CGU Insurance v. AMP Financial Planning

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DMC/INS/07/03
CGU Insurance Limited v AMP Financial Planning Pty Ltd
Australia: High Court of Australia: Gleeson CJ, Calliman, Crennan, Heydon, Kirby JJ.: [2007] HCA 36: 29 August 2007
Insurance: cover for civil liability claims: potential liability to investors arising out of misconduct of financial advisers for which insured responsible: Insured told to act as a prudent uninsured: Insured proposes settlement with investors without need for legal proceedings: insurer agrees "in principle": insured settles with investors without confirmation from insurer that it accepts liability for the payments: Whether insurer liable to indemnify the insured in respect of reasonable settlement amounts: Whether settlement amounts were reasonable: – Relevance of the requirement to act with utmost good faith in s 13 of the Insurance Contracts Act 1984 (Cth).
Insurance: Requirement to act with utmost good faith in s 13 of the Insurance Contracts Act 1984 (Cth): Meaning of utmost good faith: Whether lack of utmost good faith means only dishonesty: Whether utmost good faith may require insurer to act with due regard to insured’s legitimate interests of as well as its own: Whether insurer’s delay in accepting or rejecting liability amounted to a lack of utmost good faith: Relevance of reciprocity: Whether insurer could invoke the insured’s lack of utmost good faith if insurer had failed to act with utmost good faith: Whether insured’s lack of diligence and acting for its own interests amounted to lack of utmost good faith.
Estoppel: Estoppel by convention: Whether insurer represented that insured would not be required to prove its liability to the investors: Whether insured relied on the representation to its detriment

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.

Facts
AMP Financial Planning Pty Limited (AMP) held professional indemnity coverage with CGU Insurance Limited (CGU) which indemnified AMP for both negligent and fraudulent acts of its authorised representatives. The trigger for indemnity under the policy was that there needed to be a "Claim for Civil Liability". "Claim" was defined to mean any originating process and "Civil Liability" to mean liability for damages, costs and expenses which a civil court orders the insured to pay on a claim.

In 1999 and 2000 AMP’s "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 representatives’ 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 AMP’s response to compensate investors might have implications for its securities dealer’s 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 October 2004)
Heerey J held, on a number of grounds, that AMP had not established a right to indemnity from CGU in respect of the settlement amounts. The main points from Heerey J’s judgment at first instance can be summarised as follows:

- there was no breach of contract by CGU as there was no "Claim" to which the policy might respond. As such, the continued reservation of rights by CGU did not amount to a repudiation of the policy;

- no estoppel could run against CGU as reliance and detriment were lacking – CGU had consistently reserved its position on indemnity, insisting indemnity be considered on an "investor by investor basis";

- CGU could not be said to be guilty of any breach of the obligation of utmost good faith under section 13 of the Insurance Contracts Act 1984 (Cth) as there had been no want of honesty on its part;

- it was incumbent on AMP to establish by admissible evidence that it was legally liable to the investors and proof of the settlements on their own was insufficient. The settlements only proved that AMP believed it was, or might be, liable to the investors; and

- on "reasonableness" the question which Heerey J asked himself was whether the settlements had been shown by AMP to be based on a reasonable assessment of the risks faced by AMP that the investors’ claims would proceed to trial and judgment. Heerey J found that the settlements achieved by AMP were not reasonable where the process was "so dominated" by pressure from ASIC. He was unable to conclude that the settlements would have been reached in the agreed amounts had the pressure from ASIC not existed. Another relevant factor was AMP’s failure to take into account the availability of the section 819 defence. Heerey J commented that a settlement can fail the reasonableness test, not only because the settlement sums were not reasonable, but because of flaws in the process by which it is reached.

Decision on Appeal: Full Court of the Federal Court of Australia (2 September 2005)
AMP appealed to a Full Federal Court composed of Emmett, Moore and Gyles JJ. The majority of the Full Federal Court upheld AMP’s appeal, set aside the orders of the primary judge and remitted a number of issues to Heerey J for further consideration. The lead judgment of the majority was given by Emmett J. Gyles J dissented.

Estoppel
The majority found that the trial judge had misunderstood AMP’s estoppel claim. Emmett J found that by CGU accepting the Protocol "in principle" it had induced AMP to assume that it would not be required to establish its underlying liability to each investor. Emmett J identified the potential source of detriment to AMP as the loss of opportunity to require every investor to prove its case against AMP (the investors having been compensated would have little incentive to assist AMP to prove liability).

