For the first time, insurers have successfully asked an Australian court to treat a class action proceeding as constituting multiple Claims for indemnity purposes – in effect, denying the policyholder cover for the settlement and its associated Defence Costs.
While the question of whether a class action proceeding constitutes one, or multiple, Claims is novel and will, in each case, turn upon the particular facts and relevant policy wording, this decision provides important guidance as to what a court may consider constitutes one (or more) Claim(s) in this context. It is likely to give pause for thought to insurers, as to how their exposure may be limited, and to policyholders, as to whether they have any effective cover at all, in the context of a burgeoning class action landscape.
Following the A$6 million settlement of class action proceedings brought by Peterson Superannuation Fund Pty Ltd (Peterson) and 191 group members against Bank of Queensland (BOQ) in the Federal Court of Australia in February this year (FCA proceeding), BOQ sought indemnity for the settlement and its Defence Costs, pursuant to a Civil Liability Insurance Policy issued by AIG, Zurich and Catlin on 10 September 2012 (Policy).
Relevantly, the Policy required BOQ to pay a Retention of A$2 million in respect of each and every Claim. The question for the Supreme Court of New South Wales was whether the Loss for which insurers were liable arose from a single Claim (in which case only one Retention applied) or from multiple Claims (in which case multiple Retentions applied so that, for practical purposes, insurers had no liability to BOQ in respect of the FCA proceeding).
Stevenson J found that there were multiple Claims, such that BOQ was effectively uninsured in respect of the FCA proceeding.
How many Claims were there?
Stevenson J agreed with BOQ that, while each group member had ‘brought’ claims against BOQ in the FCA proceeding, these did not constitute ‘written demands’ and, therefore, more than one Claim under the Policy. However, his Honour accepted insurers’ submission that each Class Member Registration Form completed by group members for the purpose of class closure, which set out the amount that each had been unable to recover from their respective investments, constituted a separate Claim under the Policy.
On that basis, his Honour found that there was one Claim constituted by the FCA proceeding and 192 Claims constituted by each of the Class Member Registration Forms.
If one Claim, was it disaggregated?
Even if wrong in his characterisation of the Class Member Registration Forms, Stevenson J determined that, in any event, the disaggregation clause operated such that the one Claim (namely, the FCA proceeding) constituted multiple separate Claims, due to the nature of, and relationship between, the Wrongful Acts (as defined by the Policy), which, in his Honour’s view, were ‘unrelated’ to each other.
Characterisation of Wrongful Acts
BOQ submitted that there was only one Wrongful Act alleged in the FCA proceeding namely, its continued effect, without question, of fund withdrawal instructions on behalf of Peterson. Stevenson J disagreed, finding that the specific withdrawals of funds particularised each constituted a Wrongful Act, rather than the breach of contract that enabled it, and the specific withdrawals of funds, were Claims ‘for’ each of the Wrongful Acts.
If multiple Claims, were they aggregated?
The court declined to find that these were Claims arising out of, based upon or attributable to ‘a series of related’ Wrongful Acts, for the purpose of the aggregation clause. His Honour noted that this was an ‘acutely fact sensitive’ enquiry, echoing the comments of the UK Supreme Court in AIG v Woodman , in this instance concluding that the transactions did not constitute a ‘series of related’ Wrongful Acts. Moreover, ‘the mere fact of their occurrence within the broader, more remote scheme of a fraudulent practice’ was not sufficient to aggregate the Claims.
The resolution of aggregation issues remains highly fact sensitive. However, the significance of this decision lies in its recognition that class actions shouldn’t automatically be treated as a single Claim for Retention and Limit purposes, as has largely been assumed in the Australian market.
Although two of the leading UK authorities on aggregation, Lloyds TSB v Lloyds Bank Group  and AIG v Woodman , were cited in relation to the interpretation of ‘a series of related’ acts, Stevenson J did not comment in detail on the contentious decision of Lord Hoffman in the former, that acts only constitute a related series if, in combination, they cause the Loss. Instead, a more common sense approach to the interpretation of this phrase was adopted, following the Australian High Court decision of Distillers v Ajax .
In the wake of this decision, we expect that insurers and policyholders alike will be turning their attention to the potential implications for other matters on their books. Considering the sums regularly involved in class action proceedings in Australia (with some recent settlements in excess of A$450 million) and with an expected increase in class actions as a result of the exposure of misconduct by the Financial Services Royal Commission, insurers are right to consider whether multiple-Claim defences could be mounted in similar matters. Noting the importance of the issue, and the continuing appetite for class action litigation, we wait with interest to see whether the decision is appealed.
Read other items in Professions and Financial Lines Brief - December 2018