General Insurance Update June 2010

The interplay between common law negligence and consumer protection statutes like the Trade Practices Act has been vividly illustrated in a high-profile decision from the Federal Court of Australia.

The case concerned the arthritis medication Vioxx and claims that it had led to heart attacks in some patients. It came before the court as a “test case” in a class action lawsuit against the manufacturer of the drug, Merck Sharp & Dohme. The case not only resolved the claim of the named plaintiff, Mr Peterson; but also established findings common to all claimants in the class action.

Mr Peterson had taken Vioxx from 2001 until the drug was recalled from the market in 2004. He claimed it had contributed to his heart attack in December 2003. He sued Merck alleging both negligence and breaches of the Trade Practices Act.

The negligence claim was based on an argument that Vioxx increased the risk of cardiovascular disease and that Merck knew or should have known this prior to the 2004 recall of the drug. The Trade Practices Act claims were advanced on the basis that Vioxx was not reasonably fit for its intended purpose and was not of “merchantable quality”.

In a lengthy judgment, Justice Jessup found as a fact that Vioxx doubled the risk of heart attack across the population as a whole. The argument that it contributed to other cardiovascular conditions apart from heart attacks was however rejected. In Mr Peterson’s case, it was found that Vioxx had contributed to his heart attack.

Justice Jessup found that Merck had a duty to take reasonable care for the safety of Vioxx consumers; but found that it had not breached that duty in this case. Mr Peterson had argued that Merck had negligently failed to carry out sufficient research and investigation in response to a study in 2000 which had indicated a “statistically significant” increase in cardiovascular problems in patients taking Vioxx compared with those taking alternative medication. In particular, Justice Jessup rejected the suggestion that the only reasonable response to the 2000 study was to withdraw Vioxx from the market.

Mr Peterson also claimed that Merck was negligent in the way it had marketed Vioxx to Australian doctors. Justice Jessup accepted that Merck had breached its duty of care by failing to warn Mr Peterson’s doctor of the potential cardiovascular risk of the drug, but that finding did not apply generally to the other members of the class action.

Notwithstanding that finding, Justice Jessup found that the breach of duty did not cause any loss to Mr Peterson, as even if appropriate warnings had been given; Mr Peterson would probably still have taken Vioxx.

Accordingly, both the bases of the negligence claim were rejected.

On the Trade Practices Act claims, Justice Jessup found that Vioxx was a “defective” product, for the purposes of the Act. However, he accepted Merck’s defence that the state of “scientific or technical knowledge” at the time Vioxx was supplied to Mr Peterson was not sufficiently advanced to enable the defect to be discovered.

Mr Peterson however also argued that Vioxx was not reasonably fit for the purpose for which it was supplied (section 74B of the Act) and that it was not of “merchantable quality” (section 74D of the Act). Since taking Vioxx involved almost a doubling of the risk of heart attack, Justice Jessup found it was not fit to be used as an arthritis treatment. It therefore followed that it was not of “merchantable quality”. Since the “scientific knowledge” defence was not applicable to those sections of the Act, Merck was liable on those bases.

Interestingly, Justice Jessup was also prepared to find that Merck’s marketing of Vioxx and failure to warn doctors about its risks amounted to misleading and deceptive conduct under section 52 of the Act. However, as he had already found that Mr Peterson would have taken Vioxx even if his doctor had been appropriately informed, that breach did not “cause” the harm to Mr Peterson in a legal sense.

The decision is significant for several reasons. First and most obviously, it establishes a basis for the hundreds (or perhaps thousands) of other claims against Merck by Australian consumers. It however also illustrates the dangers for manufacturers and their insurers, in that claims for allegedly “defective” products can succeed even where negligence has not been established.

Where there’s smoke…

In contrast perhaps to the Merck decision, the High Court has also recently considered the impact of scientific knowledge in negligence cases, with a rather different outcome.

The core issue in the case was the cause of lung cancer contracted by Mr Cotton. He had died from the disease, and the claim was brought by the executor of his estate, Ms Ellis.

