to make an order that amounts received under a contract of reinsurance must be applied by the liquidator in some alternative manner, being a manner that the court considers just and equitable in the circumstances.

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87

The plaintiffs argued that it would be unfair if the full benefit of the reinsurance recoveries were not paid to them, and submitted that the special circumstances of the case included that:

• theJamesHardieGroupanditsbrokerwereactiveinassistingHeathAustraliatoobtaincoverandwerefullyawarethat the London market was underwriting all risk;

• HeathUIwasunabletoinsuretherisksitselfunderitsexistingtreatyarrangements;

• therelevantfacultativereinsurancearrangementsinfavourofHeathUIwereputinplacefortheclearandexpresspurpose of providing cover for the plaintiffs; and

• nopremiumpassedtoHeathUI,or,inthewordsofcounselfortheplaintiff,HeathUIwas‘paidnothingfordoingnothing’.

In considering whether it would be ‘just and equitable’ to make the order the plaintiffs sought the court did not consider relevant the interests of the plaintiffs’ creditors (being asbestos claimants). The interests of the defendants’ other insurance creditors were relevant. It was found, however, that the reduction of the pro rata entitlement, which would, in the absence of the making of the order, have been available to the broader body of creditors, would be relatively minor.

On the facts, it was relevant that the reinsurance was provided for the direct purpose of ensuring HeathUI was able to issue the cover to the plaintiffs and was, in fact, the only way that cover could be provided. His Honour said that:

… the reinsurance proceeds derived by HeathUI ought properly be regarded as part of what HeathUI, as insurer, was committed to provide to the plaintiffs upon and by reason of their sustaining the relevant loss.

The court therefore determined to grant the relief the plaintiffs sought in relation to the sums actually received under the reinsurance arrangements. However, the court also determined that it could not grant relief in relation to future reinsurance payments not yet received, finding that the ambit of s562A(4) was limited to assets that liquidators currently held.

This outcome was almost certainly not intended as a matter of policy. Therefore, it is possible that steps will be taken to amend the legislation in order to enable orders to be made with respect to future reinsurance assets coming into the hands of liquidators after the making of a court order, as well as in relation to assets liquidators hold as at the date of the order.




88

Case Name:Westport Insurance Corporation v Gordian

Runoff Ltd

Citation:[2011] HCA 37, High Court of Australia

per French CJ and Gummow, Heydon, Crennan, Kiefel and Bell JJ


Issues:•Interpretationofsections29and38ofthe

Commercial Arbitration Act 1984 (NSW)

•Interpretationofs18Bofthe Insurance Act 1902 (NSW)

A recent High Court decision is significant for all parties involved in arbitrations or whose contracts contain arbitration clauses, and for reinsurers whose contracts are subject to New South Wales law.

In 1999, Gordian Runoff Ltd (Gordian) wrote a seven-year directors’ and officers’ runoff policy for FAI Insurance Ltd (the FAI policy) and entered into reinsurance treaties with reinsurers. In 2001, claims were made under the FAI policy and Gordian made a claim on its reinsurers. The reinsurers refused to cover the claim on the basis that their treaties only covered underlying policies with a term not exceeding three years and the FAI policy, being cover for a seven-year term, was outside the treaties’ protection.

The terms of the reinsurance treaties required the dispute to be arbitrated. In the arbitration, Gordian relied on section 18B of the Insurance Act 1902 (NSW). That section provided that if an insurer excludes or limits liability, the insured shall not be disentitled to be indemnified if the loss was not caused by, or contributed to by, the excluded or limited events or circumstances, unless in all the circumstances it is not reasonable for the insurer to be bound to indemnify the insured.

The arbitrators agreed with the reinsurers that the treaties only covered underlying policies with a maximum duration of three years. However, they found that s18B operated to cover claims made within three years, even where the policy Gordian had written went for a longer term.

In order to appeal the award, s38(5)(b) of the Commercial Arbitration Act 1984 (NSW) (the Arbitration Act) required the reinsurers to demonstrate that there had been a ‘manifest error of law on the face of the award’ or that there was ‘strong evidence that the arbitrator or umpire made an error of law’. The matter came to the High Court, following the reinsurers successfully appealing to the Supreme Court and Gordian having that result overturned in the Court of Appeal.

The High Court found for the reinsurers and allowed the appeal. It found that the words ‘manifest error on the face of the award’ in the Arbitration Act meant that the error’s existence must be apparent to the reader of the award. The court rejected previous approaches in which the word ‘manifest’ had been treated as requiring the error to be very quickly identifiable. The High Court found that the arbitrators’ construction of s18B was a ‘manifest error on the face of the award’ even though it might have taken some time to explain or understand the error.

The High Court found that s18B could not operate to require the reinsurers to meet a claim made on the FAI policy because that policy was outside the scope of the reinsurance treaties. The treaties did not cover all claims made on any policy within three years but only those made on policies covered by the treaties.

High Court untangles the Gordian knot

89

The court also found that providing inadequate reasons could be a ‘manifest error’. It stated that the standard of reasons for the making of an arbitral award will depend on the nature and circumstances of the dispute, and reasons of a judicial standard will not necessarily be required. Having relied on s18B as a critical element in reaching their decision, the arbitrators had to explain why each of the elements of that provision was satisfied. They failed to explain how it could be reasonable for the reinsurers to be required to indemnify Gordian for a claim made on a policy that was not covered by the treaties. This constituted a manifest error.

On 1 September 2009, after the arbitration and the hearing at first instance, the New South Wales Government excluded reinsurance from the operation of ss 18, 18A, 18B and 19 of the Insurance Act 1902 (NSW). While the High Court did not consider whether s18B applies to reinsurance treaties written or claimed upon before 1 September 2009, it is now certain that s18B cannot be used to require reinsurers to meet claims made on policies that fall outside the scope of cover a reinsurance treaty provides.

Since the arbitration that was the subject of this case, New South Wales has passed the Commercial Arbitration Act 2010 (NSW). Other states have followed, or are expected to follow, suit. For arbitrations conducted under the 2010 Act, appeals may be available if the arbitrator’s decision on a question of law is ‘obviously wrong’, rather than there being a ‘manifest error’, as required by the previous legislation. Of course, an appeal under s34A of the new Commercial Arbitration Act is only available if both parties consent – although consent can be given in advance of the dispute arising. It remains to be seen whether courts will interpret ‘obviously wrong’ in the same way as ‘manifest error’.


http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2011/37.html?stem=0&synonyms=0&query=title(“2011%20HCA%2037”)

90

Case Name:Earthquake Commission v The Insurance Council of

New Zealand Incorporated & Ors

Tower Insurance Limited v Earthquake Commission

Citation:CIV-2011-485-1137 NZHC per Winkelmann,

MacKenzie and Miller JJ

CIV-2011-485-1116 NZHC per Winkelmann, MacKenzie and Miller JJ


Issues:•InterpretationoftheEarthquake Commission

Act 1993 (NZ)

•Whendoesreinstatementoccur?

In this case, the High Court of New Zealand considered the liability of the Earthquake Commission under the Earthquake Commission Act 1993 (NZ). The case also illustrates the courts’ approach to reinstatement and the factors that will be taken into account in construing acts.

In September 2010 a magnitude 7.1 earthquake struck Christchurch, New Zealand causing widespread property damage. A subsequent earthquake near Christchurch in February 2011, with a magnitude of 6.3, also caused significant property damage and claimed 185 lives.

The New Zealand Earthquake Commission (the Earthquake Commission), established in 1945, is an agency of the New Zealand Government that has access to the Natural Disaster Fund, a fund with more than $5 billion in assets, which is supported by reinsurance and a government guarantee. The Earthquake Commission provides natural disaster insurance cover for residential fire insurance policyholders (EQCover). The EQCover is triggered by certain natural disaster events such as an earthquake, volcanic eruption or tsunami.

Individual fire insurance policyholders contribute to the Natural Disaster Fund through a disaster insurance premium charged by their insurer. They are entitled to claim under the EQCover to the extent of the replacement value of their property, subject to a limit of NZ$100,000 for a residential building and NZ$20,000 for its contents.

The Christchurch earthquakes in September 2010 and February 2011, which were the subject of the judgment, resulted in more than 300,000 claims being made to the Earthquake Commission. Many policyholders made claims for damage to property suffered in both the September 2010 and February 2011 earthquakes. Since the judgment there have been further earthquakes and aftershocks causing property damage in and around Christchurch, including a magnitude 5.8 earthquake on 23 December 2011.

Issues in dispute

The present proceedings were commenced by the Earthquake Commission, which sought declarations in relation to the following issues:

• HowdoestheEarthquakeCommissioncoverrespondtohomeownerswhohavemademorethanoneclaimfor damage suffered in more than one earthquake where, in the aggregate, such damage exceeds the maximum replacement value of property?

• WhethertheEarthquakeCommissionisliabletopay,inrespectofeachproperty(andcontents):

• uptothemaximumreplacementvalueforeachoccurrence;or

Exposure of the Earthquake Commission and reinsurers for the Christchurch earthquakes

91

• nomorethanthemaximumreplacementvalueintotalfortheaggregateofalldamage,untilearthquakecoverisreinstated or by entry into a new or renewed fire insurance contract?

The decision

The New Zealand High Court held that, in the circumstances, reinstatement occurs under EQCover when the Earthquake Commission logs a claim in its project management system, and it is at that point that the Earthquake Commission incurs a liability. In doing so, the court rejected the Earthquake Commission’s interpretation that reinstatement occurs on the making of an emergency payment by the Earthquake Commission, as that could lead to arbitrary outcomes, particularly as the Earthquake Commission has some latitude under the Earthquake Commission Act 1993 (NZ) (the Earthquake Act) regarding the timing of payments.

In practical terms, the decision means that the Earthquake Commission has a higher exposure (and equally reinsurers have a more limited exposure) to EQCover claims in respect of the Christchurch earthquakes because it is liable to pay up to the maximum replacement value for every claim made in relation to each insured event.

This case has practical implications for reinsurers exposed to property claims arising from the Christchurch earthquakes in September 2010 and February 2011. While it turned on the specific wording of the Earthquake Act, the case also has more general implications for insurance and reinsurance law. In particular:

• theNewZealandHighCourtheldthat,inthecircumstances,reinstatementwasdeemedtohaveoccurred at the time that a claim was made; and

• thecourtconsideredthatthearbitraryresultsthatcouldflowfromtheEarthquakeCommission’sinterpretation of the Earthquake Act was a relevant factor in determining how the Earthquake Act should be construed.




