Recent Insurance Cases

23 January 2020, Federal Court of Australia – Allsop J

Ditchfield Contracting Pty Ltd and Ditchfield Contractors Pty Ltd (Ditchfield) were engaged by the Newcastle City Council regarding the construction at a waste management facility of a landfill cell. After an accident that occurred in September 2016 at the worksite, diesel spread across the adjoining property and along the route of an electricity easement to a creek. Ditchfield was subsequently charged with a pollution offence by the Environmental Protection Agency (EPA), and incurred costs in cleaning up and remediating the spill path.

RELEVANT POLICIES

Ditchfield had been issued a Combined Business Liability Policy on behalf of Certain Underwriters at Lloyd’s and Berkley Insurance Company (collectively, the Epsilon insurers), by Epsilon Insurance Broking Services Pty Ltd (Epsilon), an underwriting agency Ditchfield had engaged.
Ditchfield had also been provided cover under a Management Liability Policy (the DUAL policy) by Liberty Managing Agency Ltd on behalf of Syndicate 4473, Arch Underwriting at Lloyds Ltd on behalf of Syndicate 2012, Asta Managing Agency Ltd on behalf of Everest Syndicate 2786 and Hardy (Underwriting Agencies) Ltd on behalf of Syndicate 382 (collectively, the DUAL insurers). This policy was issued by DUAL Australia Pty Ltd, the Australian underwriting agent, and the cover included additional benefits for official investigations and inquiries (cl 2.1), statutory liability (cl 2.3) and pollution cover (cl 2.4).

COSTS PAID

In April 2018, an amount of $262,666.95 was paid to Ditchfield resulting from confirmation from the Epsilon insurers that the Epsilon policy responded to Ditchfield’s claim in respect of “mitigation costs arising from the incident”. Additionally, indemnity to Ditchfield was granted by the DUAL insurers under the DUAL policy, for the costs in the defending the charge brought by the EPA and EPA’s costs incurred, and the order for payment that was imposed by the Land and Environment Court. Contribution from the DUAL insurers on behalf of Epsilon was then sought on the grounds that the two policies provided cover for the cost of the steps taken by Ditchfield, and as a result the DUAL insurers incurred liability to contribute for their equitable share of the amount paid (said to be 50%).

The questions to be decided, separate from any other questions, were:

Whether cover was provided for steps the insured took to prevent, mitigate or rectify property damage arising or continuing out of an occurrence, under the Combined Business Liability Insurance policy issued by the Epsilon insurers?
Court found – unnecessary to answer

Whether cover was provided for steps the insured took to prevent, mitigate or rectify property damage arising or continuing out of an occurrence, under the Management Liability insurance policy issued by the DUAL insurers?
Court found – negative

KEY POINTS OF THE JUDGMENT:

1. The DUAL policy did not respond to indemnify Ditchfield for the costs and expenses of the action resulting from the diesel spill. [61]
2. Even if the steps taken, and expense incurred by Ditchfield acted as to prevented further damage, they were properly characterised as the monetary equivalent of the damage itself already caused by the initial negligent act. [32]
3. No cover was provided under the DUAL policy for the loss represented by the expenses of directly dealing with the property damage resulting from the negligent release of diesel fuel as a pollutant. [47]
4. Under the Statutory Liability Additional Benefit, cover was limited to fines and penalties. [58]

16 September 2019, Supreme Court of New South Wales, Court of Appeal – Meagher, Gleeson and Payne JJA

MetLife Insurance Ltd (MetLife) issued to FSS Trustee Corporation a Blue Ribbon Policy, as trustee of the First State Superannuation Scheme.

RELEVANT POLICY PROVISION:

Entitlement to benefits for total and permanent disablement (TPD) if, having been “absent from” his or her occupation “through injury or illness for six consecutive months”, the insured member “provided proof to [the insurer’s] satisfaction that [the member had] become incapacitated to such an extent as to render [him or her] unlikely ever to engage in any gainful profession, trade or occupation for which [he or she was] reasonably qualified by reason of education, training or experience”.

WHO WAS MX?

MX was a police officer who was a member of the above scheme. MX was certified as unfit to return to work in September 2010, diagnosed with delayed-onset post-traumatic disorder (PTSD) in January 2011, and was medically discharged from the NSW Police Force nine months after diagnosis. In March 2012, MX made a claim for benefits under the policy.R

RESULT OF CLAIM?

MetLife did not dispute that the first limb of the definition of TPD was satisfied – MX was hurt on duty, and continued to suffer from an illness which continued to incapacitate him from his occupation for six consecutive months. However, MetLife denied the claim on 1 December 2014, on the grounds that MX had not become incapacitated to such an extent as to render him unlikely to ever engage in any gainful profession, trade or occupation for which he was reasonably qualified by reason of education, training or experience (the ETE clause).

SECOND DECLINATURE OF CLAIM

MetLife subsequently denied MX’s claim for a second time. MetLife’s declinature was on the basis that, despite the medical opinions agreement on the diagnosis of PTSD, and that it was unlikely MX would return to employment outside the NSW Police Force, MetLife was not satisfied that while MX was an insured member of the scheme he was incapacitated to such an extent as to render him unlikely ever to engage in any gainful profession, trade or occupation for which he was reasonably qualified by reason of education, training or experience (the second limb of the provision).

