CGU Insurance v. AMP Financial Planning
DMC Category Rating: Confirmed and Developed
This case note was contributed by Ebsworth & Ebsworth Lawyers, Sydney. Ebsworth & Ebsworth Lawyers are International Contributors to the website for Australia.
In 1999 and 2000 AMPís "securities representatives", Pal and Howarth, conducted a financial advisory business through their own corporate vehicles including Macquarie Advisory Group Pty Limited. Investors placed funds for investment with the securities representatives, which investments later failed, resulting in substantial losses to investors. During the course of 1999 and 2000, AMP notified CGU of possible claims against it in relation to the activities of its securities representatives. The Australian Securities and Investments Commission (ASIC) commenced investigations into the conduct of the securities representatives. By early 2001 ASIC had determined that a number of investors adversely affected by the securities representativesí activities should be expeditiously compensated by AMP without any discounting for "valid claims" and with the obligation to override any "insurance concerns". It was made clear by ASIC that any delay in AMPís response to compensate investors might have implications for its securities dealerís licence.
Following meetings with ASIC, AMP put together a settlement protocol by which it proposed to assess, adjust and compromise claims by investors (Protocol). The Protocol was provided to CGU for its approval. CGU indicated its agreement "in principle" to the Protocol but repeatedly instructed AMP to act as a "prudent uninsured" and reserved its rights. CGU also made clear that its consideration of indemnity would be on an "investor by investor basis". AMP acted in accordance with the Protocol to settle with investors to a total value of approximately A$3 million. None of the investors to whom settlement amounts were paid had made a "Claim". CGU continued to reserve its position on indemnity during the time that payments were made.
CGU ultimately denied indemnity in November 2002, substantially on the basis that AMP had not demonstrated a liability to the individual investors under section 819 of the Australian Corporations Law (Corporations Law). On 13 June 2003, AMP commenced proceedings in the Federal Court of Australia seeking declarations that it be indemnified by CGU. In aid of this claim for relief, AMP alleged: (a) breach of contract; (b) estoppel; and (c) breach of the duty of utmost good faith.
Decision at first instance: Federal Court of Australia (18
Decision on Appeal: Full Court of the Federal Court of Australia
(2 September 2005)
Utmost Good Faith Ė section 13 of the Insurance Contracts Act
The reasonableness of the settlement
CGU appealed to the High Court of Australia.
The decision by the High Court of Australia
In a separate joint judgment, Callinan and Heydon JJ also upheld the primary judgeís finding that AMP had failed to establish the elements of estoppel, holding that no relevant detriment had been suffered and AMP did not alter its position on the basis of any assumption or belief induced by the conduct of CGU. To the contrary, their Honours found that AMP had made the settlements for its own reasons and in its own interests.
Gleeson CJ and Crennan J did, however, consider that, because of its "in principle" acceptance of the Protocol and its repeated statements to AMP to act as a "prudent uninsured", CGU would have been estopped from denying indemnity on the basis that technically there was no "Claim" under the policy and the settlements were without CGUís consent. The judges said that this produced the consequence that CGUís liability to indemnify AMP operated to cover AMPís reasonable payment of the settlement amounts in satisfaction of its liabilities to investors. Their Honours approved the reasoning of Gyles J in dissent in the Full Federal Court, who said:
This links in with the requirement to establish the "reasonableness" of a settlement, which we discuss below.
Relevantly on the question of a "prudent uninsured" Gleeson CJ and Crennan J also referred to Heerey Jís comments that:
Utmost Good Faith Ė section 13 of the Insurance Contracts Act
Gleeson CJ and Crennan J commented that the obligation of utmost good faith could affect the conduct of an insurer in making a timely response to a claim for indemnity. However, they said that they did not need to decide this question because AMPís claim for breach of duty of good faith was based not on delay, but rather on the proposition that it was unconscientious CGU to require AMP to establish, by admissible evidence, that it was liable to individual investors.