92

Case Name:Gard Marine & Energy Ltd v Tunnicliffe & Ors

Citation:[2011] EWHC 1658 (Comm), England and Wales

High Court, per Steel J


Issues:•Whatdoesthenotation‘100percent’meaninthe

context of an excess or limit in a sum insured clause?

•Despitethereferenceto‘100percent’,couldthe deductible be scaled to match the proportional

interest that the insured had in the insured property?

The England and Wales High Court considered whether a limit or excess, which was stated to be ‘100 per cent’ in an energy facultative reinsurance policy, should be scaled to reflect the insured’s interest in the property or whether it meant the total insured value of the original loss asset.

Various insurers issued an energy package insurance policy (energy policy) to Devon Energy Corporation (Devon). Devon is an oil exploration and production company with interests of varying percentages in a number of wells and platforms in the Gulf of Mexico.

The energy policy included cover for all risks of physical loss or damage to offshore and onshore property and business interruption. The relevant parts of the energy policy were subject to a combined single limit of ‘US$400 million (for interest) any one accident or occurrence’ arising out of a ‘Named Windstorm’ in the Gulf of Mexico.

Gard Marine & Energy Ltd (Gard) subscribed to a 12.5 per cent share of the energy policy and entered into a policy of reinsurance with various Lloyd’s syndicates by which it reinsured 7.5 per cent of its 12.5 per cent share (the reinsurance policy). The reinsurance policy included a ‘Sum Insured’ clause that stated:

To pay up to Original Package Policy limits / amounts / sums insured excess of US250 million (100%) any one occurrence of losses to the original placement

In September 2005, Hurricane Rita caused damage to assets in which Devon had a 46 per cent interest. Gard made a claim under the reinsurance policy in respect of payments that it had made to Devon under the energy policy. A dispute arose between Gard and the reinsurers as to the correct construction of the reference to ‘(100 per cent)’ in the reinsurance policy.

Gard submitted that the excess point in the sum insured clause was based on the total insured value of the original lost assets, and not Devon’s interest in the original lost assets. The reinsurers submitted the counter-argument, that the reference to ‘(100 per cent)’ in the sum insured clause meant that the limit of liability and retention were to be reduced proportionately with Devon’s share in the lost assets.

The court made the following points regarding the approach to the construction of reinsurance contracts:

• thecorrectapproachtotheconstructionofawrittencontractisthatthecourtshouldseektoascertainthemeaning that the document would convey to a reasonable person, having all the background knowledge that would reasonably have been available to the parties in their situation, and at the time that the contract was entered into;

100 per cent of what? The limit or excess under a facultative reinsurance policy

93

• inthecaseofreinsurancecontracts,thefactualmatrixthatshouldbeconsideredincludesthetermsof,andcircumstances surrounding, the underlying policy of insurance; and

• thefactualmatrixwillincludeevidenceofrelevantmarketpracticesiftheyarewidespread,butnotuniversal.Inthatinstance, market practices will form part of the background known to each party.

The judge added that, in his view, it is important for the court to consider industry practice when attempting to construe a contract with industry terms in it.

Surprisingly, the reinsurers conceded that a similar reference to ‘100 per cent’ in the underlying policy meant that the limit or deductible would scale. The court held that the construction of an underlying policy will form part of the factual matrix to be considered when construing a reinsurance contract.

The court ultimately held that, in the market of writing direct insurance of offshore energy risks and facultative reinsurance, the notation ‘100 per cent’ has the effect that the limit or excess will scale to reflect the insured’s interest in the relevant assets.

The decision confirms that a notation of ‘100 per cent’ in relation to an excess or limit will be scaled in the context of the market for energy risks and facultative reinsurance. The decision also highlights that:

• inEnglandatleast,courtsmay,incertaincircumstances,construeacontractbyadoptingmarketpractice and industry terms over the ordinary and natural meaning of terms; and

• courtscan,andoftenwill,identifynarrowsub-marketsofinsuranceandreinsurance,andthatwillberelevant to the probative value placed on any expert witnesses from the industry who are relied upon to give evidence on policy construction.



94

Case Name:Teal Assurance Company Ltd v WR Berkley

Insurance (Europe) Ltd & Anor

Citation:[2011] EWHC 91 (Comm) England and Wales High

Court per Smith J

Date of Judgment:31 January 2011

Issues:•Orderinwhichclaimsshouldbeconsideredin

determining whether primary and excess layers of insurance have been exhausted

•Rightofindemnityforinsuredsandcedants

In this case, the High Court of England and Wales found that, in determining liabilities under an insurance policy, claims should be considered in the order that the insured and cedant suffered their loss.

Teal Assurance Company Limited (Teal) is a captive insurer, based in the Cayman Islands, which insures companies in the Black & Veatch group, including Black & Veatch Corporation (BV), a US-based engineering company.

BV’s professional indemnity program

BV’s professional indemnity program, referred to as the ‘p.i. tower’, comprised US$60 million of cover, in excess of deductibles and a self-insured retention of US$10 million for any one claim, or US$20 million in the annual aggregate. Within the p.i. tower, BV had layers of cover underwritten by Teal as follows:

• US$5millionexcessofUS$15million;

• US$30millionexcessofUS$20million;and

• US$20millionexcessofUS$50million.

Teal also underwrote a ‘top and drop’ layer that provided cover for liability in excess of the p.i. tower (the original policy). The original policy was intended to drop down and provide cover if an underlying policy was exhausted. It was subject to a limit of £10 million for each claim, and did not cover claims emanating from, or brought in, the United States. Teal reinsured its risk under the original policy by entering into an excess reinsurance policy with the defendants (the excess policy).

Professional indemnity claims

During the period of its 2007-08 professional indemnity program, BV gave notice of the following significant claims:

• aclaimarisingintheUnitedArabEmirates,andaclaimarisinginTrinidad(theinternational claims); and

• twoclaimsarisingintheUnitedStates(theUS claims).

Order of claims under contracts of insurance and reinsurance

95

Issues in dispute

The court considered:

• theorderinwhichclaimsshouldbeconsideredforthepurposeofdeterminingwhetherprimaryandexcesslayersofinsurance have been exhausted; and

• whentherightofindemnityarisesforaninsuredandcedant.

The decision

An issue arose between Teal and the defendants in relation to the order in which the claims had been brought into account. This, in turn, had implications for whether the primary and excess layers had been exhausted. In particular:

• iftheUSclaimswereattributedtoandexhaustedtheprimaryandexcesslayers,thenTealwouldbeliableundertheoriginal policy for the two international claims, and would have a valid claim under the excess policy; however,

• iftheinternationalclaimswereattributedtoandexhaustedtheprimaryandexcesslayers,thentheUSclaimswouldbe considered under the original policy and excess policy, and rejected by reason of the applicable exclusion.

In the proceedings, Teal submitted that the order in which claims should be considered under the different layers of the professional indemnity program was by reference to when they were presented for payment, rather than when the underlying liability arose. Reinsurers, on the other hand, submitted that the claims should be considered in the order that the insured and cedant suffered their loss.

The court ultimately preferred the reinsurers’ argument. In doing so, the court reiterated a number of legal principles relevant to the liability of reinsurers and, in particular, when losses are deemed to have been ascertained. Those principles are outlined further below.

The decision clarifies that, for the purpose of determining the order of liabilities under a policy of insurance, losses are brought into account in the same order as they are ascertained. The insured’s right to an indemnity arises under a liability policy when its liability has been established and quantified, for example, by judgment, arbitral award or settlement. In the case of a first party policy, the right to an indemnity arises when the relevant loss is incurred by the insured.

Under a policy of reinsurance, the right of the cedant to indemnity arises once its own liability to the underlying insured has been established and quantified by judgment, arbitral award or settlement.



96

Winding up an insolvent insurer under judicial management

This decision resolves a conflict in the provisions of the Insurance Act 1973 (Cth) and the Corporations Act 2001 (Cth) in relation to the winding up of a general insurer on the application of a judicial manager. An implied amendment was required to the provisions of the Corporations Act to enable a judicial manager to make a winding-up application.

In June 2010, the Federal Court placed ACN 000 007 492 Pty Ltd (formerly Rural and General Insurance Limited) (Rural) under judicial management under the Insurance Act, upon an application by the Australian Prudential Regulation Authority (APRA).

The judicial manager was required to file a report with the court that included a recommendation of the course of action that the judicial manager considered most advantageous to Rural’s policyholders’ general interests. The report filed by the judicial manager in September 2010 concluded that Rural was insolvent and recommended that it be wound up. Accordingly, the judicial manager sought an order for the winding up.

Justice Perram concluded the order ought to be made for the following reasons:

• Rural’saffairsweresufficientlymodestthatonecouldassumeanyordersmadewouldhavenosystemiceffects; and

• thecontinuationofRural’sbusinesswasclearlynotintheinterestsofanyparty,includingitspolicyholders.

However, Justice Perram considered there was a contradiction between the provisions of the Insurance Act and the Corporations Act, which made it unclear whether a judicial manager could make an application to wind up an insurance company under the relevant provisions of the Corporations Act.

The Insurance Act provides that the winding up of a general insurer will be a winding up in accordance with the Corporations Act. The Corporations Act, however, provides that an application for the winding up of a company in insolvency may only be made by the persons listed in section 459P and prohibits applications by any other person. The list of eligible applicants in s459P does not include a judicial manager appointed under the Insurance Act.

In order to resolve this conflict, Justice Perram found that there must be an implied amendment to the relevant Corporations Act provisions, so as to give effect to the intention expressed in the Insurance Act and to amend the list of eligible applicants under s459P to include a judicial manager appointed under the Insurance Act. Accordingly, the court ordered that Rural be wound up in accordance with the Corporations Act.

Case Name:Australian Prudential Regulation Authority v

ACN 000 007 492 (in Liq)


Perram J


Issues:•Windingupaninsolventinsurerontheapplication

of the judicial manager

•ImpliedamendmentrequiredtotheCorporations Act 2001 (Cth) to enable judicial manager to make

such an application

http://www.aar.com.au/pubs/pdf/ari/2011/PrintJudicialmanagementandliquidations.pdf

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The judicial management regime is relatively new in Australia, with Rural being only the second general insurer placed under judicial management. This case provides clarity on how the judicial management regime will operate alongside the Corporations Act winding-up regime, where a judicial manager appointed under the Insurance Act determines that, having regard to the interests of the insolvent insurer’s policyholders, winding up is the appropriate course of action.