INITIAL PROCEEDINGS: QUESTIONS FOR DETERMINATION

(1) Whether, in refusing to accept MX’s claim, Metlife had acted in breach of its statutory and/or general law duties?

Primary judge answered affirmatively.

(2) Whether Metlife breached its duty to act reasonably in considering the claim made by MX?

Primary judge answered affirmatively.

METLIFE SOUGHT LEAVE TO APPEAL – WHAT WAS CHALLENGE

MetLife challenged the following findings by the primary judge:

• MetLife’s reasons for its decision were inadequate;
• MetLife had failed to act fairly and reasonably in evaluating the evidence, including medical reports;
• MetLife’s process of consideration was unreasonable because it took into account an irrelevant consideration (the first decision) when reconsidering its decision;
• MetLife had not acted reasonably in its consideration of MX’s claim.

FINDINGS ON APPEAL: PER GLEESON JA (WITH WHOM MEAGHER AND PAYNE JJA AGREED)

Reasonably and fairly?

In considering the question of incapacity, and determining whether it was satisfied that the extent of the insured member’s incapacity answered the terms of the ETE clause, the insurer was required to act reasonably and fairly. Breaching one or more of these implied obligations deprives the decision of contractual effect. [77], [78]

Distinction between acting reasonably in the formation of an opinion (process of consideration), and the formation of a reasonable opinion (the outcome itself). For the process of consideration, an insurer misdirected itself in law if it took into account an irrelevant consideration. [79]

MetLife’s consideration of the medical opinions as to whether MX was totally and permanently disabled was not undertaken reasonably and fairly. [142], [146]

Adequacy of Reasons?

To merely refer, as MetLife did, to competing medical opinion with respect to MX’s capacity did not explain why MetLife preferred the view of one doctor to the competing medical evidence of MX’s treating doctor and a forensic psychiatrist. [156]

It was open to the primary judge to conclude that MetLife’s reasons were inadequate, and that the insurer, in breach of its contractual duty, failed to act fairly and reasonably in considering MX’s claim. [162]

Irrelevant Considerations?

It was not an irrelevant consideration for MetLife to have regard to its first decision and the reasons previously furnished for declining the claim. [89]-[91]

16 January 2020, Federal Court Of Australia – Allsop J

Relevant Policies

Swashplate Pty Ltd (Swashplate) acquired two helicopters located in the United States. At 2pm AEST on the 19^th of May 2018, Swashplate’s agent at Austbrokers sent two placement slips to Liberty International Underwriters (Liberty). Insurance cover was then confirmed, the policy taking effect from 19 May 2018 and incorporated the 2009 Institute Cargo Clauses (A) (2009 ICC(A)). Clause 4.3 of the 2009 ICC(A) regarded packing or preparation of the subject matter, and cl 8.1 of the 2009 ICC(A) concerned the attachment of the policy and duration. Three conditions were also contained on the master slip that reflected a Helicopter Single Transit endorsement (HST endorsement) that was contained in the Liberty Policy, and included a “static cover” extension for a period of up to five days prior to loading.

What happened to the Helicopters?

Two containers were used to transport the helicopters, the container used to transport helicopter 56044 arrived in Picayune, Mississippi at 3pm, 18 May local time (6am AEST 19 May). Helicopter 56044 was then loaded into the container, which was then loaded onto a truck for transportation to New Orleans. The container used for the transportation of helicopter 56047 arrived in Picayune at 8am, 19 May local time (11pm AEST 19 May), where the helicopter was again loaded into the container for transportation. In both instances the temporary wheels were not chocked in their final stowage position, with insufficient or unsuitable strapped employed. This resulted in damage to the helicopters when they moved in their containers.

Indemnity was granted by Liberty in respect of helicopter 56047, but was denied in respect of helicopter 56044. Liberty adopted the view that the inadequacy of packing occurred before the policy attached to helicopter 56044, and that timing was crucial for the operation of one of the exclusions in the policy.

Determination of whether Swashplate was entitled to indemnity in respect of its claim for the cost of repairs to helicopter 56044 was undertaken as a separate question.

When did the Policy attach?

Swashplate’s Contention

In reliance on the static cover extension, Swashplate contended that the policy attached five days prior to the inception date. Swashplate submitted that extension varied the commencement or attachment of the policy, which would have otherwise have applied pursuant to cl 8.1 of the 2009 ICC(A). It was further submitted that if the static cover extension was not indicative of the time of commencement or attachment of the policy, the policy should not have been construed as a time policy, but instead as a voyage policy. It was then argued that even if the insurance was not to attach prior to 19 May 2018, due to the fact that the period of insurance on the placement slip covering 56044, being the operative place slip, was determinative, that reference was to AEST, not Picayune time. Swashplate further contended that the effect of the HST endorsement was to vary cl 4.3 of the 2009 ICC(A) such that cover was extended to loading and unloading as long as the cargo was professionally packed, stowed and carried and/or if the packing and stowage was overseen by a qualified aviation engineer.

Liberty’s Contention

Liberty’s submission was that the date of commencement should have been understood as the time and date of the place where the insured property was at the time the insurance was effected, being Picayune. Thus, the failure to chock or provide sufficient or suitable strapping occurred 18 May 2018, Picayune time, giving full contractual force to the “period of insurance” in the operative placement slip, and static cover extension. Liberty also placed reliance on cl 4.3 of the 2009 IC(A).