Mr Cotton had been exposed to asbestos fibres during two separate periods of employment. The first was between 1975 and 1978 when he worked for the South Australian Engineering and Water Supply Department. There he worked with asbestos cement pipes manufactured by Amaca Pty Ltd (formerly James Hardie & Co). Between 1990 and his death in 2002 he worked for Millennium Inorganic Chemicals Ltd, where he was also exposed to asbestos.

However, Mr Cotton had also smoked (on average) between 15 and 20 cigarettes a day for slightly more than 26 years before he was diagnosed with lung cancer.

Ms Ellis brought proceedings in the Western Australian Supreme Court against the State of South Australia, Millennium and Amaca alleging that the asbestos exposure was a cause of the lung cancer. She succeeded against all three defendants at trial and in the Western Australian Court of Appeal. The defendants appealed to the High Court.

The central question in the High Court was whether Ms Ellis had established it was more likely than not that the asbestos exposure was a cause of Mr Cotton’s lung cancer. A unanimous seven-member bench of the High Court found it had not been.

The evidence relied on by Ms Ellis was almost entirely epidemiological – in other words, it was evidence based on the study of diseases in the general population. That evidence suggested that exposure to asbestos fibres was a possible cause of lung cancer. The evidence also established however that cigarette smoking was also a cause of lung cancer; that the combination of the two was also a possible cause of lung cancer; but that some people exposed to asbestos did not develop lung cancer and that conversely some people developed lung cancer without any exposure to either. What that evidence also showed however was that there was actually a higher risk (in the general population) of developing lung cancer from smoking than from exposure to asbestos.

On the key question of causation, the High Court observed that the epidemiological evidence established only that Mr Cotton’s asbestos exposure may have been a cause of his lung cancer, not that it was the “more likely” cause. The Court noted that the fact that asbestos may have been a cause of MrCotton’s cancer was not a sufficient basis for attributing legal responsibility. Although a small percentage of cancer cases were probably caused by asbestos, that did not identify whether Mr Cotton was one of that group.

Ms Ellis argued that causation could be established based on three arguments: first, that smoking and asbestos must work together; second, that the only two explanations of MrCotton's cancer that needed to be considered were smoking as the sole cause and the combined effect of both smoking and asbestos; and third, that because exposure to both is more dangerous than exposure to one or the other, exposure to both was probably the cause of MrCotton's cancer.

Those arguments were however rejected. The Court noted:

“If the relative risks and probabilities derived from epidemiological studies were to be treated as revealing what was a probable explanation of what caused MrCotton’s cancer, those analyses support two conclusions. First, it is more probable than not that smoking was a cause of (in the sense that it was a necessary condition for) MrCotton’s cancer. Second, the risks and probabilities associated with asbestos, whether alone or in conjunction with smoking, are low and not sufficient to found the inference which the plaintiff sought to have made: that it is more probable than not that exposure to respirable asbestos fibres was a cause of MrCotton’s cancer.

It was not shown to be more probable than not that asbestos was a cause of (a necessary condition for) his cancer. It was not shown that exposure to asbestos made a material contribution to his cancer. Material contribution was not shown because a connection between MrCotton's inhaling asbestos and his developing cancer was not demonstrated.”

Accordingly, the appeals were allowed and judgment given for the defendants.

Police “advice” does not amount to duty of care

Some would say that police officers have a hard enough job as it is. Officers can however take some comfort from a decision of the NSW Supreme Court, which appears to put some sensible limits on the duties they owe in dealing with members of the public.

In June 2007, Tania Rickard sought help from the Auburn Police about domestic violence. She was attended to by Senior Constable Darlington. She advised him of the alleged assault on her. She also stated that she was leaving Australia and would have to leave behind two vehicles, including a Ford Laser. Senior Constable Darlington told her that he was looking to buy a car for his brother. She offered to give him the Ford Laser. He told her that he would have to pay something for it. She said she would accept $100. He agreed.

He also told her that if she intended to leave the country it would be a waste of police time to institute any court proceedings about the alleged assault because they would fail for lack of evidence.