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Case Name:New Cap Reinsurance Corporation Ltd (in Liq) &

Anor v AE Grant & Ors

Citation:[2011] AWHC 677 (Ch) England and Wales High Court per Lewison J (first instance decision) and

[2011] EWCA Civ 971 England and Wales Court of Appeal per Mummery, Lloyd and McFarlane LJJ

(appeal decision)

Date of Judgment:15 March 2011 (first instance decision) and 9 August

2011 (appeal decision)

Issues:•EnforcementofAustralianjudgmentsabroad–

assistance of English courts

•DiscretionofEnglishcourtstoassistforeigncourts

In an important decision, the English Court of Appeal has unanimously confirmed that English courts will provide assistance, where appropriate, to Australian liquidators attempting to enforce Australian insolvency judgments abroad.

New Cap Reinsurance Corporation Ltd (New Cap) was an Australian reinsurer. The defendants were members of a Lloyd’s syndicate that placed reinsurance with New Cap. In accordance with a provision of the reinsurance contracts, New Cap and the defendants entered into a commutation agreement under which New Cap made two payments to the defendants. Shortly after making these payments, New Cap went into liquidation.

The liquidator commenced proceedings in the New South Wales Supreme Court to recover these payments, which the liquidator claimed were unfair preferences paid in breach of the Corporations Act 2001 (Cth). The defendants had no assets in Australia, they did not submit to the jurisdiction of the NSW Supreme Court and they did not appear. In the defendants’ absence, Justice Barrett found in favour of New Cap. Justice Barrett also issued a letter to the High Court of Justice of England and Wales, asking that it assist the NSW Supreme Court by enforcing the judgment against the defendants. Justice Barrett’s request referred to section 426 of the Insolvency Act 1986 (UK), which enables courts in the United Kingdom to assist foreign courts exercising insolvency jurisdiction.

Justice Lewison, sitting in the High Court of Justice, agreed to assist the NSW Supreme Court. He found that, although the powers under s426 of the Insolvency Act are discretionary, that discretion is limited, and the power to assist foreign courts should be exercised unless it would be ‘improper’ to do so. Justice Lewison also found that the English common law gives the court a similar discretion to assist the NSW Supreme Court, despite the NSW Supreme Court’s judgment being unregistrable under the Foreign Judgments (Reciprocal Enforcement) Act 1933 (UK) (the Enforcement Act).

The defendants appealed the decision of Justice Lewison. The English Court of Appeal unanimously rejected the appeal. The Court of Appeal:

• disagreedwithJusticeLewisonontheapplicationoftheEnforcementAct,findingthatinsolvencyjudgmentsof the NSW Supreme Court can be registered under the Enforcement Act;

• foundthattheonlyrelevantgroundforsettingasideajudgmentregisteredundertheEnforcementActwouldbe a finding that the foreign court lacked jurisdiction to make the judgment in question which it found was not the case here;

• upheldJusticeLewison’sinterpretationoftheInsolvencyActandfoundtheapplicationoftheEnforcementAct does not preclude the application of the Insolvency Act; and

Assistance of English courts in enforcing Australian insolvency judgments

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• foundthattheEnforcementActdisplacesthepoweratcommonlawofEnglishcourtstoenforceforeigninsolvencyjudgments.

This decision demonstrates that English courts are willing to assist Australian courts in insolvency matters. This case confirms the avenues available to Australian liquidators seeking to enforce Australian judgments in the English courts and provides a measure of reassurance to creditors exposed in cross-border transactions.

Leave has been granted for the matter to be heard by the Supreme Court on appeal. The hearing is expected to take place by mid-2012.


http://www.bailii.org/ew/cases/EWHC/Ch/2011/677.html

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The response to natural disasters – proposals for the reform of flood insurance

The nature and extent of the provision of flood cover to households and small businesses has been a matter of significant interest during 2011 following a series of natural disasters, including the Queensland floods and Cyclone Yasi, in late 2010 and early 2011.

Reforming Flood Insurance – Clearing the Water

The Federal Government released a consultation paper Reforming Flood Insurance – Clearing the Water (the consultation paper) in April 2011, in order to spur debate in the community about ways to improve the provision of flood insurance. The consultation paper contained two key recommendations: first, that there should be a standard definition of ‘flood’ and, second, that consumers receive a Key Facts Sheet on home building and home contents insurance policies.

The Federal Government introduced amendments to the Insurance Contracts Act 1984 (Cth) (the IC Act) and Insurance Contracts Regulations 1985 (Cth) (the IC Regulations) to Parliament in December 2011, in order to implement the key recommendations described in the consultation paper.

Standard definition of ‘flood’

The proposed amendments to the IC Act and IC Regulations have the effect of inserting a standard definition of ‘flood’ that would apply to prescribed contracts that offer flood cover, in the following terms:

Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following:• alake(whetherornotithasbeenalteredormodified);• ariver(whetherornotithasbeenalteredormodified);• acreek(whetherornotithasbeenalteredormodified);• anothernationalwatercourse(whetherornotithasbeenalteredormodified);• areservoir;• acanal;or• adam.

The prescribed contracts defined in the amending instruments are contracts providing:

• homebuildinginsurance;

• homecontentsinsurance;

• insurancefordestructionordamagetoastratatitleresidence;and

• insuranceforlosscausedtoasmallbusiness(thatis,abusinesswhoseturnoverinthelastfinancialyearwas less than $1 million, or which has fewer than five employees).

http://www.aar.com.au/pubs/pdf/ari/2011/PrintLegislativeandregulatorydevelopments.pdf

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The amendments to the IC Regulations also establish that if a policy sets different coverage limits for different flood events, the highest of these limits will apply to all flood events covered by the insurance.

The Federal Government has not sought to make flood cover compulsory for these insurances but, rather to standardise the definition of ‘flood’ if such cover is provided by the policy.

Key Facts Sheet

The proposed amendments to the IC Act create a legislative framework to enable future amendments to the IC Regulations to be passed that would require a plain English one-page ‘Key Facts Sheet’ to be provided to purchasers, to allow them quickly and easily to check the basic terms of the insurance policy, including the nature of the cover and any key exclusions.

An insurer would be required to supply a Key Facts Sheet to a person who enquires about home building or home contents insurance, and failure to do so would be an offence. The requirement to provide a Key Facts Sheet is in addition to the present requirement that an insurer provide potential insureds with a product disclosure statement, under the Corporations Act 2001 (Cth), when they offer or issue an insurance policy.

It is expected that the foreshadowed amendments to the IC Regulations will be released for public consultation in 2012. The content and format of the Key Facts Sheet will be subject to consumer testing before it is released, to ensure it is user friendly.

National disaster insurance review

In March 2011, the Federal Government commissioned the Natural Disaster Insurance Review Panel (the review panel) to conduct an independent inquiry into flood insurance and related matters. The review panel released its final report in November 2011, containing 47 recommendations addressing a range of issues, including:

• mandatoryfloodcover;

• theestablishmentofafloodreinsurancepool;

• astandarddefinitionof‘flood’;

• improvingconsumerawarenessofthenatureofhomeinsurancecover;and

• insuranceclaimshandlinganddisputeresolutionprocesses.

Mandatory flood cover

The review panel recommended that all insurers be required to offer flood cover as part of home building, home contents and home unit insurance policies, although it stopped short of recommending that flood insurance cover be compulsory for homeowners.

To address the affordability of flood insurance cover, the review panel recommended the introduction of a system of premium discounts that would be available to most purchasers of home building and home contents insurance in areas

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subject to flood risk. Only existing dwellings would be eligible for the discounts, and the discounts would be phased out gradually over time.

In relation to small businesses, the review panel recommended that all insurers offering small business insurance be obliged to include flood cover on an opt-out basis in all their small business package policies. The review panel did not recommend that premium discounts be provided to small businesses, or that the reinsurance pool offer reinsurance for small business risks.

The Federal Government is encouraging public consultation on the proposal requiring all insurers to offer flood cover in home building and home contents insurance policies, while allowing consumers to opt out of the cover. The closing date for submissions is 30 March 2012.

Flood reinsurance pool

The flood premium discounts would be delivered through the establishment of a flood risk reinsurance pool. The proposal would require insurers to retain a portion of the flood risk, and to underwrite and price that portion of the risk themselves. The remainder of the risk could be ceded to the reinsurance pool at a discounted reinsurance premium. It would be at the insurers’ option whether to cede risks to the pool, but the pool would be required to accept all risks at pre-agreed prices.

The reinsurance pool would be funded, as needed, by the Federal Government, thereby guaranteeing the wherewithal of the pool to pay claims. The Federal Government would meet any shortfall that may occur in the reinsurance pool, and then seek reimbursement for a portion of the shortfall from the government of the state or territory in which the flood occurred.

Further consultation regarding the establishment of a reinsurance pool will occur in 2012.

Standard flood definition

In order to address consumer confusion around the various definitions of ‘flood’, the review panel recommended that the Federal Government introduce a standard definition of ‘flood’ for home building and contents insurance policies.

Consumer awareness

The review panel also made a number of recommendations that seek to improve consumer awareness at the time of purchasing home insurance, including:

• amendingsection35(2)oftheICActsothatpolicyholdersarenotdeemedtobeclearlyinformedofadeviationfrom‘standard cover’ merely by being provided with a copy of the insurance policy or the product disclosure statement;

• requiringthataKeyFactsSheetbeprovidedtopurchasersofinsurance;and

• thatwherefullreplacementorfullfloodcoverisnotprovided,insurersmustincludea‘healthwarning’intheKeyFacts Sheet.

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Handling of claims and dispute resolution

The review panel recommended a number of changes to the General Insurance Code of Practice to improve insurers’ handling of claims and disputes relating to natural disasters, including:

• repealingclauses4.3and4.4oftheCode,sothatclaimsarisingfromnaturaldisastersaresubjecttothesameminimum standards as other claims;

• imposingafour-monthtimelimit(subjecttoexceptionalcircumstances)oninsurerstodecidewhethertoacceptorreject liability for a claim, for all claims, including those made during natural disasters;

• requiringthatinsurers’internaldisputeresolutionprocessesareindependentoftheirclaimsdepartment,andhavethe authority to overturn original decisions and to accept claims; and

• introducingageneralfairnesstesttobeappliedtoclaimsandcomplaintshandling.

The industry has been asked to provide its views to the Federal Government on the recommended changes to the General Insurance Code of Practice to improve insurers’ handling of claims and disputes relating to natural disasters by the end of February 2012.