HELD: Indemnity did not extend to Helicopter 56044

Key points of the judgment:

1. The deficiencies in the stowage of helicopter 56044 consisted of either inadequate strapping to tie down the helicopter in the container, or the failure to chock the helicopter in the container, and occurred between 3pm and 5pm on 18 May 2018 (Picayune time) – [38]
2. The various contractual documents were to be read together, giving effect where possible to all provisions in a harmonious construction reflective of business common sense. The master slip, whilst not a contractual document, was an aspect of the surrounding circumstances that assisted in the interpretation of the contract of insurance. – [51]
3. In looking to the terms of the operative placement slip and the incorporated wording, a reasonable business person would have sought to understand the meaning of effect of them in the context of the master slip, and the future undertakings which the master slip envisaged. – [52]

• The cl 4.3 exclusion of the 2009 ICC(A) applied: the deficiencies in packing was carried out prior to the attachment of the insurance. – [69]
• If it had been necessary to address cl 8.1 of the 2009 ICC(a), the insurance attached when the helicopter was moved for the purpose of loading. – [75]

16 September 2019, Supreme Court of New South Wales, Court of Appeal – Meagher and McCallum JJA

Relevant policy

Mr and Mrs Voitenko conducted business at a warehouse in Mortdale, and had taken out a contents insurance policy for the sum of $1.1million with Zurich Australian Insurance Ltd (Zurich).

Damage suffered

Three months after the policy was taken out, the warehouse was destroyed by a fire. Zurich made payments in the sum of $284,917, and refused to meet any further claims.

Initial Proceedings

Mr and Mrs Voitenko commenced proceedings against Zurich for breach of the insurance contract, claiming damages of $786,069.

Zurich’s initial defence was on the ground that the claim was fraudulent, however, two years later, in May 2019, Zurich amended its defence, alleging that the first had been deliberately lit by Mr Voitenko. Thus, Zurich claimed an entitlement to refuse to pay on the ground that Mr Voitenko had breached his duty of utmost good faith, or, in the alternative, on the ground of an exclusion under the policy for loss or damage caused by a willful act of the insured.

What was appealed?

Mr and Mrs Voitenko identified five alleged material errors in the primary judgment:

1. Primary judge had erred in their failure to take account of the material consideration of presumptive prejudice, and there was significant prejudice in allowing Zurich to amend for the first time that Mr Voitenko was responsible for lighting the fire, eight years and eight months after it occurred.
2. Primary judge had erred in treating the explanation for the delay as sufficient justification for it, thereby treating the justification as a factor to be weighed against the effects of the delay on the applicants.
3. Primary judge had erred in taking account of the irrelevant consideration of when evidence was served, in considering whether the explanation for the delay did in fact justify the delay.
4. Primary judge’s failure to weight in the balance Zurich’s failure to identify what pointed to an available defence of “fraud in the event”.
5. Primary judge had erred in their failure to have specific regard to the matters identified in s 56-59 of the Civil Procedure Act 2005 (NSW).

Findings on Appeal

1. Leave was required because the decision was interlocutory, and governed by principles concerning appellate review of discretionary decisions and decisions on a question of practice and procedure, requiring the exercise of particular caution before intervening. – [4]
2. Failure to make explicit reference to s 56-59 of the Civil Procedure Act did not constitute legal error – the critical question was whether the primary judge had failed to have regard to any mandatory relevant consideration identified in those provisions. – [37]
3. There is not sufficient doubt to warrant reconsideration on appeal. The application did not raise an issue of principle, a question of general public importance or an injustice which was reasonably clear. – [40]

21 June 2019, Supreme Court of New South Wales, Court of Appeal – Bell P, Leeming JA and Emmett AJA

Relevant policy provision

MetLife Insurance Ltd (MetLife) issued a policy of insurance to the FSS Trustee Corporation (FSS), as trustee of the First State Superannuation Scheme, which provided superannuation benefits for members of the NSW Police Force. Under the policy, if an insured member suffered total and permanent disablement (TPD) MetLife would pay FSS a sum in respect of the insured member.

Who was Ms Newling?

Ms Newling was a former officer of the NSW Police Force and a member of Scheme. She completed a claim form summarising her condition as “severe symptoms lumbar radiculopathy”, stating she was permanently incapacitated, thus suffering TPD under the Scheme.

Result of the claim?

MetLife was not satisfied that Mrs Newling was incapacitated to such an extent as to render her unlikely ever to engage in any gainful profession, trade or occupation for which she was reasonably qualified by reason of education, training or experience. MetLife provided to Ms Newling documentation which contained possible adverse information on 2 March 2015 and in a subsequent letter included a summary setting out matters of significance and conveyed its reasons for forming the view that some of the material was “against TPD”, on 15 July 2015. After receiving no response from Ms Newling, MetLife declined the claim on 14 August 2015. MetLife confirmed to FSS the opinion that had previously been communicated, for the reasons previously communicated, on 7 January 2016.

Initial proceedings

Ms Newling’s submissions

Ms Newling submitted that:

1. MetLife owed her a duty of good faith and fair dealing, had an obligation to act reasonably in considering and determining its opinion, and had an obligation to consider and determine whether it should form an opinion on the question of whether the definition of TPD in the policy was satisfied.
2. MetLife had breached that duty in its declination of her claim.

