Wednesday, 19 November 2014

Case Note] CGU Insurance v AMP Financial Planning Pty Ltd


I           FACTS
In the case of CGU Insurance Ltd v AMP Financial Planning Pty Ltd[1], Messrs Pal and Howarth who represented AMP Financial Planning Pty Ltd (‘AMP’), an insured under a professional indemnity policy with CGU Insurance Ltd (‘CGU’), acted outside its scope of authority and made investments in which “[even] the most speculative of investors would not have been attracted to”.[2] Around $3.4 million of investors’ money was lost. Australian Securities and Investments Commission (‘ASIC’) warned AMP that its securities dealer’s licence could be at risk if they fail to settle investors’ claims promptly and in full.
AMP sought indemnity from CGU under the policy in relation to investors’ lost funds and submitted a protocol for managing investors’ claims. CGU agreed in principle but reserved its position under the Policy. Despite AMP’s repeated attempts to obtain instructions or confirmation that it would be indemnified, CGU told them to act as “prudent uninsured.” AMP proceeded with the settlement of claims because of pressure from ASIC. In due course, CGU denied AMP indemnity under the Policy.
AMP commenced proceedings in the Federal Court and claimed that CGU was estopped from denying indemnity under the policy regarding settlements which proceeded in accordance with the Protocol. In the alternative, AMP claimed that CGU breached the statutory requirement of utmost good faith under section 13 of the Insurance Contracts Act 1984 (Cth) (‘ICA’) by denying its liability.

The High Court allowed the appeal. The High Court’s decision covered a wide of range of issues of fact and law, including such matters as estoppel, reasonableness of settlements and most importantly the scope of s 13 of the ICA (‘), statutory duty of utmost good faith.

A         Estoppel
The issue of estoppel was whether AMP was induced by CGU’s conduct to assume that, if it settled investors’ demands on reasonable terms, it would be indemnified in respect of sums paid.
The majority came to the conclusion that this argument by AMP failed. Gleeson CJ and Crennan J found that AMP did not settle investor’s demands in reliance on representation by CGU since the settlements took place at the time when CGU was still determining whether AMP was liable to the investors.[3] Callinan and Heydon JJ found that the estoppel argument was a “marked departure” from the one pleaded earlier[4] and therefore, found no basis for addressing this issue. However, their Honours held that in any case, AMP settled for its own interests.[5]
Kirby J dissented and found there was an estoppel by implication and that CGU led AMP to believe it would be indemnified because CGU delayed in determining the question of liability.[6]
B         Reasonableness of Claims
The Court held by majority that AMP did not settle the claims on reasonable terms. It is important to note that most of the settlement amounts were paid ‘at a time when CGU was questioning AMP’s liability to the investors.’[7]
Gleeson CJ and Crennan J stated “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...”[8] Since AMP settled without any CGU’s confirmation or instructions, they disregarded CGU’s interests, and therefore settlements were not reasonable. Callinan and Heydon JJ held that it was unnecessary to consider this issue as their Honours rejected the estoppel.
Kirby J dissented and held that CGU would have been “aware of the discipline to which AMP was subject from ASIC under the Law…”[9] and as a result, the settlements were reasonable.
C         Section 13 of the ICA
The High Court considered the scope of s 13 of ICA and the obligations that this section imposes upon an insurer in relation to the handling of claims by an insured. The High Court unanimously stated that the duty was not limited to want of honesty.[10]
Gleeson CJ and Crennan J stated that the obligation might require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured.[11] However, failure to do so does not conclusively determine the question of insurer’s liability; it is merely a “part of some principle process of reasoning”.[12]
Callinan and Heydon JJ held that “something more than passivity” is required and that the duty was a reciprocal one.[13] The notion of reciprocity was central to their Honours’ reasoning. If not for AMP’s failure to show sufficient degree of good faith, their Honours would have been inclined to find liability against CGU because “an insurer acting opportunistically, and temporising, [is] not acting in good faith…”[14]. In order to show the reciprocal good faith, to their Honours’ view, AMP should have considered defendable claims and not keep the insurer at distance from the management of the claims;[15] AMP lacked ‘clean hands’.[16]
Kirby J dissented and held that CGU breached the statutory duty of utmost good faith because CGU delayed and postponed its decision to deny indemnity...’[17]