Other recommendations

The review panel’s other recommendations included:

• establishinganagencysponsoredbytheFederalGovernmenttomanagethenationalcoordinationoffloodriskmanagement and operate the flood risk reinsurance pool;

• requiringallhomebuildinginsurancepoliciesthatoffer‘suminsured’covertobemodifiedbytheendof2014,soasto offer full replacement cover in the event of a total loss of the home;

• applyingunfaircontractstermslawstogeneralinsurance,sothatgeneralinsurancepolicyholdersaregiventhesamelegal remedies as other consumers; and

• requiringthatallAustralianPrudentialRegulationAuthority-authorisedgeneralinsurersadoptandcomplywiththeGeneral Insurance Code of Practice.

Commentary

It would appear that the core proposal is the requirement that insurers offer flood cover at a premium determined by them for home building and home contents insurance policies. Insureds will be permitted to opt out of the cover and, no doubt,theywilldosoinoneoftwocircumstances–wheretherelevantresidenceisclearlynotsubjecttoanyfloodrisk;or where there is significant flood risk but the premium is unaffordable. The latter is likely to be the major problem area, unless there is some support mechanism that results in premiums becoming affordable, particularly for those already living in flood-prone areas. Logically, premiums will be quite high in some cases. This raises the possibility that, in future floods, the issue will not be whether or not cover was available but, rather, the affordability of that cover, which may also be reflected in underinsurance, leading to similar issues to those faced after the Victorian bushfires of 2009.

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This suggests that the proposal for a flood reinsurance pool is critical to the long-term viability of the other proposals. However, the Federal Government does not appear to be prepared to embrace such an arrangement, or other forms of premium support, and questions therefore arise as to whether the industry may, with appropriate approvals to deal with the competition effects, be able to establish such an arrangement itself, so that there is some pooling of risk and, thus, the ability to make premiums more affordable even if they are still relatively high.

Other government and parliamentary reviews

In addition to the consultation undertaken by the Federal Government and the National Disaster Insurance Review, a number of other significant reviews of events relating to the 2010-11 floods have been and are being, undertaken by the:

• QueenslandGovernment;

• VictorianGovernment;and

• FederalHouseofRepresentativesStandingCommitteeonSocialPolicyandLegalAffairs.

Queensland Floods Commission of Inquiry

The Queensland Government set up the Queensland Floods Commission of Inquiry to look into the events surrounding the 2010-11 floods in Queensland. The terms of reference of the commission include an inquiry into the ‘performance of private insurers in meeting their claims responsibilities’. An interim report of the commission was released on 1 August 2011; however, it did not deal with the performance of insurers, which will be dealt with in the final report to be issued on 16 March 2012.

Victorian Floods Review

The Victorian Government established the Victorian Floods Review (VFR) in order to assess the state’s preparedness for the 2010-11 floods. The terms of reference of the VFR did not include an assessment of the performance of the insurance industry.

Inquiry into the operation of the insurance industry during disaster events

On 2 June 2011, the Federal House of Representatives Standing Committee on Social Policy and Legal Affairs commenced an inquiry into the operation of the insurance industry during disaster events. The terms of reference of the inquiry are broad and relate to the response of the insurance industry to the 2010-11 extreme weather events, with a specific focus on:

• insuranceclaimsprocessingarrangements;and

• conductofinternalandexternaldisputeresolution.

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On 27 February 2012, the inquiry issued a detailed report In The Wake Of Disasters, with a number of recommendations for reform of the insurance industry, including:

• obliginggeneralinsurerstoofferinsurancethatconformstoastandardcover,includingfloodcoverandfullreplacement in the event of total loss;

• makinginsurancecontractssubjecttotheUnfairContractTermsLaw;

• significantlyamendingtheGeneralInsuranceCodeofPractice;

• makingtheGeneralInsuranceCodeofPracticecompulsoryforallinsurers;and

• makingabreachofthedutyofutmostgoodfaithabreachoftheInsuranceContractsAct, so as to enable ASIC to regulate insurance claims handling.

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APRA’s latest consultation package on its review of capital standards for insurers

On 9 December 2011, the Australian Prudential Regulation Authority (APRA) released a further consultation package as part of its review of capital standards for general and life insurers. The aims of the review include improving the risk sensitivity of the capital standards and achieving better alignment of these standards across APRA-regulated industries.

In our 2010 Annual Review, we reviewed the broad outline of the revised capital framework APRA proposed in its first discussion paper. Since then, APRA has released three technical papers, undertaken two quantitative impact surveys (QIS) and issued a response paper regarding the first QIS. This most recent consultation package includes a response paper regarding the second QIS (the response paper) and 14 draft prudential standards.

General overview of new capital framework

The new framework adopts a three-pillar approach, which is similar to the regime applicable to authorised deposit-taking institutions (ADIs):

• Pillar1–quantitativerequirementsforrequiredcapital,eligiblecapitalandliabilityvaluationsoastocomprise capital charges to cover asset risk, asset concentration risk, insurance risk, insurance concentration risk and operational risk;

• Pillar2–thesupervisoryreviewprocess,whichincludessupervisionofinsurers’riskmanagementandcapital management practices and may include a supervisory adjustment to required capital; and

• Pillar3–disclosurerequirementsdesignedtoencouragemarketdiscipline.

The minimum level of capital an insurer will be required to hold at all times is the prudential capital requirement (PCR), which consists of the prescribed capital amount, plus any supervisory adjustment applied by APRA.

For general insurers, the proposed capital requirements broadly correspond to the existing minimum capital requirement; however, for life insurers the two existing requirements for solvency and capital adequacy will be replaced by the single measure of the PCR. Another significant change for the life insurance industry is that the life insurer, rather than the appointed actuary, will have responsibility for calculating the capital base and prescribed capital amount for each statutory fund, the general fund and the company as a whole. Under the proposed new standards, the appointed actuary will be required to provide advice to the insurer regarding the calculation of the capital base and prescribed capital amount. The insurer will be required to explain any differences between the calculations it reports and the appointed actuary’s advice.


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The response paper

There was a high participation rate in the second QIS, with APRA receiving submissions from more than 110 insurers and industry groups. The impact of APRA’s proposals varied widely between insurers. While some insurers reported little change or reduction in their required capital and many reported modest increases, some insurers reported a material increase in required capital. APRA has noted that further refinements are required to the proposals regarding life insurers, in particular.

The response paper sets out the main issues identified in those submissions, as well as APRA’s response, which included revising its proposals for some issues and providing further clarification on some of its proposals. We highlight below some of the important issues addressed in the response paper.

Supervisory review and assessment

APRA has provided further clarification on the proposed approach to supervisory review and assessment.

The Internal Capital Adequacy Assessment Process (ICAAP), as APRA has previously outlined, is expected to include a comprehensive assessment by the insurer of its risk profile and the capital needed to support the risks undertaken. APRA has provided further clarification on its expectations for the ICAAP, including:

• theICAAPisprimarilytheresponsibilityoftheinsurer’sboard,whichmustapproveit;

• theICAAPisexpectedtoincludetriggerpointsandtargetcapitallevels,andsetouttheactiontheinsurerwilltakewhen those trigger points are reached (including trigger points upon which the insurer will notify APRA);

• APRAacknowledgesthatthecapitalpositionofinsurersmayfallbelowtargetcapitallevelsfromtimetotime,andthisis acceptable, as long as the insurer acts according to the actions set out in the ICAAP;

• itisproposedthatinsurersundertakeanindependentreviewoftheirICAAPnolessthanonceeverythreeyears;

• thedocumentationcomprisinganinsurer’sICAAPwillinclude:

• asetofprocessesandsystemsforassessingandmanagingtheinsurer’scapitalposition;

• anICAAPsummarystatementthatsummarisestheseprocesses;and

• anannualICAAPreportthatsetsouttheoutcomesofapplyingtheICAAP,tobesubmittedwithinaperiodoffourmonths from the end of an insurer’s financial year.

In the response paper, APRA has also provided additional guidance on APRA’s approach to supervisory adjustments to prescribed capital. A supervisory adjustment may be in the form of:

• anadditiontotheinsurer’sprescribedcapitalamount;

• anadjustmenttotheminimumrequirementsforthecompositionofthecapitalbaseusedtomeetthePCR;or

• anadjustmenttoanyaspectoftheprescribedcapitalamountcalculation.

Any supervisory adjustment will typically be undertaken as part of APRA’s usual supervisory assessment of an insurer; however, APRA may impose a supervisory adjustment outside the regular process if it is considered necessary. The

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response paper also sets out some of the circumstances in which APRA may impose a supervisory adjustment, including where:

• theinsurerhasmateriallychanged,orplansmateriallytochange,itsbusinessmix;

• materialissueswiththecompetence,orprobity,ofresponsiblepersonsareidentified;

• materialweaknessesintheinsurer’sgovernanceorriskmanagementstructuresareidentified;

• theinsurer’sICAAPisnotwell-defined,orinadequate;and

• theinsurerhasbeenunable,inatimelymanner,torestoreitscapitalpositiontotargetlevelsaccordingtoitsICAAP.

Composition of the capital base

As APRA has foreshadowed, it intends to align the requirements for the composition of the capital base for insurers with those of ADIs. This approach will result in material changes for life insurers and the details are provided in the draft LPS 112, which was released with the response paper. The main areas for which APRA has proposed changes include:

• applyingtherevisedBaselIIIdefinitionofcapitaltogeneralinsurersandlifeinsurers(withsomemodificationstorecognise the special features of statutory funds);

• requiringthatthelimitsforthecompositionofthecapitalbaseofinsurersbeexpressedrelativetothePCRratherthan the capital base, which ensures that insurers with lower target capital levels relative to their PCR will be obliged to hold a higher percentage of their capital base in the highest quality form of capital;

• requiringthefollowingminimumrequirementsforallinsurersatalltimes:

• theCommonEquityTier1mustexceed70percentofthePCR;

• Tier1capitalmustexceed80percentofthePCR;and

• capitalbasemustexceedthePCR;

• requiring,inaddition,thefollowingmodifiedminimumrequirementsforeachfundofalifeinsureratalltimes:

• thecapitalbaseofeachstatutoryfund,excludingTier2capital,mustexceed80percentofthePCRofthefund;

• thecapitalbaseofeachstatutoryfund,includingTier2capital,mustexceedthePCRofthefund;and

• thecapitalbaseofthegeneralfundmustexceedthePCRofthefund;

• extendingtolifeinsurerstheexistingrequirementimposedongeneralinsurerstoobtainAPRA’swrittenconsentbefore reducing their capital.