MetLife’s submissions:

MetLife submitted that:

1. A duty was owed of good faith and fair dealing, but at all times it had complied with this duty.
2. At all times it acted reasonably in considering and determining its opinion and that it had acted in accordance with its obligation to consider and determine whether it should form an opinion on the question of whether TPD was satisfied.
3. It’s decision to decline the claim was made in accordance with the doctrine of procedural fairness.

Questions for the primary judge:

Whether, in declining Ms Newling’s claim, MetLife:

• Breach its duty to Ms Newling, or
• Failed to act reasonably in considering and determining its opinion, or
• Formed an opinion that was not open to MetLife acting reasonably and fairly in the consideration of Ms Newling’s claims, and
• Failed to consider and determine whether it should have formed an opinion on the question of whether the definition of TPD in the policy was satisfied.

Primary Judge: Answered all questions “no”

What was appealed?

Ms Newling’s contention on appeal

Ms Newling contended the primary judge:

1. Had failed to consider whether MetLife acted reasonably and fairly in assessing and determining her claim,
2. Had erred in applying an incorrect “test of unreasonableness”,
3. Had erred in finding that MetLife was not obliged to give reasons for declining the claim, and
4. Had failed to treat MetLife’s letters of 14 August 2015 and 7 January 2016 as separate declinatures, and had failed to give reasons for the determination

Finding on Appeal: Per Emmett AJA (with whom Bell P and Leeming JA agreed)

(1) Adequacy of reasons?

MetLife had provided adequate reasons – a trustee was not required to give reasons for the exercise of a discretion imposed by the relevant trust instrument, and it was arguable that a member of the Scheme would not be in any different position so as to be entitled to require FSS to give reasons simply because FSS had arranged to insure against any liability that it might have had to a member in respect of the Scheme. – [73]

(2) Duty of good faith

The duty owed to Ms Newling did not require MetLife to prefer the opinion of treating doctors over consulting doctors. It was not a breach of such a duty for greater weight to be given to independent consultants than treating doctors, particularly in this case, given much of the opinion evidence of the treating doctors was dependent upon the history provided by Ms Newling. – [79]

(3) Reasonably and fairly in assessment and determination

MetLife provided reasons that were sufficient to enable Ms Newling to know and understand why the opinion was reached, and there was no basis for concluding that it did not act reasonably and fairly when doing so. – [84]

(4) Treatment of the letters

It was artificial to treat the letters as separate decisions.

Findings on appeal: Per Bell P

It was not necessary to decide whether the obligation to act fairly and reasonably in circumstances where an insurer owed a duty of good faith to an insured person gave rise to an implication that the insurer was required to give reasons for a decision. – [2]

2 September 2019, Supreme Court of New South Wales, Court of Appeal – Bell P, Gleeson JA and Emmett AJA

MMJ Real Estate (WA) Pty Ltd (MMJ) conducted business as a realtor and property valuer. In late 2010, BNY Trust Company of Australia (BNY) retain MMJ to provide valuations in respect of certain strata lots in Rockingham. These valuations were prepared and signed on behalf of MMJ by its director, Mr Hosking, and reviewed and counter-signed by an employee, Mr Volk.

Relevant Policy

XL Insurance Company SE (XL) issued a professional indemnity insurance policy to MMJ, which provided indemnity against legal liability arising from any civil cause of action for any compensatory damages or claimant’s costs incurred by MMJ, Mr Volk and Mr Hosking in respect of:

• Any legal proceedings or demand against the insured for compensation arising from the performance of:
• Real estate agency services;
• Property valuation services;
• Property management services; and
• Project management services.

The policy contained an exclusion (ix) in the endorsement, which excluded liability for valuations undertaken for any provider of financial security that was not an authorized deposit-taking institution (ADI) supervised by APRA unless the valuation report included a “prudent lender clause”.

Here: BNY was not an ADI and the property valuations prepared by Messrs Hosking and Volk did not include a prudent lender clause.

Commencement of Proceedings

BNY incurred a loss, commencing proceedings against MMJ, Mr Volk and Mr Hosking (collectively, the insured). BNY’s allegation was that, in breaching MMJ’s retainer and the duty of care owed to it, the insured had failed to exercise the care and skill of a reasonably competent property valuer.

The insured cross claimed against XL, seeking declarations that the insurer was liable to indemnify them in respect of any liability that they had to BNY and the costs incurred in defending the proceedings.

Primary Judgment

The primary judge declared that XL was liable in accordance with the terms and conditions of the policy to indemnify the insured in respect of any liability they had to BNY. Her Honour found that although the words of the endorsement were ambiguous, she was satisfied that on the proper construction of exclusion (ix), a causal link was required between the absence of the prudent lender clause, and the loss in respect of which indemnity was claimed.

What was appealed?

XL’s submissions on appeal

XL asserted various errors by the primary judge in her approach to the construction of exclusion (ix), particularly that:

1. The exclusion operated to exclude cover for “loss” as defined in the policy where the valuation was undertaken for lenders who were not an ADI and which did not include a prudent lender clause;
2. No ambiguity was introduced into exclusion (ix) by the “introductory words” in the endorsement or their relationship to the subject matter of exclusion;
3. The subject matter of exclusion (ix) was valuations that had been undertaken for lenders who were not ADIs; it was not defined by reference to any quality or characteristic of an error or omission by any of the insureds; and
4. It was the identity of the ultimate client of the insured, and the different risk profile which that client presented, that was the mischief to which the exclusion was directed.