It appears that the sale of the vehicle proceeded as planned. In 2008 however, she commenced proceedings seeking damages; on the basis that at the time, she was in a “vulnerable state”, the transaction was improvident and that Snr Constable Darlington owed her a duty of care to refer her to independent advice before she agreed to it. She also joined the State of NSW alleging that it was vicariously liable for the breach of duty.

In the Magistrates Court, the magistrate found that no duty of care existed and that the claim should be struck out. Ms Rickard appealed.

On appeal, Justice Hulme in the NSW Supreme Court noted that, in certain circumstances, police officers owe a duty of care to prevent foreseeable harm; and police officers did not have “blanket immunity” against negligence claims.

In a lengthy judgment, Justice Hulme analysed the “salient features” on the issue of whether a duty of care existed or not. These included the fact that the claim was largely (though not entirely) for economic loss; the relevant provisions of the Police Act did not create private rights; the line of authority which established that police officers generally do not owe a duty of care; the public interest factors which militated against the imposition of a duty of care; the transaction was a private one unconnected with the crime being reported; the imposition of a duty of care would “open up” police to claims by a broad class of persons; the law generally did not impose a duty to do a positive act and it was unlikely that a duty of care could attach to general police powers.

Justice Hulme noted that the assessment of whether a duty of care should be found is not made by considering the individual features of the case, but their cumulative effect. In this case however, all the individual features are against a finding that a duty of care existed and the cumulative effect pointed “powerfully” in that direction.

As a result, the magistrate’s findings were held to be correct and the appeal was dismissed.

State’s duty extends to the “vulnerable”

Long-dormant claims of abuse present a particular difficulty for a range of organisations and their insurers. In the case of State departments charged with the welfare of children, the “door” for making such claims may have been edged a little wider by a decision of the NSW Court of Appeal.

The plaintiffs were two sisters, identified only as DC and TB. They alleged that they had been sexually abused by their stepfather over a ten year period from about 1974 to 1984, when they were children.

In 2008, nearly 25 years after the abuse ended, they brought action against the State of New South Wales; and an officer of the Department of Youth and Community Services who was responsible in 1983-1984 for dealing with the sisters’ complaints against their stepfather.

They alleged that the defendants breached their duty of care by failing to report the sexual abuse to the police, once they became aware of it in April 1983.As a result, they alleged, they suffered yet more sexual abuse by their stepfather resulting in further physical and mental injury.They also sought orders to extend the limitation period.

The defendants sought summary judgment, claiming that the case was “frivolous or vexatious” or that it disclosed no cause of action. That application was granted in the NSW Supreme Court. The plaintiffs appealed.

Although the appeal was dealt with on narrow grounds – i.e. whether the claim should have been summarily dismissed – the Court of Appeal provided some useful comment on the question of duty of care. The defendants had conceded that they owed a duty to exercise reasonable care in carrying out the mandatory provisions of the (former) Child Welfare Act.

Justice Sackville, delivering the leading judgment for the unanimous Court of Appeal, however went rather further. He observed that, consistently with the High Court’s decision in Stuart v Kirkland-Veenstra, the mere existence of a statutory power to act was not sufficient to establish a cause of action for failing to exercise that power.

Rather, it was necessary to examine “the degree and nature of control exercised over the risk of harm that has eventuated, the degree of vulnerability of those who depend on the proper exercise of the relevant power, and the consistency or otherwise of the asserted duty of care with the terms, scope and purpose of the relevant statute”.

In this case, Justice Sackville found that it was “difficult to think of a more vulnerable class of persons” than abused children.It was “self-evident” that the risk of harm may be very high. Therefore the “value of personal autonomy” that informed much of the law of negligence did not militate against the existence of a duty of care in this case.In addition, there did not appear to be any “lack of coherence” between the imposition of a duty of care on the State when notified of child sexual abuse and the statutory framework governing the welfare of children in force in 1983.

Since the duty of care relied on by the plaintiffs was maintainable as a matter of law, the allegation that the defendants breached that duty raised factual questions. In particular, the allegation that the defendants breached the duty by failing to notify the police of the abuse was not so obviously untenable that it cannot possibly succeed.

As a result, the appeal was allowed and the matter remitted to the NSW Supreme Court.