Calculations of prescribed capital amount

Submissions to the second QIS raised a variety of comments and concerns about the approach and formulae that APRA proposed for the calculation of the prescribed capital amount. APRA has addressed these comments in great detail in the response paper, and proposed changes to certain formulae (particularly formulae relevant to life insurance-specific areas). In general, however, APRA has not substantially departed from the approach set out in its earlier proposals. In many cases, APRA has provided additional clarification on its reasoning for the proposed approach and its expectations of insurers.

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One matter common to both general and life insurers is the operational risk charge. Despite insurers’ concerns that the formula proposed for the calculation of the operational risk charge was not a good indicator of operational risk, APRA has not proposed in the response paper any changes to the formula proposed in the March 2011 response paper. APRA reiterated its view that an explicit charge for operational risk was necessary, but acknowledged that operational risk modelling was not well developed in the insurance industry. Accordingly, APRA’s preferred approach is to require a relatively simple operational risk charge calculation and continue to monitor industry developments with a view to reviewing the calculation in the future.

The minimum PCR for life insurers has also been revised. APRA had previously proposed that a minimum PCR of $10 million would apply to the general fund of all life insurers, with existing friendly societies permitted to apply for an exemption from this requirement. In response to concerns expressed in some submissions, APRA has revised its proposal so that a minimum PCR of $10 million will be applied to the company as a whole, rather than the general fund. A lower minimum will be applied to friendly societies that do not currently meet the $10 million minimum requirement.

Determinations

APRA has indicated that determinations for the adjustment of specific capital requirements made under the current capital standards (GPS 110 to GPS 116) will not be preserved when the new capital framework is implemented. Accordingly, a general insurer will be required to submit a new request to APRA in order to retain any capital-related determinations.

While the existing life insurance capital standards do not give APRA the power to make determinations for the adjustment of specific requirements, the revised capital framework will include such a power, in order to align the prudential standards of the two industries.

Transitional arrangements

APRA recognises that the implementation of more risk-sensitive capital standards will have a material impact on some insurers’ capital position. Accordingly, if insurers are unable to implement changes to mitigate these impacts before 1 January 2013 (when the new capital framework is intended to become effective) APRA will consider allowing transitional arrangements, which will be determined on a case-by-case basis. Requests for transitional arrangements must be submitted by 30 September 2012, and should be accompanied by details of the insurer’s projected capital position as at 1 January 2013 and for a further three-year period after that date.

Next steps

The key future dates for the review process include:

• submissionsontheresponsepaperandthedraftstandardsweredueby24February2012andfinalcapitalstandards are expected to be released in May 2012;

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• draftprudentialpracticeguides(coveringtheICAAP,APRA’sprocessfordeterminingsupervisoryadjustments,theinsurance concentration risk charge for general insurers and the asset risk charge) will be released in September 2012;

• consultationonreportingrequirementsforinsurerswilltakeplaceduring2012andfinalreportingstandardswillbereleased in October 2012; and

• thenewcapitalframeworkwillbeeffectivefrom1January2013.

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Unfair terms in insurance contracts

On 12 December 2011, the Federal Government released a draft regulation impact statement looking at the options for the extension of the unfair contract terms (UCT) protections to insurance contracts. In our 2010 Annual Review we reported on the options paper that the previous Federal Government released in March 2010, covering the same issue. Discussions between the Government and stakeholders continued during 2010 and 2011, and those consultative processes are said to have informed the formulation of the options in the current consultation paper.

The new consultation paper

As with the options paper released in 2010, the current draft regulation impact statement seeks comment on the application of the UCT laws to insurance contracts. The UCT provisions were enacted as part of the Australian Consumer Law reforms that came into force on 1 July 2010. At the time of their enactment, the UCT laws were expressed to apply to all sectors of the economy (including most financial products and financial services under the Australian Securities and Investments Act 2001 (Cth) (the ASIC Act)). However, these reforms do not apply to contracts governed by the Insurance Contracts Act 1984 (Cth) (the ICA), because section 15 of the ICA restricts the availability of relief for unjust or unfair contracts under other legislation.

In 2009, the Senate Economics Legislation Committee formed the view that the existing framework did not provide sufficient protection to consumers entering into insurance contracts. Accordingly, the Committee recommended that the Federal Government provide consumers of general insurance with the same level of protection as offered by the UCT laws.

The current consultation examines the imbalance between general insurance contracts regulated by the ICA and the protections afforded to consumers of other financial products and services (that is, through the provisions of the ASIC Act1).

Options under consideration

The consultation paper outlines five options that reflect the submissions received in response to the earlier options paper issued in March 2010. The consultation considers the primary issue of whether the UCT regime ought to apply to insurance contracts.

AsecondaryissuearisesifitisdeterminedthattheUCTlawsshouldapplytoinsurancecontracts–thatis,howthe ‘main subject matter’ exclusion should be framed to cater for the unique character of insurance contracts –thisisconsideredbelow.

1 ASIC Act s12BI; Competition and Consumer Law Act 2011 (Cth) schedule 2, s26.



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The five main options are as follows:

If it is considered that the UCT laws should not apply to insurance contracts

• Option A – status quo. The problem would continue to be addressed through s14 of the ICA (the duty of utmost good faith). It seems unlikely that making no changes to the current position would be seen as a viable option, given the concerns the Senate Economics Legislation Committee expressed about the inadequate protection under the current regime, and the recent consultation processes.

• Option B – enhance existing ICA remedies. Existing remedies in the ICA (particularly s14) would be modified to improve their effectiveness and to prevent the use of unfair terms; s15 would continue to apply, so that the UCT laws do not apply to insurance contracts.

The enhancement of the existing ICA remedies is likely to include some of the measures contained in the Insurance Contracts Amendment Bill 2010, which was introduced into Parliament in March 2010 but lapsed in July 2010, due to that year’s federal election. This includes:

• anextensionofthedutyofutmostgoodfaithtothird-partybeneficiaries;and

• empoweringASICtocommencepublicinterestproceedingsforbreachesofs14.

In addition, the consultation paper suggests additional measures that would:

• reversetheonusofproofforas14breach,sothatinsurersmustshowthatrelianceonatermisnotabreachofthe good faith duty; and

• imposeablanketbanontermsfoundtobeinbreachofthedutyofutmostgoodfaith.

The consultation paper notes that even if s14 is bolstered, it may not provide an equivalent level of protection to that currently provided by the UCT provisions. Furthermore, given that the earlier options paper questioned the effectiveness of s14 of the ICA to protect insureds from unfair terms, it seems unlikely that the Government will embrace this option.

If it is considered that the UCT laws should be extended to insurance contracts

• Option C – allow the ASIC Act provisions to apply in addition to and alongside the ICA. Section 15 would be amended so that the UCT laws could apply in addition to the remedies under the ICA.

• Option D – include UCT provisions in the ICA. Include provisions similar to the ASIC Act in the ICA, so that UCT remedies would be available to insureds (in which case, s15 would continue to operate).

Options C and D are the Government’s preferred approach to address the current imbalance in the UCT framework in financial services. Both options would provide additional remedies for consumers of general insurance, including remedies that could be pursued by ASIC. However, these options are likely to result in some level of commercial uncertainty for insurers, having regard to their policy wordings and the risk that exclusion clauses, in particular, may

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be held to be void. This, in turn, would be likely to have an impact on their reinsurance arrangements and could lead to increased premiums.

Option C, enacting UCT provisions in the ICA to operate alongside the ASIC Act, may result in regulatory complexities and would enable consumers to plead two alternatives in proceedings challenging unfair terms.

• Option E – encourage industry self-regulation, to discourage the use of unfair terms by insurers. For example, the General Insurance Code of Practice could incorporate principles directed at eliminating unfair contract terms, and a regulatory body, established or appointed under the Code, would be able to review any terms upon application by a consumer. Although this option involves fewer costs and no changes to legislation, self-regulation may not provide the equivalent level of protection to general insurance consumers. As a result, it seems unlikely that the Government will adopt this option.

What is the ‘main subject matter’ of a contract of insurance?

The UCT provisions do not apply to the ‘main subject matter’ of a contract. That is, the main subject matter of a consumer contract cannot be declared unfair. The policy rationale for this provision is that the terms of a consumer contract that have been genuinely negotiated ought not be subject to review, since they have been duly considered before the contract was entered into and should not lightly be declared unfair.2

In the context of insurance policies, it is not clear whether a term in a contract of insurance that seeks to limit an insurer’s liability (such as an exclusion in the policy) could be considered something that was the subject of genuine negotiation, such that it could be characterised as the main subject matter of the contract.

The consultation paper sets out three possible options for the definition of the ‘main subject matter’ of an insurance contract:

• Option 1 – broad definition. Terms that limit the insurer’s liability are considered to be within the main subject matter of an insurance contract, and therefore would not be subject to judicial review on the basis of ‘fairness’.

• Option 2(a) – narrow definition. Terms that limit liability are not considered to be within the main subject matter of an insurance contract (and so would be subject to the UCT provisions).

• Option 2(b) –remediesrestrictedtotheexercisebyaregulatoryauthority.Giventhepotentialimpactoninsurersofdeclaring certain exclusions in an insurance policy void, this alternative to Option 2(a) would only permit a regulatory authority to exercise a right to seek review of an unfair term.

Whichever option is implemented, there may be significant uncertainty around the operation of the new regime, especially if the narrow definition of the main subject matter is adopted. For example, it may be unclear whether an exclusion clause or other term that is not clearly defined, or not generally known by the insured at the time the contract was entered into, could be considered to form the ‘main subject matter’ of the policy.

2 Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd (Civil Claims) [2008] VCAT 482.

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Given this uncertainty, the consultation suggests the UCT laws could be supplemented by additional rules allowing exclusions to be reviewed on grounds of ‘unfairness’, even if such an exclusion would be considered to form part of the main subject matter of the contract. The insurance industry does not support this proposal, given that exclusions from cover are factored into analyses of issues such as pricing, reserving and purchasing reinsurance. The consultation paper acknowledges that the uncertain operation of the proposed new regime may impact on insurers’ capital positions and compliance costs, which may, in turn, lead to higher premiums.

Interested parties were required to make submissions on a number of issues raised in the consultation paper by 17 February 2012.

