The High Court has clarified some important issues surrounding the intersection between bankruptcy and insurance that could have potentially wide-ranging implications for insurers, particularly those in the D&O market.
Mr John Greaves was the chairman and a director of One.Tel. He held a directors and officers liability policy with CGU. Following the collapse of One.Tel, ASIC took action against Mr Greaves in the NSW Supreme Court, which resulted in orders that he pay $20 million compensation to One.Tel and $350,000 to ASIC.
In the face of those debts, Mr Greaves entered into a deed of arrangement under the Bankruptcy Act which was valid for three years unless extended. Under that deed, he assigned his rights under the CGU policy to a trustee, and provided that any amount recovered from CGU would be paid in satisfaction of Mr. Greaves’ liabilities to One.Tel and ASIC. It also provided that creditors were barred from enforcing his debts to them until certain steps had been performed in relation to the insurance policy.
The trustee then commenced proceedings seeking to enforce liability against CGU, claiming that the $20 million owed to One.Tel was a “loss” within the terms of the policy and that CGU was liable to indemnify Mr Greaves for it. CGU denied the claim. While those proceedings were in train, the three-year period specified in the deed expired and it terminated.
CGU raised a number of defences to the claim; but the matter ultimately turned on the assignment of Mr. Greaves’ rights under the policy to the trustee.
CGU argued that, even if the assignment was valid at the time of the deed, the trustee’s right of recovery against CGU ended when the deed expired. It also contended that there had not been any “loss” as defined under the policy. That argument hinged on the assertion that because Mr Greaves’ creditors (including One.Tel and ASIC) were barred from enforcing his debts to them, there existed no loss for which it was liable to indemnify the insured.
The policy defined the term “loss” as “the amount payable in respect of a Claim made against the Directors and Officers for a Wrongful Act and shall include damages, judgments, settlements, interest, costs and Defence Costs”.
CGU had succeeded in the original proceedings in the NSW Supreme Court; but that was overturned by the NSW Court of Appeal. CGU appealed (by special leave) to the High Court.
In the High Court, both CGU’s arguments were rejected.
The unanimous five-member bench of the High Court (comprising Chief Justice French and Justices Heydon, Crennan, Kiefel and Bell) found that the trustee was entitled to continue recovery against the policy notwithstanding the expiry of the deed. Quite apart from the assignment of rights actually embodied in the deed, Mr. Greaves had also made an equitable assignment of those rights that operated separately to the deed, and which survived its expiry.
Therefore, when the deed expired, the trustee continued to owe duties to Mr. Greaves as a “bare trustee”. As part of those duties, the trustee was entitled to (and arguably required to) continue recovery action against CGU under the policy.
On the issue of whether there was a “loss”, the court found that the definition of “loss” in the policy was broad enough to include the orders made in favour of One.Tel and ASIC against Mr Greaves. The deed did not set aside any orders made against Mr. Greaves.
When the deed expired, Mr. Greaves was returned to his previous position (although now as beneficiary of a “bare” trust). At that point, it was open for One.Tel and ASIC to pursue him for any shortfall in the amounts paid to them by the trustee. On that basis, there was still a “loss” for the purpose of the policy.
For D&O insurers, the decision confirms that assignment of an insured’s rights under a D&O policy may be upheld even though the deed purporting to assign the rights has expired.
In addition, even where the insured is protected by bankruptcy laws from creditors, the definition of “loss” under most D&O liability policies of insurance will continue to apply, particularly in relation to claims made by the company itself and regulators.
CGU Insurance Ltd v One.Tel Ltd (in liq) [2010] HCA 26
Many types of liability policies are tied to the conduct of a business by the insured. In most cases, just what the insured’s business is will be fairly clear; but in some cases, it can be tricky to pin down just what the business is and what activities it entails, as a recent decision of the NSW Supreme Court illustrates.
Mrs Vasic and Mr Fairey owned and operated a farm at Mulga Creek Station, Byrock, in western New South Wales. Part of the business included allowing sport shooters onto the property for hunting of feral animals. On 3 July 2003, Mr Ahmed El Hayek and his father attended the property and made arrangements to go hunting on the property, which included accommodation. That accommodation was a shearers’ shed.
In the early hours of 4 July 2003 the shearers’ shed caught fire and Mr El Hayek was injured.
Mr El Hayek brought proceedings against Mrs Vasic and Mr Fairey, alleging they were negligent and liable for the injuries sustained in the fire.They denied liability. Those proceedings had not been resolved at the time of the hearing of this matter.
However, in earlier proceedings, it had been decided that QBE Insurance and Mercantile Mutual Insurance were liable to indemnify Mrs Vasic and Mr Fairey under a policy they issued in relation to the Mulga Creek Station property.
QBE, in turn, claimed contribution from Wesfarmers based on a “Rural Plan” policy issued to Mrs Vasic; alleging that its legal liability cover meant that a situation of double insurance arose in relation to the claim by Mr El Hayek.