Findings on Appeal: Per Gleeson JA (with whom Bell P agreed)

Reliance of Exclusion (IX)?

XL was entitled to rely upon the exclusion to deny indemnity to the insured and to refuse to pay their defence costs of the proceedings, as it applied to exclude cover for “loss” where a valuation was undertaken by or on behalf of the insured for a non-ADI lender and the valuation did not include a prudent lender clause. – [109], [110]

Construction of Exclusion (IX)

• Policy was a commercial contract, and thus construing it involved identifying the imputed intention of the parties, by reference to the contractual text construed in the light of its context and purpose. – [47]
• A causal relationship between the subject matter of the clauses that followed the endorsement and the “loss” the subject of the claim for indemnity was postulated by the introductory words “directly or indirectly arising out of, based upon, attributable to or in consequence of”. – [62]
• Given that it was not the purpose of the exclusion to guard against “loss” arising out of a claim against the insured by an ADI lender, the exclusion was given a distributive effect where a valuation was undertaken for both an ADI lender and a non-ADI lender by limiting the exclusion to such valuations insofar as the valuation was undertaken for a non-ADI lender. – [86]
• Courts will not usually make a declaration as to the liability of an insurer to indemnify an insured in circumstances where the liability of the insured to a claimant had not yet been established by judgment – the proper basis was found in the agreed facts and answers to the separate questions. – [114], [116]

6 August 2019, Supreme Court of New South Wales, Court of Appeal – Bathurst CJ, Macfarlan and White JJA

The Bank of Queensland Ltd (BOQ) and BOQ’s agent, DDH Graham Ltd (DDH), had representative proceedings brought against them by Petersen Superannuation Fund Pty Ltd (Petersen) on behalf of itself and other investors, who were behalf of former clients of Sherwin Financial Planners Pty Ltd (SFP). The investors unwittingly invested in a fraudulent Ponzi scheme which was conducted by SFP utilizing BOQ bank accounts, and alleged that they suffered loss as a result of BOQ’s failure to protect the investors’ interests when BOQ became aware of SFP’s fraud. The claims were based on BOQ’s vicarious liability for the acts of DDH, and were attributable to a wrongful act by DDH in paying money out of each claimant’s individual Money Market Deposit Account (MMDA) to SFP, with knowledge that SFP was using the funds received in a fraudulent Ponzi scheme.

Relevant policy

BOQ was insured under a Civil Liability Insurance Policy with three insurers, including AIG Australia Limited and Catlin Australia Pty Ltd (collectively, the insurers). The policy had a limit of liability of $40m for all claims and a retention of $2m for each claim.

CLAUSE 2.2 OF THE POLICY DEFINED A “CLAIM”:

“(i) any suit of proceeding, including any civil proceeding, third party proceeding, counter claim… brought by any person against an insured for monetary damages or other relief…

(ii) any verbal or written demand from any person that it is the intention of the person to hold an insured responsible for the results of any specified wrongful act…”

Clause 2.2 also provided that “all claims arising out of, based upon or attributable to one or a series of related wrongful acts shall be considered to be a single claim” and “conversely where a claim involves more than one unrelated wrongful act, each unrelated wrongful act shall constitute a separate claim”.

BOQ commenced proceedings

BOQ sought declarations and other relief as to its entitlement to indemnity against the insured, claiming it was entitled to indemnity, subject to a single retention of $2m, in respect of the sum of $6m which it had paid to settle the representative proceeding and in respect of BOQ’s costs of defending that proceeding.

Denial of indemnity

Insurers denied indemnity on the grounds that BOQ’s loss arose of multiple claims in relation to each of which a retention of $2m was payable, and not out of a single claim by the investors in which case a single retention of $2m would have been payable.

Primary Judgment

Primary judge found in favour of the insurers – concluded that there was only one “claim” within the meaning of that paragraph and the class member registration forms completed by each group member constituted a separate “written demand” and therefore “claims” under cl 2.2(ii).  The relevant “wrongful acts” were BOQ’s actions.

What was appealed?

BOQ’s contention on appeal

Contended that there was only a single claim against it within the meaning of cl 2.2(i) because there was only a single suit or proceeding. If cl 2.2(i) and (ii) led to the conclusion that there were multiple claims, the claims were, by reason of the aggregation clause, to be treated as a single claim because they arose “out of, [or were] based upon or attributable to one or a series of related wrongful acts” and therefore gave rise to only a single claim pursuant to the terms of the aggregation/disaggregation clause.

Insurer’s contention on appeal

Contended that the effect of the representative proceeding was that each group member brought a “suit or proceeding” for the purposes of cl 2.2(i), or, in the alternative, that each group member who opted to participate in the distribution made a written demand within cl 2.2(ii) by lodging a class member registration form. Thus, it was submitted that both subclauses had the effect that there were multiple claims.

Findings on appeal: per Macfarlan JA (with whom Bathurst CJ agreed)

Multiple claims?