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Productivity Commission proposes national disability insurance scheme

The Productivity Commission has released its report into long-term care and support for Australians with a disability (the report). The report recommends, among other things, the establishment of:

• theNationalDisabilityInsuranceScheme(NDIS); and

• theNationalInjuryInsuranceScheme(NIIS).

These two national insurance schemes are intended to provide a new system for supporting Australians with disabilities, and with catastrophic injuries resulting from accidents.

The report

On 10 August 2011, the Productivity Commission (the Commission) released the report, which describes the current arrangements relating to disability support services as ‘underfunded, inefficient and unfair’. The Commission’s inquiry heard that:

• therewerenotenoughdisabilityservicesonoffer;

• disabilityservicesweren’tavailableforlongenough;

• disabilityservicesdidn’treflectdisabledpeople’sneeds;and

• applyingfordisabilitysupportwasalong,complicatedprocess,whichoftendeliveredunsatisfactoryresults.

In response to the above, the report recommended the establishment of the NDIS, which would be a no-fault, Medicare-style, publicly funded insurance disability scheme to pay all ‘reasonable and necessary’ care for about 410,000 disabled people.

The report also recommended the establishment of the NIIS as a counterpart to the NDIS. The NIIS would cover people suffering from a catastrophic injury, and be based on the motor accident compensation schemes that operate in the states and territories.

How will the NDIS work?

The NDIS will cover all Australians, and provide assistance to those with significant and ongoing disabilities whose needs cannot be met without taxpayer support. It will be a nationally administered scheme, under a single authority, the National Disability Insurance Authority (NDIA). The scheme will operate according to three tiers:

• Tier1:targetingtheentireAustralianpopulation,toincreasesocialparticipationbypeoplewithdisabilitiesand minimise the impact of disability.

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• Tier2:targetingpeoplewithdisabilities(4million)andtheirprimarycarers(800,000).Tier2wouldincludeinformation and referral services about the most effective care and support options for anyone with, or affected by, a disability.

• Tier3:thosepeoplereceivingfundedsupportfromtheNDIS(around410,000).

The scheme will provide high-quality long-term care and support to those in tier 3, by assisting with, for example:

• aidsandappliances;

• homeandvehiclemodifications;

• respiteservices(short-termcareforthosewithdisabilities,togivecarerstheopportunitytorest);and

• domesticassistance–egwithmealplanninganddomestictasks,bankingandshopping–toenableindividualstolive independently in the community.

The scheme will also provide referrals to services such as health, public housing, public transport, and mainstream education and employment services.

The NDIA will supervise needs assessments, support packages and planning at the local level. People will be able to choose to have their needs met by a range of providers, including private firms, not-for-profit groups, paid individuals and specialist disability service providers.

Those receiving funded support will be given an individual package, devised in consultation with the NDIA. The Commission anticipates that most consumers will elect a ‘choice of provider’ model of care, where the consumer chooses the services they want (from options the NDIA provides) and the providers they want to deliver them. The NDIA would pay the providers and negotiate rates of payment.

How much will the NDIS cost?

The Commission estimates that the NDIS will cost $13.5 billion a year, which represents an additional $6.5 billion on top of the $7 billion in funding that the states and the Commonwealth currently provide.

How will the NDIS be funded?

The Commission proposes a number of different funding models for the scheme. The preferred model is one in which the Commonwealth directs payments into a dedicated fund (the National Disability Insurance Premium Fund). The funds would either come from a new taxation arrangement (eg a disability levy) or from savings elsewhere in the federal budget.

The other, less preferred, option the Commission suggests is that the state, territory and federal governments pool funding according to an agreed formula, with specified funding shares.

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How will the NIIS work?

The NIIS will be a model of separate state-based schemes. They will be ‘no fault’ in nature, providing consistent national care and support arrangements. Coverage will be provided irrespective of how an injury was caused and will only cover new cases of injury.

The role of the ‘national’ scheme will be to set national standards and ensure consistency in eligibility, definitions and assessment across jurisdictions, as well as generally coordinating the work of state-based schemes.

How much will the NIIS cost and how will it be funded?

The Commission estimates the cost of implementing the NIIS at $831 million per annum. Costs will vary from state to state, depending on the level and type of coverage already in place. Each government would meet its own costs.

Next steps – what to look out for in 2012

The Commission proposed a start date of July 2014 for the NDIS, extending across Australia from mid-2015 onwards, with all cases of significant disability to be funded by mid-2019.

The Commonwealth has not yet indicated whether it will adhere to this timetable. Indeed, the Government’s stated commitment to achieve budget surpluses may prove to be a significant obstacle to funding the NDIS and launching it within the timeframes that the Commission proposes. The Treasurer has acknowledged that the scheme presents ‘a huge budgetary challenge’.

On 3 December 2011, the Federal Government announced that it was committing $10 million to the establishment of an agency to plan the NDIS’ implementation. Throughout 2012, the new agency is expected to work with the states and territories, and relevant stakeholders, on the design and development of the scheme, in preparation for its eventual launch.

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New requirements for insurers carrying on business in New Zealand

Legislation has been implemented in New Zealand that will introduce a new licensing regime and new prudential requirements for insurers carrying on business there from 2012.

The Insurance (Prudential Supervision) Act 2010 (NZ) (the Act) and the Insurance (Prudential Supervision) Regulations 2010 (NZ) (the Regulations) apply to all insurers ‘carrying on insurance business in New Zealand’, and require these insurers to be licensed and comply with ongoing prudential requirements by the end of the transitional period.

Insurers that operated in New Zealand on 7 September 2010 were required to tell the Reserve Bank of New Zealand (the RBNZ) by 5 January 2011 whether they intended to carry on insurance business in New Zealand after 7 March 2012. These insurers must then apply for, and be issued with, a provisional licence by 7 March 2012 while the RBNZ assesses their application for a full licence.

Insurers seeking to enter the New Zealand market after 7 March 2012 need to have a full licence before they commence carrying on insurance business.

A summary of the key dates and transitional requirements are outlined in the table below:

Date Requirements Notes

7 March 2012 All insurers must have a provisional or full licence by this date.

The following categories of insurers are not eligible for a provisional licence and must have a full licence by 7 March 2012:

• existinginsurerswhodidnotprovidenotice to the RBNZ, as required, by 5 January 2011; and

• newinsurers(beinginsurerswhosought to enter the New Zealand market after 7 September 2010).

7 September 2013 All insurers carrying on business in New Zealand must have a full licence (ie be in full compliance with the Act) by this date.

Provisional licences expire at this date.

The application process for obtaining a licence can be time consuming, given all the information that must be collated and included in the application form. As such, insurance companies seeking to enter the New Zealand

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insurance market, and those on provisional licences, would need to act very quickly to ensure they provide the RBNZ with all the information and documents required under the Act, the Regulations and the guidelines, in order to obtain a full licence by the end of the transitional period. The RBNZ has published guidelines and standards on its website (and will continue to do so) to assist applicants in completing their applications.

Insurers seeking to exit the New Zealand market

The RBNZ can issue a provisional licence to facilitate the exit of an insurer from the New Zealand market, so long as run-off is complete by 7 September 2013. If insurers still have liabilities beyond this date, a full licence will be required.

Licence requirements under the Act

Section 19(1) of the Act outlines a number of matters of which the RBNZ must be satisfied before a licence will be issued, including requirements that the applicant:

• holdacurrentfinancialstrengthratinggivenbyanapprovedratingagency;

• complywithprudentialregulations(includinginrelationtosolvency,financialstrengthratings,disclosureofoverseaspolicyholder preferences, risk management programs and supplying financial statements);

• providetheRBNZwithacopyofits‘fitandproper’policyandcertificates;

• providetheRBNZwithacopyofitsriskmanagementprogram;and

• complywiththeminimumgovernancerequirementsforlicensedinsurerssetoutintheRBNZguidelines,whichdealwith issues including incorporation, ownership and governance structure, composition and roles of the board, requirements for various committees, and directors’ qualifications and experience.

For applicants that carry on business as a life insurer, the Act provides for compliance with other provisions of the Act and Regulations, such as those relating to statutory funds.

In the case of applicants that are incorporated outside New Zealand, the RBNZ must also be satisfied that the law and regulatory requirements of the applicant’s home jurisdiction are adequate and appropriate as they relate to:

• supervisionofinsurers,solvencyandcapitalstandards,financialreportingandauditing,corporategovernanceanddisqualification of persons to act as directors/officers; and

• thenatureandextentoftheprudentialsupervisionprovided.

Exemptions from licensing requirements

There are some exemptions from compliance with licensing requirements for certain classes of insurers, including:

• Overseas insurers operating as a branch in New Zealand: Overseas insurers whose home country is an ‘approved jurisdiction’ (currently Australia and the United Kingdom) will be exempt from certain requirements of the Act and certain prudential standards (including those relating to solvency standards, ‘fit and proper’ certificates and

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governance structure, and compliance with statutory fund requirements). Certain exemptions are also available for Lloyd’s underwriters.

• Small insurers and friendly societies: Insurers with an annual gross premium of less than the amount set by the regulations (currently NZ$1.5 million) are exempt from requirements such as those relating to statutory funds, maintenance of a minimum amount of capital, financial strength ratings from an approved rating agency and the filing of annual and half-yearly financial statements.

• Pure reinsurers and captives: Insurers that only carry on reinsurance business in New Zealand, and captive insurers, will be exempt from requirements relating to financial strength ratings.

Disclosure of overseas policyholder preferences

Certain provisions of the Act require overseas insurers to disclose overseas policyholder preferences, which essentially refers to a law or regulatory requirement in the applicant’s home jurisdiction that has the effect of prioritising claims of creditors/classes of creditors in the event of an insurer’s insolvency and which is materially disadvantageous to New Zealand policyholders.

For insurers carrying on business both in Australia and New Zealand, three Australian provisions come to mind:

• s116AoftheInsurance Act 1973 (Cth), which specifies when assets and liabilities are taken to be such in Australia;

• s116(3)oftheInsuranceAct,whichprovidesthat,inthewindingupofageneralinsurer,theinsurer’sassetsinAustralia must not be applied in the discharge of its liabilities other than its liabilities in Australia (unless it has no liabilities in Australia); and

• s562AoftheCorporations Act 2001 (Cth), which deals with the proceeds of reinsurance where an insurer goes into liquidation.