Utmost Good Faith – section 13 of the Insurance Contracts Act
The majority rejected the trial judge’s analysis and proposed a more expansive definition of the duty of utmost good faith. Emmett J held that while a want of honesty on the part of an insurer would give rise to a breach, it was not a necessary and sufficient starting point. He stated that the concept of utmost good faith encompasses notions of fairness, reasonableness and community standards. Further, while an essential element of dishonest conduct will constitute a breach of the duty, so will capricious or unreasonable conduct. Emmett J found that as CGU had sufficient details regarding AMP’s proposed settlements with investors, it had the opportunity to provide input on individual settlements (and it knew of the pressure being applied by ASIC) but did not make a determination on indemnity over a significant period of time, then this conduct was capable of constituting a breach of the obligation of utmost good faith (but did not finally determine the issue).

The reasonableness of the settlement
The majority expressed the view that "reasonableness" had to be assessed by reference to an objective standard. Emmett J held there was simply no evidence that AMP had "paid over the odds" due to ASIC’s pressure. He concluded that while the pressure from ASIC was an objective reality, it did not automatically follow that the settlements were unreasonable from an objective standpoint.

CGU appealed to the High Court of Australia.

The decision by the High Court of Australia
The majority of the High Court, with Kirby J dissenting, upheld CGU’s appeal and in doing so held that the Full Federal Court should have dismissed the appeal from Heerey J. The High Court focused on the issues of estoppel, the meaning of a "prudent uninsured", the duty of utmost good faith and the reasonableness of the settlements.

Estoppel
Gleeson CJ and Crennan J found on the evidence that, at the time that most of the settlements were paid, it was plain to AMP that CGU was not committing itself to accepting liability to indemnify AMP and in these circumstances, there could have been no reliance. In fact, during this time CGU was questioning whether AMP was under any liability to the investors. Further, the evidence did not support the allegation that a representation was made by CGU that it would not put AMP to proof of its liability to the investors.

In a separate joint judgment, Callinan and Heydon JJ also upheld the primary judge’s 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 CGU’s consent. The judges said that this produced the consequence that CGU’s liability to indemnify AMP operated to cover AMP’s 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:

To act as a prudent uninsured is… similar to the position of an insured denied cover in breach of contract. A prudent uninsured might arrive at an objectively reasonable settlement in light of its potential liability and pay accordingly.

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 J’s comments that:

The real significance of the term [prudent uninsured]… is that CGU made it clear that [AMP] was to be no worse off in respect of [its] rights (if any) under the Policies by negotiating with the Investors and entering into the Settlements…

Utmost Good Faith – section 13 of the Insurance Contracts Act
The majority agreed with the expansive definition of the duty of utmost good faith formulated by the Full Federal Court. They found that a lack of utmost good faith is not to be equated with dishonesty only. They also accepted that utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured as well as to its own interests. Callinan and Heydon JJ likened the duty to other equitable doctrines and held that those seeking relief must come with "clean hands" (although they did say it was not necessary for the purposes of the case to attempt a "comprehensive definition" of the duty).

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 AMP’s 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 AMP’s 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 AMP’s own conduct lacked the measure of reciprocal good faith necessary for it to be entitled to relief against CGU. The relevant conduct included AMP’s 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 AMP’s 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 insurer’s 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 party’s duty of utmost good faith.

The reasonableness of the settlements
Gleeson CJ and Crennan J referred to Heerey J’s judgment on this point and the criticisms made by the Full Federal Court that Heerey J did not examine the material relied upon by AMP in settling claims. The difficulty which AMP had on this point was that it conducted the litigation on the footing that it did not need to prove, by admissible evidence, facts which established its liability to the investors. Rather, it set out to demonstrate the "process" it followed in settling the claims. Although it tendered statements by investors and legal recommendations, these were tendered for the limited purpose of proving "AMP’s state of mind at the time it settled". Without evidence as to liability and in circumstances where liability was in question (especially in light of section 819 of the Corporations Law), Gleeson CJ and Crennan J found that there is little more that Heerey J could have done.

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.

Comment
There are a number of implications flowing from the High Court’s judgment. When liability in relation to the underlying claim is in question, one thing that is made clear is that an insured who settles a claim without the consent of an insurer does so as its own peril, especially in circumstances where the insured is not prepared, or able, to establish the objective "reasonableness" of the settlement, which may include leading evidence to establish an underlying liability. Simply proffering a legal opinion which concludes there are risks and showing that the claim has been discounted may not be enough where there are question marks about the underlying liability and it may be that direct evidence is required. Heerey J at first instance certainly thought that proof of a liability to the investors was required and suggested that AMP could have called three or four investors to give evidence. The question about how much evidence will suffice was not answered by the Court but it is clear that leading no evidence on this issue, as AMP chose to do, could leave an insured in a situation where it has no cover for a claim.

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 insured’s 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 insured’s legitimate interests as well as to an insurer’s 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 JJ’s 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 insurer’s consent before it settled a claim.

There are still questions left unanswered by the High Court – 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 – but the High Court has clearly signalled that an insured must proceed very carefully when settling a claim without an insurer’s consent.

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