For the purposes of cl 2.2(i) and (ii), multiple claims were made against BOQ, however, because the claims arose out of related wrongful acts, the policy required them to be aggregated and only one retention of $2m was applicable. – [106]

Representative proceeding

The representative proceeding was only one suit or proceeding. – [63]

A reasonable businessperson would, taking each group member separately, consider that the representative proceeding was a suit or proceeding brought by that group member, at least from the time that the group member lodged its class member registration form. – [64]

Multiple wrongful acts?

BOQ’s acts in allowing withdrawals of funds from the MMDAs, notwithstanding BOQ’s knowledge of the fraudulent scheme, allegedly resulted in the loss to the group members and, on the basis of these allegations, a separate wrongful act occurred each time a request for a withdrawal was acted upon. Therefore, there were multiple wrongful acts. – [73]

Related multiple wrongful acts?

A reasonable businessperson, having knowledge of the matters alleged in the representative proceeding, would have concluded that the wrongful acts referred to in the Further Amended Statement of Claim were “related” in the manner contemplated by the aggregation clause in the policy. – [104]

Appeal findings per Bathurst CJ

1. There were multiple claims, and the completion of the class member registration forms constituted a “written demand” by each of the persons who completed those forms for the purpose of cl 2.2(ii) of the policy – unless the claims could be aggregated, each individual claim was subject to a retention of $2m. – [5], [7], [8]
2. Payments were attributable to “a series of related wrongful acts” – the series of payments out of the funds of the MMDAs were made with knowledge of the fraudulent activities of the payee. Although the payments were made out of the funds of different claimants, the similarity in the circumstances in which the payments were made was sufficient to give rise to the conclusion that there was “a series of related wrongful acts”. – [27], [28]

Appeal findings per White JA

1. There was only one claim. – [126]
2. The wrongful acts were related. – [122]
3. Construction of the aggregation and disaggregation provisions provides that if there was a series of related wrongful acts and there were multiple claims that arose out of the related wrongful acts that formed that series then the claims would be considered to be a single. That did not require that all claims were caused by every wrongful act that formed part of the series. – [125]

13 May 2019, Supreme Court of New South Wales – Ball J

Who is Babcock & Brown Limited

Babcock & Brown Limited (BBL) was a specialist investment and advisory firm, which collapsed in 2009. The businesses included a funds management business that was carried on through DIF Capital Partners Ltd, formerly known as Babcock & Brown Direct Investment Fund Ltd (the Manager) and its Investment Committed comprised Messrs Topfer, Green, Neilson, Nicholson and Prof Officer. BBL held operating and investment subsidiaries through Babcock & Brown International Pty Ltd (BBIPL), which was an intermediate holding company, and Babcock & Brown LP (BBLP), which was the main operating company through which BBL held assets in the United States.

What was the partnership?

Under a Management Agreement (the Partnership), the Manager managed the investments of the DIF III – Global Co-Investment Fund LP (DIF III Fund) which held the funds contributed by investors who became limited partners of the Partnership. Sole responsibility for the Partnership’s management was with DIF III GP Limited (the General Partner), and the services provided by the Investment Committee were provided to the Partnership through the General Partner. The Manager sponsored and promoted the DIF III Fund through a Private Placement Memorandum (PPM), the intention being that the funds raised would be invested in projects and businesses identified by the BBL group and its members (collectively, Babcock & Brown).

At about the same time the PPM was issued, Babcock & Brown was approached by Deutsche Bank, concerning the possible acquisition of Coinmach Services Corporation (Coinmach). Coinmach’s core business involved the leasing of communal laundries in multi-dwelling buildings, and the installation and servicing of laundry equipment in those buildings. The Coinmach Deal Team was established by Babcock & Brown for the purposes of considering the acquisition, supervised by Mr Topfer.

The acquisition

An agreement was ultimately reached to acquire all of Coinmach’s issued shares for US$1,460,920,000 (the Coinmach transaction). For that purpose, Babcock & Brown incorporated Spin Holdco Inc which acquired Coinmach through the merger of its subsidiary, Spin Acquisition Co, with Coinmach. RBS Equity Corporation (RBS Equity) underwrote equity of US$136m, the balance then came largely from various companies in the Babcock & Brown group and the Partnership, which all invested through Babcock & Brown Spinco LLC. The total equity investment of that company was US$176.3m, of which BBIPL invested US$67m and the Partnership invested US$25m. Despite agreement that on completion of the transaction, BBLP would have been entitled to payment of an origination fee of approximately US$21.6m, on the day that the acquisition completed, BBLP and RBS Equity, among others, entered into two escrow agreements by which amounts totaling US$21.5m and US$13,479,236.82 were held in escrow by Wells Fargo Bank to compensate RBS Equity for losses suffered on its investment in Coinmach.

Relevant policies

The PI policy

A primary policy and three excess policies (collectively, the PI policy) provided cover of up to $150m in respect of “loss resulting from claims made against the assured by third parties for civil liability provided such claims arise out of the provision by or on behalf of the assured of financial services to third parties and are first made during the policy period”. Under an extension in respect of circumstances notified during the policy period, provided that the assured’s management became aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a claim, and notice of those circumstances was given by the assured within 30 days of the expiration date of the policy period, then the subsequent legal proceedings in respect of which indemnity was sought must have been a direct result of any matter for which written notice had been given.

Exclusion 17

Excluded liability in respect of “any legal liability based on, arising out of, relating to or involving, directly or indirectly, any directorial act” which was defined to mean any act, error or omission by any director of the assured acting in that capacity.

