Joining Insurers

Author: Serge Perkovic, Principal at S Perkovic & Associates

INSOLVENT DEFENDANTS

Joining PI Insurers in Proceedings against Insolvent Corporate Professionals

When claiming against a corporate defendant involved in professional services who has became insolvent, it is possible to consider joining to proceedings its professional indemnity insurers: under s6 Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (“LRMP”), under the 562 and 601AG Corporations Act 2001 (Cth) (“CA”), r 6.24 Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”)  and, arguably, in equity. All of these rely on discretion of the Court to grant leave to join insurers. 

We faced this issue in the case Belcastro & ANOR v Nakhl & Ors, 371629 of 2013 NSWSC where we represented the plaintiffs.

Background

Mr Nakhl was formerly a financial planner whom ASIC prohibited from the financial planning industry at the end of year 2013. Mr Nakhl had provided the plaintiffs with financial planning services and mis-invested their money losing most of it. He was the authorised representative of  Australian Financial Services Limited (“AFSL”) from June 2009 to April 2011. At that time he incorporated his own company SydFa Pty Ltd (“SydFa”) which obtained its own financial services licence.  Both companies went into liquidation during the 2013 year.

Claim and Interlocutory Application

The plaintiffs claimed against Mr Nakhl and companies he represented:  damages for breach of contract and fiduciary duty, for unconscionable conduct, negligence, misrepresentation and pursuant to various statutes.

The plaintiffs proceeded in way of interlocutory proceedings to join insurers under the s6 LMPR, s562 and s601AG CA and r 6.24 UCPR.  

Obtaining Policies

It took the Plaintiffs almost the whole year to obtain the majority of policies of AFSL (from 2009-2013) and SydFa (from 2011 to 2014), some of them only they only viewed in confidence.

Finally plaintiffs issued a subpoena to the AFSL insurer to produce policies for the years 2009-12. The matter when charge attached became relevant in determining relevance of the policies – see discussions under the heading Charge under the Section 6 below.  

S6 LRMP 

The Plaintiffs contended that the Court should exercise its discretion in their favour by granting leave because:

a) They presented that the defendants were insolvent;

b) They demonstrated that there was an arguable case that there were real questions of fact or law to be tried. The test from Energise Fitness Pty Ltd v Vero Insurance Limited (2012) NSWCA 213 may had been satisfied: that there may be an acceptance that facts are pleaded which, if true, would on an arguable view of the law provide a remedy. They also have demonstrated that evaluation of evidence supporting the pleaded case indicated that evidence may had been of sufficient state and strength to support the Plaintiffs’ case.

c) They presented sufficient evidence to show that there were claims made  during the terms of the 2012/13/14 policies.

d) They showed that the defendants may notified their insurance companies. The SydFa Insurers argued that there was no notification of the claim made. Even if that was the case, s54 of the Insurance Contract Act 1984 (Cth) (“ICA”) applies to a claim by a third party to the insurance contract against an insurer pursuant to s6 LRMP  (Gorczynski v W & FT Osmo Pty Ltd (2010) NSWCA 163). The section stipulates that an insurer may not refuse to pay claims in certain circumstances.   

e)  The insurers argued that the insured misrepresented facts in the insurance proposal and therefore cover was not available. However, s 28 of ICA applies (Macquarie Underwriting Pty Ltd v Permanent Custodian Ltd (2007) FCAFC60. It provides a specific regime for non-disclosure so  that the exclusion (mis-representation) should not stand in the way of s6 LRMP. 

Charge under the Section 6

The insurers argued that the charge did not attach but the plaintiffs submitted is incorrect as there were damages suffered during the years 2012/13/14.  The plaintiffs argued that, when determining the basis of professional liability, a tort action is considered to be available together with a contract action that in negligence, for misleading and deceptive Conduct and under the statute a tortuous liability exists (South Australia v Johnson (1982) 42 ALR 161; Vulic v Bilinsky (1983) 2 NSWLR 472). Liability in tort is independent of any liability in contract (South Australia v Johnson (1982) 42 ALR; Baker v Sheridan (2005) Aust Torts Reports 81-788). The statutory duty will create a private right of action in tort in the event of breach unless a contrary legislative intention appears – O’Connor v SP Bray Ltd (1937) 56 CLR 464 High Court of Australia.