Gleeson CJ and Crennan J found that AMP, for its own sound commercial reasons (including the need to protect its relations with ASIC, its licence, and its goodwill) adopted a procedure for dealing with investors which was designed to ensure that "Claims" were not made. They found difficulties with the idea that utmost good faith requires an insurer to inform the insured, before the insured event has occurred, whether the insurer will accept liability if and when it occurs.
Importantly, Gleeson CJ and Crennan J made some comments about the consequences of a breach of section 13 of the Insurance Contracts Act. In their view, the question remains open as to how such a breach could lead to the conclusion that the insurer is liable to indemnify the insured under the policy. For example, assuming that CGU had breached its duty of utmost good faith by not taking a coverage position in 2002, it is not clear how this could have affected AMPís entitlement to indemnity, if any, for settlements concluded in 2001. Even if there had been a breach in 2001, Gleeson CJ and Crennan J noted that the link between the premise of a breach of the duty and the conclusion that there was an entitlement to indemnity was never clearly articulated.
Callinan and Heydon JJ expressed the view that CGU had acted opportunistically and that its conduct left "something to be desired". They were critical of the "long delay" that occurred before CGU denied indemnity. They, however, also considered that AMPís own conduct lacked the measure of reciprocal good faith necessary for it to be entitled to relief against CGU. The relevant conduct included AMPís failure to invoke the "Senior Counsel clause" under the policy, its failure to consider a possible defence under section 819 of the Corporations Law and its determination to settle with investors quickly for its own reasons. They did comment that, if AMPís conduct had been otherwise, AMP might have been able to make its case that CGU did not act in good faith with the consequence that "settlements had to be, and were, not inappropriately made...".
Interestingly Callinan and Heydon JJ commented that reliance on a strict policy definition of a "Claim", as an originating or similar process, could be an infringement of an insurerís duty of utmost good faith under section 14 of the Insurance Contracts Act. That section prevents a party relying on a provision in a policy where to do so would be in breach of that partyís duty of utmost good faith.
The reasonableness of the settlements
Gleeson CJ and Crennan J held that an assessment of the objective reasonableness of the settlements, bearing in mind the circumstances of haste and external pressure under which they were reached, could not be divorced from the question whether AMP was liable to the investors with whom it settled. They agreed with Heerey J that it was open to conclude that AMP had not shown that the settlements were reasonable.
The onus placed on the insured to establish the objective "reasonableness" of a settlement when a regulator is involved is more complex as the Court, when deciding the issue, will look at the pressure exerted by the regulator and the insuredís own interests in settling (for example, for reputational reasons) and weigh this against the risks which the insured potentially faced on liability.
The High Court has shed some light on what the elusive duty of utmost good faith comprises. Although not providing a "comprehensive definition", the following emerges from the judgment: a lack of duty of good faith is not to be equated with dishonesty only, it requires regard both to an insuredís legitimate interests as well as to an insurerís interests, it may require an insurer to act with commercial standards of decency and fairness and those seeking relief must come with "clean hands". On this last point, Callinan and Heydon JJís judgment on good faith is interesting and suggests that even if there is conduct by the insurer which on its own could amount to a breach of the duty of utmost good faith, the conduct of the insured also needs to be examined and the issue looked at in the context of all of the circumstances to decide if, in fact, there has been such a breach. It still remains that a failure by an insurer to make a decision on indemnity in a reasonable period of time in circumstances where all requisite information has been made available to it, may well give rise to a breach of the duty of utmost good faith on the part of the insurer.
There were no significant developments on estoppel which generally tends to turn on the facts of the case. However, the High Court in examining what it means when an insurer says to act as a "prudent uninsured" when it has full knowledge that the insured intends to settle a claim, made it clear that in these circumstances, the insurer would later be estopped from denying indemnity on the basis that the insured had breached any policy condition requiring it to obtain the insurerís consent before it settled a claim.
There are still questions left unanswered by the High Court Ė the consequences of a breach of the duty of good faith under section 13 of the Insurance Contracts Act and the extent of the evidence required to establish an underlying liability are two of those questions Ė but the High Court has clearly signalled that an insured must proceed very carefully when settling a claim without an insurerís consent.
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