Wesfarmers resisted the claim, arguing primarily that the “business” specified in its policy was “Cropping Farm (not cane)”; and that the activity of allowing shooters onto the property did not fall within that “business” and was therefore not covered by the policy.
QBE submitted that the activity was a part of the farming business carried on at the property and would fall within the description in the policy; and that, even if it was not directly within the relevant description, it was an activity which was incidental to that description. It also contended that the Wesfarmers policy required that any occurrence had to happen “… in connection with …” the farm business, and that phrase was of such a broad interpretation that it was sufficient to capture what had occurred.
For its part, Wesfarmers argued that the shooting activity was a separate and distinct “business” from the “Cropping Farm (not cane)” description in the policy; and therefore not covered by it. It also contended that, although the phrase “… in connection with …” had a wide connotation, no reasonable construction of that phrase in context would allow for a conclusion that the fire occurred in connection with the farm business of cropping.
Justice Garling noted that the Wesfarmers policy had no specific definition of the term “business”; rather it was used in a way which suggested that it was a term of common usage and understanding.
The question then was whether, as a matter of fact, using a common understanding of the word “business”, the shooting activity was part of the farming business or not.
Justice Garling noted that while formulating a “closed list” of indicators of what constituted a business was not possible, some of the relevant factors in this case included:
- Whether the shooting activity was separate and distinct from all of the other activities which constitute the farming business;
- The frequency with which it occurred;
- Whether the shooting was conducted in an area of the farm which was exclusively devoted to that activity or whether it was conducted in an area used for more than one activity;
- Whether, in order to run the shooting activity, it was necessary for there to be a separate organisational structure, including employees which controlled the way in which it was conducted;
- Whether the shooting was regarded internally as a separate “profit centre”, and whether there was a separate business name or a separate ABN for it;
- Whether the shooting activity was a “going concern” for profit on a continuous and regular basis; and
- Whether there had been any advertising or other marketing, to promote shooting as a business and distinguish it from the farming activity undertaken on the property.
While noting some deficiencies in the evidence, Justice Garling found that the totality of the evidence, and the description of the interaction between the farming business and the shooting in combination, suggested that there was only one business being undertaken.
In addition, the control of feral animals was a necessary activity for the proper and ongoing management of, and maintenance of, the “Cropping Farm” business, on the property; and it made little difference whether that was conducted by employees or paying shooters.
Accordingly, Justice Garling was satisfied that the shooting activity in which Mr El Hayek was engaged at the time of the fire, was an activity which formed part of the farm business, described as “Cropping Farm (not cane)” being undertaken by Mrs Vasic.
In any event, even if it was not an integral part of the farm business, the claim would still have been covered by the policy, because the injuries sustained by Mr El Hayek were caused by an occurrence (i.e. the fire) which was “ … in connection with …” the farm business.
The cases indicated that the phrase “in connection with” had a broad meaning and wide connotation requiring “merely a relationship between one thing and another”. Here, the occurrence was connected to the farm business because the fire took place in the shearers’ shed which was one of the farm buildings used for the farm business and in which Mr El Hayek was accommodated as a paying guest. This activity had been disclosed to Wesfarmers and there was accordingly a sufficient causal connection.
In the result then, Wesfarmers was obliged to indemnify Mrs Vasic under the legal liability provisions of its policy.
QBE Insurance (Australia) Ltd v Wesfarmers General Insurance Ltd [2010] NSWSC 855
In several classes of insurance, where business is written on “claims made” policies, it is important to establish just when a “claim” is made on the insured. The occurrence of that policy trigger can have far-reaching implications for both the insured and the insurer. But when is a “claim” actually made? The issue has – perhaps surprisingly – arisen in two different contexts in recent cases; the first of those involving a professional indemnity policy.
In January 2008, registered valuer Eric Leslie provided a valuation report addressed to Dimitra Cassidy advising that, in his opinion, the market value of a property at Dunns Creek was $1.5 million. That report was obtained on behalf of Ms Cassidy, who was providing a loan of $900,000 which was to be secured against the Dunns Creek property.
At the time, Mr Leslie was insured with Calliden Limited under a professional indemnity policy for the year ending 21 January 2009.
On 11 April 2008, Mr Leslie received an email from a law firm representing Ms Cassidy. That email noted that the valuation “may be fundamentally flawed” and there was concern that the property would sell for less than one-third of the amount stated in the valuation.
It went on to state that the lawyers’ instructions were to place Mr Leslie “on notice that an insurable event may occur if the property does not provide sufficient funds at auction to repay the loan”.It also “strongly” suggested obtaining legal advice; and indicated that if a shortfall did occur, proceedings would be commenced in the NSW Supreme Court.