Therefore, the plaintiffs claimed that the "event giving rise to the claim"  happened at the time at which the loss became readily ascertainable (Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) [2011] FCA 1124. In alternative, they claimed that it may be that in negligence and related causes of action the cause of action accrued when the damage was suffered. Finally, in alternative, in contract, it happened at the time when breaches took place.   

The AFS insurers 2012-13 argued that a charge was not available where the contract of insurance did not come into existence until after the event giving rise to the claim occurs relying on the leading case The Owners - Strata Plan No 50530 v Walter Construction Group Ltd (in liq) (2007) 14 ANZ Ins Cas ¶61-734 (NSWCA).

In addition, they contended that it may be open for a claimant to argue that if there was any contract of insurance in existence when the relevant event occurred, then a charge is created over the insured's entitlement to the receipt of any moneys payable from that contract of insurance (or any replacement of that contract of insurance) however the charge does not "descend" or become fixed until the liability is determined (either by judgment, award or settlement) – as per Chubb Insurance Company of Australia Ltd v Moore (2013) 302 ALR 101 at paragraphs [118] and [119].

Policies for the Years 2009-2012

The usual type of PI policies of professional services companies are “claims made and notified” policies where the policies may respond only if a claim is both made and notified during the term of the policy. 

However, the plaintiffs argued that some of the policies for the years 2009-12  may been  “claim made and notified discovery policies“ where a claim is deemed to exist if the insured becomes aware of circumstances which may subsequently give rise to a claim,  (as was the policy in FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38). In that case, knowledge of the relevant facts during the term of a policy by the insured may be sufficient for the policy to respond if there was no notification  as s54 ICA may apply. Consequently, it may had been open to the plaintiffs to seek to join the previous years’ insurers of SydFa and AFS if the policies if the insurance policies for the years from 2009 to 2012 contained a notification of a potential claims clause.

The plaintiffs stated that s54 ICA above applies.

However, the insures solicitors contended, relying on the observation of the Court of Appeal in Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542 (CAin at [35]-[36] that s 54 does not permit the reformulation of a claim and it does not operate to relieve the insured of restrictions or limitations such as the temporal limits within which the claim must be made upon the insured under a claims made policy.

The plaintiffs quoted professor Sutton[1]: 

(d) Where a claim is not made during the period of insurance, but the policy contains a notification of a potential claims clause, and no notification of relevant facts is given to the insurer during the period of the insurance, the failure to give the notice in accordance with the clause in the policy may possibly be excused as an omission on the part of the assured under s 54(1). If so, a subsequent claim outside the period of insurance will be upheld under the “deeming” provisions of the clause[2]. But the failure to notify is more likely to be regarded as a non-event instead of an omission, with the assured taking no steps to expand the scope of the policy to include cover for a possible future claim. As a non-event, it is outside the purview of s54(1). It is all a question of causation, with a link required between the failure to act and the insurer’s refusal to pay the claim[3]  

Section  562 of CA     

Please refer to the section for wording.

The Plaintiffs submitted that leave should be granted because:

a) The insurers did not accept their liability which is a necessary condition for granting leave – including “fence sitting insurers”(Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liquidation) (No 2) (2011) FCA 1124).

b) The insurer would not be in procedural disadvantage by being joined by the plaintiff, as opposed to being the subject of a cross-claim by the insured;

c) There was a real interest of the plaintiffs to join insurers in a fact that any money received under the insurance policy have(s) to be paid to them in priority to other unsecured creditors (JN Taylor Holdings Ltd v Bond (1994) SASR605; Ashmere Cove Pty Ltd v Zbeekink (No 2) (2007) FCA 1432). In addition, the plaintiffs contended that the PI policies responded to the claims made.   