Exclusion 28

Excluded liability in respect of “any liability, loss or expense, arising out of, based upon or attributable to, directly or indirectly, any conflicts of interest arising out of, based upon, relating to or in connection with investment banking activities or any research report, including, but not limited to:

(i) Conflicts between or among the interests of any assured, any research analyst, clients or customers of the foregoing, or purchasers of securities for which a research report was issued by, on behalf of, at the request of, or in the name of any assured, and

(ii) Conflicts between or among the interests of clients or customers of any assured.

The D&O Policy

A directors’ and officers’ liability insurance policy and a number of excess policies (collectively, the D&O policy) provided indemnity “with respect to claims first made against an insured during the policy period or an applicable discovery period or accepted as such pursuant to the ‘related claims’ condition and notified to the insurer as soon as practicable during the policy period or as applicable during the discovery period”.

Exclusions

1. Excluded cover for claims arising out of, based upon or attributable to “the provision of third party professional services of any kind” (professional services exclusion).
2. Excluded claims “brought on behalf of any outside entity in which an insured person serves or served in accordance with the ‘outside directorships’ extension” or “any US claim which is brought by or on behalf of any company or any insured person” (Insured v Insured US claims exclusion).
3. Exclusion to “the improper use of position or information to gain any profit or advantage or cause detriment to any company… conduct involving a wilful breach of duty in relation to any company, or” any claim arising out of, based upon or attributable to “any criminal, dishonest or fraudulent acts or omissions” (conduct exclusion).

Defined “insured person” to include the directors and officers of the company and employees who were concerned with the management of the company.

Commencement of proceedings

The investment was not a success. In late 2009, Coinmach’s debt was restructured, and the existing shareholders’ interest in Coinmach was greatly reduced in exchange for a right to receive certain deferred profits.

DIF III – Global Co-Investment Fund LP and DIF III GP Limited (collectively, DIF III) commenced proceedings against BBIPL, BBLP, the Manager, Messrs, Topfer, Green, Neilson Nicholson and Prof Officer, RBS and RBS Equity, claiming the difference between its investment (US$25m) plus investment costs of US$1,093,562.77 less the amount already received.

DIF III’s Allegations

DIF III alleged:

1. That each of BBIPL, BBLP, Mr Topfer and Mr Green were promoters of the Coinmach transaction, and in that capacity owed fiduciary duties to the Partnership in relation to the Coinmach investment, which were breached by failing to disclose to the Partnership RBS’s position in relation to the transaction;
2. That one or more of the defendants had engaged in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act 2001 and s 12DA of the Australian Securities and Investments Commission Act 2001 – by approving the recommendation to invest in Coinmach, each member of the Investment Committee had represented to the General Partner that the investment was commercially advisable, and by failing to disclose RBS’s position in relation to the investment;
3. That each member of the Investment Committee owed a common law duty of care in representing to the General Partner that the investment was commercially advisable and worthwhile and in providing services under the Management Agreement, which was breached by failing to disclose to the Partnership RBS’s position in relation to the investment, and failing properly to assess the investment.

DIF III sought recovery of the amount for which the Manager was liable from the insurers who had provided the professional indemnity insurance to Babcock & Brown (PI insurers).

The DIF III proceedings gave rise to a number of cross-claims, including cross-claims by BBIPL, BBLP and Messrs Topfer, Green, Neilson and Nicholson against the insurers who issued the D&O policy to Babcock & Brown (D&O insurers).

PI Insurers’ Response

Denied liability to DIF III and to the cross-claimants: denied that a claim had been made during the policy period or that the assured’s management had become aware of circumstances during the policy period which could reasonably have been anticipated to give rise to the claim that was made.

With regard to members of the Investment Committee (other than Prof Officer): contended that the claim had not arisen out of “the provision by or on behalf of the assured of financial services to third parties”.

With regard to Messrs Topfer and Green: contended that the claim against them was not a claim for civil liability because the definition of civil liability only included claims in respect of a “dishonest, fraudulent, criminal or malicious act or omission on the part of any employee of the assured”, and Messrs Topfer and Green were not employees.

D&O Insurers’ Response

Denied liability: contended that when the members of the Investment Committee first gave their approval to the investment in Coinmach they were not acting as insured persons, as required by the definition of “wrongful act”, because in taking that decision they were not acting as a director, and so on, or taking part in the management of any company, including the Manager.

Findings

1. The members of the Investment Committee, including Messrs Topfer and Green, owed fiduciary obligations to the Partnership in connection with the decision to invest in Coinmach, due to the vulnerability on the part of the Partnership to decisions of the Investment Committee and a degree of dependence on the decisions that the Committee took. – [149]
2. Manager was ultimately responsible for making investment decisions on behalf of the Partnership, and consequently, the Partnership, and the General Partner, must have had a reasonable expectation that the Manager would tell them if it knew of facts which called into question the Investment Committee’s decision. – [260]
3. The Investment Committee owed a duty to take reasonable care in conveying representations to the Partnership and the General Partner that the Coinmach investment was commercially advisable and worthwhile. – [282]