All members of the High Court agreed that the duty of utmost good faith is not limited to want of honesty. Callinan and Heydon JJ stated that the duty requires more than passivity. These two principles accord with the statement from Derrington J in Newnham v Baker where his Honour stated that insured is sometimes required to take reasonable steps to reduce or minimise the liability of the insurer. [18]  Recently, the decision in Camellia Properties Pty Ltd and Ors v Wesfarmers General Insurance Ltd endorsed the High Court’s interpretation of s 13 by stating the language of s 13 does not discriminate between the stringency of the duty owed by the insurer to the insured and the stringency of the duty owed by the insured to the insurer.” [19]  
So far as points of law are concerned, the High Court’s decision is significant for three main reasons. Firstly, it stresses the importance of the doctrine of reciprocity in the duty of utmost good faith. Secondly, it can be argued that an insurance policy between an insurer and insured must be made in contemplation, though not necessarily in expectation, that insureds operate in a competitive and pressured environment where concerns involve ‘discipline to which the [insured] is subject from ASIC under the relevant law and the risks that non-compliance with ASIC’s discipline would pose for the continuance of the [insured’s] licence…’[20] Thirdly, the scope of insurers’ duty under s 13 of ICA includes the manner in which the insurers manage claims by the insureds; they must act expeditiously and reasonably.
So far as the application of above principles to the facts is concerned, the decision of the High Court relating to insurers’ manner of handling of third party claims with the insureds can hardly be regarded as surprising, given that in such situation, it is in the best interests of all parties that insurers act promptly and expeditiously. Callinan and Heydon JJ stated that “temporising by an insurer can be just as damaging to an insured as outright rejection of a claim.”[21] Although CGU, in this case an insurer acting in a manner insubordinate to ‘commercial standards of decency and fairness’[22], was not found liable under s 13, the decision illustrates that devising a degree of opportunism in dealing with third party claims may lead to finding of liability against that party under the ICA.
There is nothing controversial in the idea that the insured will be denied damages if they fail to uphold the duty of utmost good faith. Callinan and Heydon JJ stated that a plaintiff seeking relief must not himself be guilty of tainted relevant conduct.’[23] If AMP had not failed to consider the availability of s 819(4) defence under the Corporations Act 2001 (Cth),  and had invoked the “senior counsel clause” under the relevant indemnity policy, [24] then the Court would have been inclined to find against the insurer CGU.[25] Callinan and Heydon JJ viewed these omissions as “a degree of opportunism.”[26]
There is one final point to make. The decision, especially the joint judgement of Gleeson CJ and Crennan J leaves some doubt as to the remedies available for breach of utmost good faith; Gleeson CJ and Crennan J stated that the ICA “does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith.” But recent amendment to the ICA successfully removed this doubt.[27] The amended s 13 provides under subsection (2) that non-compliance with s 13 ‘is a breach of requirements of [the ICA]’. Furthermore, a new provision s 14A, provides that ASIC may exercise its powers under Part 7.6 of the Corporations Act 2001 (Cth) relating to variation, suspension and cancellation of financial services licence,[28] and banning orders.[29]

[1] (2007) 235 CLR 1.
[2] Ibid [190].
[3] Ibid [22].
[4] Ibid [254].
[5] Ibid [254]-[255].
[6] Ibid [116].
[7] Ibid [7], [236].
[8] Ibid [29].
[9] Ibid [82].
[10] Ibid [15] (Gleeson CJ and Crennan J), [130] (Kirby J), [257] (Callinan and Heydon JJ).
[11] Ibid [15].
[12] Ibid [16].
[13] Ibid [257].
[14] Ibid [261].
[15] Ibid [258].
[16] Ibid [261].
[17] Ibid [139].
[18] [1989] 1 Qd R 393, 398-399.
[19] [2013] NSWSC 1975, 118.
[20] (2007) 235 CLR 1 [82].
[21] Ibid [259].
[22] Ibid [15].
[23] Ibid [257].
[24] Ibid [260].
[25] Ibid [179], [129]-[135].
[26] Ibid [258].
[27] Explanatory Memorandum, Insurance Contracts Amendment Bill 2013 (Cth).
[28] Subdivision C of Division 4 of Part 7.6.
[29] Subdivision A of Division 8 of Part 7.6.

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