d) Although the section refers to amount received, the Plaintiffs claimed that because there was a real interest of the plaintiffs to join insurers following the similar outcomes in decisions Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liquidation) (No 2) (2011) FCA 1124 and Ashmere Cove Pty Ltd v Beekink (No 2) (2007) FCA 1432).The social imperative of avoiding multiplicity of proceedings was to be preferred to the insurers’ interests (that an insurer may be embroiled in costly proceedings of considerable complexity in circumstances where it may never need to become involved) as per Beneficial Finance Corp v Price Waterhouse (1993) 59 SASR 432 at 442-3.

That is in contrast to the decision Amaca Pty Ltd v McGrath & Anor as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 which related to re-insurers.

601AG of CA  

Requirements for leave under the above section are that when seeking to recover from the insurer of a deregistered company under s 601AG(a), the applicant has to prove that a deregistered company had a liability immediately before it’s deregistration and that the subject insurance policy covered the above liability.

The plaintiffs argued that the above liability is interpreted broadly, not requiring it to be a liability which has accrued or crystallized, but rather as a liability which the plaintiffs need only, in hindsight, establish at the substantive hearing of the action. (Tziadas v Child & Anor (2009) NSWSC 465). They also contended that, despite the fact that the companies were not deregistered yet, there is a real interest to join tem in the proceedings advancing similar arguments to these advanced when seeking leave under s562 Corporations Act 2001 (Cth) above.  . 

R 6.24 UCPR and Equity

In seeking leave under UCPR the plaintiffs advanced similar arguments as in their leave applications under the Corporations Act 2001 (Cth) above.

There is an interesting new development in the Supreme Court of the NSW in the decision The Owners-Strata Plan 62658 v Mestre Pty Ltd (2012) NSWSC 1259 where the Court held that it has equitable jurisdiction to join insurers.

However, the plaintiffs did not explore this option.

Resolved by Consent  

Before the main hearing many matters were resolved by consent:

a) The insurer for AFSL 2012-13 conceded to the orders to be joined to the proceedings;

b) Subpoena to produce was set aside with a view to issue it again at more convenient time when matters in dispute between plaintiffs and insurers are to be argued in detail, during the main proceedings.

c) The plaintiffs discontinued interlocutory proceedings against the insurers for the years 2009-12 with a view to allow fast and efficient resolving of issues in dispute now and to eventually commence proceedings against these insurers at the later stage.

Outcomes 

The insurers AFSL joined by the Consent Orders and for joining the insurers of SydFa his Honour Campbell J at 51 stated:

“As I am of the view that I should permit the plaintiffs to join SydFa’s insurers once their pleading is in order consider that the requirement of s56 of Civil Procedure Act 2005 are better served by making orders now that facilitate that joinder.”

However, as recommended by his Honour, the plaintiffs did not further press some of their claims. The defendant companies were not de-registered for purposes of the s 601AG of CA claim so the plaintiffs did not press further this claim until some future date when the companies may become deregistered. The claims under the s6 LRMP was maybe too complicated to be decided in the short time frame, and the plaintiffs, in their need to speed up the proceedings, did not press these claims further.

Conclusion   

It seems that an interesting question whether a charge may attach at the time of existence of a policy which existed prior to the policy when the claim was made is not absolutely clear.

Legal practitioners and academics alike have been criticising, possibly rightfully, complexity of the above statutory regime for joining insurers and uncertainty experienced in its application. However, it seems that if the matters are approached with delicacy, claimants against insolvent professional services corporations still may receive significant benefits from it.

[1] Kenneth Sutton, Insurance Law in Australia (LBC Information Services, 3rd ed,1999) p659

[2] Antico v Heath Fielding Australia Pty Ltd [1997] 188 CLR 652 (added by S Perkovic)

[3] Greentree v FAI General Insurance Co Ltd (1999) 44 NSWLR 706 (added by S Perkovic) 

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