This means that, where the first provision deems an insurer’s assets and liabilities to be assets and liabilities in Australia, the effect of the second and third provisions would give rise to an overseas policyholder preference within the definition of the Act and, therefore, would need to be disclosed to the RBNZ. Failure to disclose can result in a fine of up to NZ$500,000.

Transfers and amalgamations

The RBNZ’s written approval is required before a licensed insurer can enter into a transfer or amalgamation of all, or part, of its insurance business. If the transferee is not a licensed insurer in New Zealand, it would need to obtain a licence before the transfer or amalgamation is approved, or obtain a licence simultaneously with the transfer or amalgamation being approved.

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Penalties for non-compliance with licence requirements

From 8 March 2012, any person or entity that carries on an insurance business in New Zealand without a licence commits an offence under s15(2) of the Act. The maximum penalties applicable are a fine of up to:

• NZ$1,000,000forabodycorporate;and

• NZ$200,000and/oruptothreemonths’imprisonmentforanindividual.

Section 151(3) of the Act allows the RBNZ to apply to the High Court of New Zealand for the liquidation of an unlicensed insurer.

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Changes to private health insurance incentives

Amendments to the Private Health Insurance Rebate (the rebate) and Medicare Levy Surcharge (the surcharge) in the 2009/10 Budget are presently passing through the House of Representatives, following changes to the composition of the House, and looks likely to pass through the Senate. The new legislation is due to come into force on 1 July 2012.

The rebate provides a reduction in the cost of private health insurance premiums for people who are eligible for Medicare and who take out a complying private health insurance policy. The surcharge imposes an increase in the Medicare Levy liability for those taxpayers exceeding certain income thresholds who do not take out private health insurance.

The key elements of the reform are:

• meanstestingtherebate;

• increasingthesurchargeforthosewhodonottakeoutinsurance;and

• includingfringebenefitsinthecalculationofincome,forthepurposeofdeterminingeligibilityfortherebateand liability for the surcharge.

The Federal Government has advocated the reform, on the basis of trying to avoid low- and middle-income earners subsidising the health insurance of high-income earners.

Certain industry participants have expressed concern that means testing of the rebate will prompt some policyholders to abandon their health insurance, putting greater stress on the public health system, although the Government does not expect this to occur in significant numbers. Another possible concern is the potential for policyholders to downgrade their cover to the minimum required to avoid the surcharge. If significant numbers of people downgrade or abandon their cover, there may well be impacts on premium rates and the composition of the risk pool.

Private health insurance reform

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In this case, the Hong Kong High Court upheld an insurer’s defence based on a contractual limitation clause and struck out a third-party claim against the insurer.

This case concerned an application made by an insurer to strike out a third-party claim brought against it by an insured defendant.

The plaintiff was an employee of the first defendant. The plaintiff was injured when working at a construction site that was owned by the second defendant. The third defendant provided the crane involved in the accident. Both the first and third defendants were the sub-contractors of the second defendant. The plaintiff alleged that the accident was caused by a defect in the crane provided by the third defendant. On that basis, the third defendant brought a claim against its insurer for indemnity under a contractors’ indemnity insurance policy. Under the relevant insurance policy, the insurer covered ‘the Principal [and]…all main contractors, subcontractors of any tier…’.

Clause 10(e) of the insurance policy stated that ‘all benefits under this Policy shall be forfeited…if the claim be made and rejected and an action or suit be not commenced, either within three months after such rejection…’ (the limitation clause). Timing in the present case was crucial and significant events were highlighted as follows:

• 5March2009:Theinsurerdeniedliabilitytoindemnifythethirddefendantonthebasisofanexclusionclause.

• 14April2009:Theinsurerreiterateditspositiontodenycoverage.

• 6May2009:Theinsurerreceivedathird-partynotice(dated4May2009),whichwasnotsealednorissuedby the High Court Registry (the registry).

• 23July2009:Theinsurerreceivedanotherthird-partynotice,whichwassealedandissuedproperlybytheregistry.

• 8December2009:Thecourtorderedthatthesecondthird-partynoticestoodastheoperativenoticeissuedby the third defendant to the insurer.

Whether the exclusion clause applied was not the issue in the present case. The insurer essentially relied on the limitation clause in its application to strike out the third defendant’s claim. As a result, the key issue was whether such a claim was commenced after the limitation period.

The third defendant argued that the action was ‘commenced’ on 4 May 2009. The court rejected this, as this third-party notice was not properly sealed and issued out of the registry. Order 2, rule 1 of the Rules of High

Case Name:Parshad v Chit Hing Construction Engineering

Citation:[2011] 1 HKLRD 217, Court of First Instance of the

High Court of Hong Kong per Master Marlene Ng in Chambers


Issues:•Third-partyproceedingsonlybeginwhenathird-

party notice is duly ‘sealed’ and ‘issued’ by the High Court Registry

•Whetheraninsurercanrelyonacontractuallimitation clause to strike out third-party proceedings

Insurer’s contractual limitation defence upheld

http://www.aar.com.au/pubs/pdf/ari/2011/PrintAsiareview.pdf

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Court (Cap 4A) (the RHC) did not cure fundamental defects like this. In fact, the registry refused to seal and issue the third-party notice, as the third defendant was acting contrary to the RHC.

The court also found that by reading Order 16, rule 3(4) and Order 6, rule 7(3) of the RHC together, a third-party claim ‘began’ when a third-party notice was duly sealed and issued by the registry. That is, the present claim was commenced when the second third-party notice was issued to the insurer on 23 July 2009. As the insurer had denied coverage on 14 April 2009, the present action was commenced after the three-month deadline imposed by the limitation clause. The third-party claim was struck out accordingly.

This case confirms that the Hong Kong court will uphold a contractual limitation defence if the elements specified in the limitation clause have been satisfied. In particular, it highlights the court’s inherent jurisdiction to strike out a claim if it is clear that a defendant can rely on a defence and a plaintiff cannot plainly overcome such a plea.

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Case Name:Law Lai Ha v Zurich Insurance Co

Citation:[2011] 2 HKLRD 450, Court of First Instance of the

High Court of Hong Kong per Sakhrani J


Issues:•Anemployeecompensationpolicycoversonlythecategories of employees specified in the schedule to

the policy

•Liabilityofaninsurertoindemnifyanemployerforcompensation payable to a deceased employee’s

estate under the policy

The Hong Kong High Court ruled that an insurer’s obligation to indemnify under the Employees’ Compensation Ordinance (Cap 282) was confined to the categories of employees specified in the schedule to the policy.

Section 40 of the Employees’ Compensation Ordinance (Cap 282) (the ECO) compulsorily requires an employer to take out an insurance policy against an employer’s liability. The defendant was the insurer who agreed to indemnify the employer in the present matter against his liability to an employee in respect of ‘bodily injury by accident or disease … arising out of and in the course of his employment’. In this case, the employer employed a man who was sent to a client’s factory in Kenya to install machinery and to train staff. The man contracted cerebral malaria and died afterwards (the deceased).

The schedule to the policy described the employer’s business as ‘trading’; its geographical limit as ‘anywhere in Hong Kong’ and the risk address as its Hong Kong office. Importantly, the schedule only specified two types of employees, which comprised one office attendant and one clerk.

The plaintiffs were the co-administrators of the deceased’s estate. They successfully obtained an employee compensation award against the employer. However, the employer went into liquidation. Therefore, the plaintiffs brought the present action against the defendant. The plaintiffs based their case on section 44(1) of the ECO, which provided a legal basis for an injured party to claim against an insurer. The defendant argued that the employee compensation policy did not cover the deceased and denied liability.

In respect of the employer’s obligation under the ECO, the court ruled that the employer was under a statutory duty to take out insurance to cover all of its employees in relation to all of its business operations. However, the employer did not need to purchase one single policy with one insurer. The singular phrase ‘a policy of insurance’ in s40(1) of the ECO was construed to include the plural and employers could take out more than one policy to meet its statutory obligation to insure against any relevant liability.

In respect of the insurer’s obligation under the ECO, the court found that the insurer’s liability to indemnify was confined to the insurance sought by the employer and provided by the defendant as specified in the policy schedule. The policy covered only those categories of employees specified in the schedule such as office attendant and clerk. It was not disputed that the deceased did not fall into one of the categories of employees in the policy schedule. As a result, the deceased was not covered and the defendant was not liable under the policy.

Insurer’s liability under the Employees’ Compensation Ordinance

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This case confirms that an insurer is only liable for the risks that it expressly agrees to undertake. Even if the employer fails to take out statutorily required insurance to cover all its employees, this will not impose any additional liability on the insurer to insure an employee who is not covered under a particular policy.

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Case Name:China Ping An Insurance (Hong Kong) Co Ltd

v Chiu Chi Yung

Citation:[2011] HKEC 642, Court of First Instance of the High

Court of Hong Kong per Deputy Judge Carlson


Issue:•Whetheraninsurercanavoidamotorvehiclethird-party risks policy on the basis of misrepresentation as

to a driver’s personal characteristics

In this case, the Hong Kong High Court confirmed that an insurer can avoid an insurance policy because of the insured’s misrepresentation as to his age, experience and occupation.

The defendant was an insured under a motor vehicle third-party risks insurance policy offered by the plaintiff insurer. In order to obtain the insurance cover, the defendant signed a proposal form, which he represented that he was 30 years old and that he had more than 10 years of regular driving experience. He also claimed that he worked in the ‘IT’ industry (which was understood to be ‘information technology’). He even presented a copy of a Hong Kong identity card to support his application, and it seemingly indicated that he was more than 30 years old. As a result of these materials, the plaintiff provided the defendant with a motor vehicle cover.

On 16 March 2010, the defendant’s vehicle collided with a bicycle. The defendant was charged with careless driving. However, he did not report the accident to the plaintiff. The plaintiff was only notified of this matter seven months later when the Legal Aid Department wrote to the plaintiff. The investigation revealed that the defendant had made the following misrepresentations:

• Age:Thedefendantwasbornin1989,sohewasonly20yearsoldwhenhetookoutthepolicy.

• Experience:ThedefendanthadbeenlicensedtodrivesinceOctober2008,soheonlyhadoneyearofdriving experience when the policy was offered.

• Occupation:Atallmaterialtimesthedefendantworkedasanair-conditioningtechnicianinsteadofintheITindustry.

Under section 10(1) of the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap 272) (HK), an insurer has a duty to satisfy judgments against an insured person. However, under s10(3), an insurer is not liable if it has obtained a declaration from the court that the insurance policy can be avoided because of the non-disclosure of a material fact. Section 10(5) states that ‘material’ means anything that will influence the decision of a prudent insurer in determining whether to offer cover.