Claims against the PI insurers

1. Section 54 of the Insurance Contracts Act did not apply to the absence of awareness of facts, circumstances or events which could reasonably have been anticipated to give rise to the claim in respect of which indemnity was sought. – [342]
2. Exclusion 17 did not apply: acts of members of the Investment Committee in approving the investment could not be described as acts of directors of the Manager in that capacity. – [354]
3. Exclusion 28 depends on the connection between the “liability, loss or expense” on the one hand and the conflicts of interest on the other. – [355]
4. There was a sufficient connection between the investment banking activities and the approval process. – [358]

Claims against the D&O Insurers

1. All failed: the D&O policy gave the person seeking an indemnity an option to notify circumstances within the policy period and treated any claim arising from those circumstances as a claim within the policy period. The claims that were made did not arise out of circumstances that were either notified during the policy period or later, in respect of which relief under s 54 of the Insurance Contracts Act was available. – [380], [381]
2. The professional services exclusion applied to the services provided by the Investment Committee. – [399]
3. The conduct exclusion did not prevent the claimants from recovering the legal fees they incurred, as if there had been a breach of duty, it did not involve any criminal, dishonest or fraudulent conduct. – [401]
4. The Insured v Insured US Claims exclusion did not apply as it was not established that the claim was a US claim and the claim was brought by or on behalf of the Partnership which was not a “company” or “insured person”. – [403]-[405]

16 April 2019, Supreme Court of New South Wales – Rothman J

M&R Insurance Brokers Pty Ltd (M&R) was an agent of Dual Australia Pty Ltd (Dual) which was the Australian subsidiary of Lumley Insurance (now WFI Insurance Ltd).

Architects Proposal Form

IUS Pty Ltd (IUS) provided architectural services. Mr Ius obtained a quote from M&R for professional indemnity insurance and, on 29 March 2007, signed the “Architects Proposal Form” and returned it to M&R. However, IUS failed to return the second page of the proposal form as part of the attachment and, when accepting the proposal, neither Lumley nor Dual were aware of the missing page.

First Page:

Stated that the policy was issued on a claims made basis.

Second Page:

Dealt with:

• Nondisclosure;
• Surrender or waiver of any right of contribution or indemnity;
• Notice of occurrence or events;
• Contract by the insured affecting rights of subrogation; and
• A privacy statement.

Third and subsequent pages:

Required completion by or on behalf of the proposer/insured. Required information included details of:

• The proposer;
• The professional business, its earnings and the source of those earnings;
• Whether subconsultants were utilized;
• Whether there was any interest in real estate;
• Past financial year gross fees or income and the state of Australia in which they were earned;
• Whether any fees were earned outside of Australia;
• The five largest contractual projects undertaken by the insured; and
• Information relating to IUS employees.

Mr and Ms Bechini

Engaged IUS to perform architectural work for the construction of two residences, and when IUS subsequently became aware of circumstances that gave rise to a claim by Mr and Ms Bechini, IUS notified its insurer, Lumley, through Dual Australia.

Proceedings

Mr and Ms Bechini sought damages for breach of contract and/or negligence both at common law and pursuant to s 12GF of the Australian Securities and Investments Commission Act 2001. Additionally, they sought rectification of the Lumley policy by the inclusion of the missing page in the proposal which was completed by IUS.

In Clause 31 Mr and Ms Bechini’s Further Amended Statement of Claim (FASOC), it was pleaded that:

“M&R promised to provide IUS with professional indemnity claims made or discovered insurance cover including for:

…

(b) Any circumstances of which IUS became aware during the period of insurance… which could give rise to a future claim provided IUS informed Dual… and/or Lumley in writing of such circumstances within the period of insurance…

(c) Any Claim whenever actually made subsequently to the period of insurance 23 March 2007 to 23 March 2008 which claim would be deemed to be a Claim made during the period of insurance if IUD… became aware of the occurrence which might give rise to a Claim and gave written notice to… Lumley within the period of insurance…”

Clause 35C of the FASOC referred to a notification on 29 July 2008 of Mr and Ms Bechini’s “claim” in a telephone conversation with Mr Ius.

Questions for determination:

1. Whether the terms pleaded at [31(b)] and [31(c)] of the FASOC was a term of the Lumley first policy (which covered the period 23 March 2007 to 23 March 2008);
2. Whether the matters pleaded and particularized at [35C] of the FASOC amounted to a “claim” within the meaning of the Lumley second policy (which covered the period 23 March 2008 to 23 March 2009);
3. If the answer to question 1 is no, ought the Lumley first policy have been rectified by the inclusion of p 2 in the proposal form and, if rectified, what was the answer to question 1?

Judgment

1. Yes, provided that the claim did not arise from or in connection with facts or circumstances that IUS knew or ought reasonably to have known prior to the insurance period might or could have given rise to a claim, and further provided that there was in place a relevant contract of insurance from 23 March 2008 until notification to IUS in the week following 29 July 2008. If IUS had become aware of facts that gave rise to the possibility or probability of a claim and had notified M&R or Lumley at a time when the policy applied (or, assuming continuity, had been renewed) then, with one qualification, the insurer was required to indemnify IUS for the damage up to its liability. – [94]
2. No. The terms of [35C] of the FASOC did not refer to the commencement of civil proceedings and, as a consequence, the telephone notification was not a “claim” within the meaning of the Lumley policies – [118].
3. Question did not strictly arise.

RECTIFICATION: Could occur where there was a continuing common intention that could be inferred in which the common intention of the parties required the contract to be in the form as rectified. Ultimately, the common intention must have been as to the content of the instrument. – [135]