Ms Cassidy took possession of the property and in June 2008 entered into a contract to sell it for $1,050,000. That sale did not complete. The property was subsequently sold at public auction on 11 October 2008 for $350,000.
Mr Leslie did not notify Calliden that he had received the email. He was served with the proceedings commenced by Ms Cassidy on 4 April 2009; and on 20 April 2009, formal notice of the proceedings was given to Calliden.
The matter came on for hearing before Justice Hoeben on a separate trial of the issues between Mr Leslie and Calliden. As originally formulated, the trial was to address two issues: whether the email of 11 April 2008 was a “claim” within the meaning of the policy; and if so, whether Calliden was entitled to deny indemnity because that “claim” had not been notified during the period of insurance. By the time of the hearing however, the only issue was whether the email constituted a “claim”. Calliden conceded that if it was, then s.54 of the Insurance Contracts Act would operate to excuse the failure to notify.
The term “claim” was defined in the policy as:
“(a) A writ, statement of claim, summons, application or other originating legal or arbitral process, cross-claim, counter claim or third or similar party notice served on the Insured for compensation;
(b) A written assertion of a right to or a demand for compensation.”
It was common ground that paragraph (b) was the relevant provision.
Calliden argued that, while the email was a “written assertion”, the paragraph required that the reference to a “right to… compensation” be an existing right. The email did not assert an existing right, but rather alluded to some future right should the property sell for less than the valuation.
Justice Hoeben noted that the contra proferentem rule prevented any insertion of the concept of an “existing right” into paragraph (b). In addition, the paragraph did not imply that the “right” had to be existing; it could be a contingent or conditional right. Further, a “right” could in any case be said to “exist” even if it was contingent on something else happening.
An analysis of the email in this case showed that it was indeed asserting a “right”. It asserted that the valuation might be “fundamentally flawed” in the context of concerns that the property would sell for considerably less than the amount of the valuation.It therefore asserted that a breach of duty by Mr Leslie had already occurred, even if the extent of the loss was not yet known.
It then set out the consequences of that breach; namely that an “insurable event” might occur, and that proceedings would be commenced, if a shortfall occurred. Justice Hoeben found that, in those circumstances, there was “no difficulty” in construing the email as a written assertion of a right to compensation, the compensation being the extent of the shortfall.
As the email was a “claim”, the issue was therefore resolved in favour of Mr Leslie.
Cassidy v Leslie [2010] NSWSC 742
Hard on the heels of the Cassidy v Leslie decision, the NSW Supreme Court delivered another decision on a similar (though, it should be stressed, not the same) issue, this time involving a construction policy.
In August 2006, the plaintiff, Eastern Creek Holdings (“ECH”), contracted with Seana Constructions Pty Ltd (“Seana”) to design and construct a hotel at Eastern Creek, near the well-known motor racing circuit.
The project was completed, but in September 2008, ECH gave written notice to Seana in the following terms:
“This letter is to inform you that the Principal (Eastern Creek Holdings) has become aware of significant Design Defects in respect of the Chifley Hotel, Eastern Creek.
These Design Defects may result in the Principal suffering damages in the future, and as such the Principal reserves its rights in respect of the Contract, at Equity and at Law.”
Having commenced proceedings against Seana, ECH then applied to join its insurer, Axis Speciality Europe Ltd into the proceeding. Axis contended that the policy did not respond to the claim against Seana because, among other things, the letter from ECH did not constitute a “claim” against Seana or notified to Axis within the period of insurance.
It is worth noting at this stage that because the application was merely to join the insurer into the action, the decision hinged merely on whether there was an “arguable case” that the policy responded. Whether it in fact responded or not was a matter that would have to be determined at any trial of the proceeding.
In the NSW Supreme Court, Justice Hammerschlag found that the letter did not constitute notice of a “claim” against Seana.In a rather short statement, it was found that the letter did not make a “demand for compensation”, but merely purported to “reserve rights”. It might also be added that the letter does not appear to have actually asserted any wrongdoing on the part of Seana. It merely observed that ECH had become aware of “significant Design Defects”; but did not directly assert that Seana was responsible for them.
However, Justice Hammerschlag also found that s.40 (3) of the Insurance Contracts Act might preclude Axis from being relieved of liability under the policy if the letter constituted notice in writing “of facts that might give rise to a claim”, a concept rather different from that of an actual “claim”. In addition s.54 of the Act, might operate to preclude Axis from refusing to pay the claim as a result of Seana’s failure to notify of circumstances within the policy period.
Accordingly, the application to join Axis into the action was allowed.
Whether the two decisions in Cassidy v Leslie and this case can sit comfortably together remains to be seen. It may be that one or both of them are taken on appeal, which may clarify some of the issues. At this time however, it seems that the question of whether there has been a “claim” or not may come down to a matter of semantic interpretation.
Eastern Creek Holdings Pty Ltd v Axis Speciality Europe Ltd [2010] NSWSC 840
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