As a matter of company policy, the plaintiff did not offer insurance cover to certain occupations and professions, which included the defendant’s occupation. This was because the plaintiff considered that persons in such occupations had a higher risk of making claims under motor vehicle insurance policies. It follows that the misrepresentation as to the defendant’s occupation was material. Indeed, the defendant had also been declined cover previously, because of his young age and inexperience, when he applied to another insurance company.

The court found that the misrepresentation regarding the insured’s age, experience and occupation amounted to material misrepresentation, which entitled the insurer to avoid the policy. As such, the insurer was not liable to indemnify the insured under the policy in respect of the accident.

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This case demonstrates that non-disclosure as to age, experience and occupation can be regarded as material non-disclosure under s10(5) of the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap 272) (HK). On this basis, a motor vehicle insurance policy can be avoided and the insurer will not be liable to indemnify the insured for any loss suffered.

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Detailed proposals have been announced for Hong Kong’s independent Insurance Authority (the IA), which will have comprehensive powers regarding insurers and insurance intermediaries. This represents a further step in the reform process commenced by the Financial Services and Treasury Bureau (the FSTB) in June 2010. The reforms are intended to create a single independent insurance regulator to replace the various bodies that now perform the task. These include the Government-run Office of the Commissioner of Insurance (the OCI), the existingIAandtheself-regulatorybodiesthatcurrentlysuperviseinsuranceintermediaries(ie–theProfessionalInsurance Brokers Association, the Insurance Agents Registration Board and the Hong Kong Confederation of Insurance Brokers).

The creation of an independent IA will also bring Hong Kong into line with the international practice that financial regulators be operationally and financially independent of the Government. The OCI is currently the only financial services regulator in Hong Kong that is part of the Government.

The FSTB has engaged with industry and relevant stakeholders regarding the proposed reforms. Draft legislation is expected to be finalised in early 2012.

The independent IA’s role and powers

The FSTB proposes to update the Insurance Companies Ordinance (Cap. 41) (HK) to provide the IA with a full range of investigatory and enforcement powers regarding both insurers and insurance intermediaries. These powers are similar to those already afforded to the Securities and Futures Commission (the SFC) and include the power to:

• setconductstandardsandrequirements;

• enterthepremisesofaregulatedentitytoconductaninspection;

• initiateandpursueaninvestigationintoaregulatedentityoritsstaff;

• applytoamagistrateforawarranttosearchfor,seizeandremoveanyrecordsordocumentsrequiredtobeproduced;

• applytotheCourtofFirstInstancetoobtainanorderrequiringcompliancewithanyconditionsimposedduring the course of an investigation or inspection;

• imposesanctionssuchasapublicreprimandandfinesfornon-complianceormisconduct;and

• prosecutecertainoffencessummarily.

While the IA will become the primary regulator for the insurance market, it is proposed that the Hong Kong Monetary Authority (the HKMA) will maintain its supervision of banks that act as insurance intermediaries. In

Hong Kong Update: Detailed proposals announced for Hong Kong’s new insurance regulator

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particular, the IA’s investigation, disciplinary and complaint handling powers will be delegated to the HKMA (or exercised jointly) if the alleged wrongdoing concerns a bank.

To minimise the impact of the reforms, the FSTB has proposed a transitional arrangement to allow existing insurance intermediaries to be deemed licensed for three years. After that time, such intermediaries will need to apply to the IA to obtain a new licence.

The independent IA’s structure and funding

The IA is intended to operate using the corporate model that the SFC has adopted, subject to basic oversight measures. These include that the IA’s management and board will be appointed by the Chief Executive and Industrial Advisory Committees will be formed to advise the IA’s board.

A statutory appeals tribunal will also be established to provide an independent review mechanism for appeals against any IA decision, including disciplinary decisions. The proposed tribunal members will be appointed by the Chief Executive and consist of market practitioners or others with appropriate knowledge and experience. It will be chaired by a person eligible for appointment as a High Court judge.

The IA’s initial operating costs are expected to be approximately HK$240 million for the first year. This will be met by an initial Government grant and will then be funded from the revenue generated by:

• fixedlicencefeespayablebyallinsurersandinsuranceintermediaries;

• variablelicencefeespayablebyinsurersandcalculatedontheirliabilities;

• userfeesforspecificservices(suchasapplicationsfortransferofbusiness,forauthorisationofinsurersorchangeinkey personnel); and

• alevyof0.1percenttobechargedonallinsurancepremiums.

To offset the impact of these costs, the FSTB proposes to introduce the fees and levy incrementally over a five-year period and to exempt insurance intermediaries from paying licence fees during this time. The FSTB also recommends that a cap be imposed on the levy on non-life insurance policies with annual premiums of more than HK$5 million and life insurance policies with single or annualised premiums at or above HK$100,000. The level of this proposed cap will be subject to the IA’s review. The FSTB also suggests exempting reinsurance contracts from the levy.

Conclusion

As it stands, the independent IA is likely to introduce a new era of increased regulation for insurers and insurance intermediaries. The IA’s new powers also suggest that it will adopt a robust approach to the investigation and enforcement of regulatory non-compliance and misconduct. As a result, it seems probable that regulatory compliance will receive greater emphasis under the independent IA and become a more pressing concern for the market in the future.

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Liability to indemnify a main contractor for a sub-contractor worker’s injury

Case Name:Lim Keenly Builders Pte Ltd v Tokio Marine

Insurance Singapore Ltd

Citation:[2011] SGCA 31, Singapore Court of Appeal per

Chao Hick Tin, Andrew Phang Boon Leong and VK Rajah JJA


Issues:•Workmen’sCompensationInsurancePolicy–

interpretation of insuring clause

In 2010, the Singapore High Court ruled1 that a main contractor could not claim indemnity against an insurer for its liability for injury to a worker employed by one of its sub-contractors. The Court of Appeal has overturned this decision, reaffirming that the terms of a contract will be construed according to their ordinary meaning and in the context of the contract.

Lim Keenly Builders Pte Ltd (LKB) was the main contractor for the design and construction of an industrial building and held a policy of workmen’s compensation insurance with Tokio Marine Insurance Singapore Ltd (Tokio Marine). LKB was sued by a worker (the plaintiff), who was injured while working on the worksite. At the time of his injury, the worker was employed by a subcontractor of LKB. LKB brought third-party proceedings against Tokio Marine for indemnity under the policy.

The court was required to consider the operative clause of the policy, which provided that:

... if any workman in the Insured’s employment shall sustain personal injury by accident or disease caused during the Period of Insurance and arising out of and in the course of his employment by the Insured in the Business, the Company will ... indemnify the Insured against all sums for which the Insured shall be liable to pay compensation either under the Legislation or at Common Law, and will in addition pay all costs and expenses incurred by the Insured with the written consent of the Company.

The policy relevantly defined ‘the Insured’ to include LKB or ‘their sub-contractors of all tiers and levels as contractor’.

The issue in this case was whether the policy applied only where an insured incurred liability to its own employees, or whether it also applied where liability was incurred to anyone in the pool of individuals employed by the various co-insureds for the purposes of the project.

The High Court construed the operative clause such that the term ‘Insured’ referred to each separate entity, and therefore held that the policy only covered claims by an insured in respect of liabilities it incurred for claims made by its direct employees.

On appeal, the Court of Appeal held that the term ‘Insured’ referred collectively to all contractors, and that a plain reading of the operative clause suggested that all contractors involved in the project were to be treated as a single entity for the purposes of the policy. The court noted that this interpretation was consistent with the commercial purpose of the policy, since the project would necessarily involve the main contractor and many sub-contractors, making it essential that the policy covered liability towards all employees of all contractors involved in the project.

1 Mohammed Shahid Late Mahabubur Rahman v Lim Keenly Builders Pte Ltd (Tokio Marine Insurance Singapore Ltd, third party) [2010] SGHC 142.

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Notwithstanding that the Court of Appeal’s decision turned on the particular wording of the policy, it widens the scope for workmen’s compensation insurance to cover not only the liability of a contractor to its own employees, but also any liability incurred by one contractor to the employees of any other contractor within the class of co-insureds under the policy.

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On 11 April 2011, the Singapore Parliament passed legislation that enhances existing protection schemes for depositors and insurance policy owners and consolidates the existing schemes into a single statute.

Following three rounds of public consultation, the Monetary Authority of Singapore proposed legislation designed to enhance the Deposit Insurance Scheme (the DI Scheme) and the Policy Owners’ Protection Scheme (the PPF Scheme). On 11 April 2011, the proposed legislation was passed by Parliament.

The DI Scheme and PPF Scheme are designed to compensate depositors and policy owners in the event that their bank or insurer fails. Prior to the new legislation, the DI Scheme was governed by the Deposit Insurance Act 2005 (Sg), while the PPF Scheme was provided for by the Insurance Act 1966 (Sg). The new legislation consolidates the two schemes into a single piece of legislation.

The key amendments to the DI Scheme are:

• theScheme’scoveragehasbeenexpanded,frominsuringonlyindividualsandcharities,tocoverallnon-bank depositors, with a view to mitigating potential cash flow problems faced by small business depositors in the event of a bank failure;

• themaximumlevelofcoveragehasbeenraisedfromS$20,000toS$50,000perdepositorperDISchememember; and

• therehasbeenashifttoa‘grosscompensationpayout’approach,wherebydepositorsarepaidthegrossamount of their insured deposits up to the coverage limit without first netting off liabilities to the DI Scheme member bank or finance company.

Key amendments to the PPF Scheme include:

• expandingthescopeofcoveragetoincludeallaccidentandhealth(A&H) policies written by life insurers, as well as personal motor insurance, individual and group short-term A&H, personal property insurance, foreign domestic maid insurance and personal travel insurance written by general insurers, in addition to the policies already covered (life policies and compulsory motor third-party injury and work injury compensation policies); and

• increasingthelevelofcoverto100percentoftheliabilitiesoflifepolicies(whichwereformerlyonlycoveredup to 90 per cent), subject to a cap. Liabilities under non-life policies will continue to be 100 per cent covered, but will not be subject to a cap.

The legislation commenced on 1 May 2011.

Singapore Update: Parliament passes Deposit Insurance and Policy Owners’ Protection Schemes Bill 2011

Documents

Annual Review of Insurance & Reinsurance Law 2011 · decided to investigate the viability of seeking compensation from the directors of Penrice for suspected deficiencies in the discharge