CGU Insurance v AMPFP paper 211007

THE DECISION OF THE HIGH COURT IN

CGU INSURANCE LTD V AMP FINANCIAL PLANNING PTY LTD [2007] HCA 36

BY

ANNA ROBERTSON

On 29 August 2007, the High Court of Australia (Gleeson CJ, Callinan, Heydon and Crennan JJ, Kirby J dissenting) handed down their decision in CGU Insurance Ltd v AMP Financial Planning Pty Ltd. The decision considers some important questions in relation to the effect of an insured settling claims with third parties in circumstances where an insurer has neither admitted nor denied indemnity; what the duty of utmost good faith requires; what are the consequences of a breach of s 13 of the Insurance Contracts Act particularly in circumstances where an insurer would not otherwise be contractually liable to indemnify an insured; the circumstances in which a settlement by an insured with third parties will be reasonable; the evidence which an insured will need to call to establish the reasonableness of the settlement; and the importance of senior counsel clauses in insurance policies.

FACTS

AMP Financial Planning Ltd (“AMP”) was a licensed securities dealer under the Corporations Law. On 19 February 1999 AMP and CGU entered into a professional risks insurance contract. Cover was for 12 months from 28 February 1999 after which a further policy was entered into on 28 February 2000 on identical terms. The policies were claims made polices.

AMP provided financial planning advice to retail clients through Macquarie Advisory Group (“MAG”) which held an appropriate authority from AMP and was a representative of AMP for the purpose of Chapter 7 of the Corporations Law. Two representatives of AMP, Mr Pal and Mr Howarth, traded beyond their proper authorities. This was discovered by Hillross Pty Ltd, a company related to AMP, with whom Mr Pal and Mr Howarth also held authorities.

Hillross terminated the authorities of Mr Pal and Mr Howarth and notified ASIC of possible breaches of the Corporations Law. Mr Pal and Mr Howarth were banned from participating in the securities industry and from management of companies.

Initial notice of claims against Mr Pal was given by AMP to CGU on 16 December 1999. Further notice was given on 5 September 2000, under the 2000 policy of matters which might give rise to a claim.

On 14 February 2001 ASIC officers met with AMP to discuss ASIC’s concern over the delay in compensating investors. ASIC made it clear that AMP should deal with investor claims in a fair and timely manner and that such obligation should override insurance concerns. It was implicit that if the response to investor claims was not adequate AMP’s securities license would be at risk.

AMP contacted CGU following the meeting with ASIC. In a letter dated 1 March 2001, AMP pointed out to CGU that its relationship with ASIC was critical to its business. The letter enclosed material relevant to the claim to indemnity including AMP files and a summary of the investments leading to the demands for compensation by investors. It also included a draft liability report in relation to the Bajada Retirement Fund, one of the investors.

On 26 March 2001, AMP’s solicitors wrote to CGU’s solicitors enclosing a “Proposed Procedure for the Management of Claims”. This procedure became known as “the Protocol”. The letter also sought confirmation as to whether CGU would provide indemnity in relation to the conduct of Messrs Pal and Howarth.

On 6 April 2001, CGU’s solicitors wrote to AMP’s solicitors stating that instructions were being sought in relation to indemnity and pending indemnity, AMP should continue to act as a prudent uninsured. CGU neither granted nor denied indemnity.

On 11 May 2001, CGU wrote to AMP informing AMP that it agreed in principal to the protocol for handling claims. The letter said that CGU would consider indemnity on an investor by investor basis.

On 7 June 2001, AMP was in a position to settle the Bajada Retirement Fund claim. It wrote to CGU requesting that it confirm indemnity within 14 days, failing which, AMP would settle the claim.

Similar letters were sent by AMP in relation to other investors on 9 July 2001.

CGU’s solicitors responded by letter dated 12 July 2001. The letter stated that CGU had no difficulty with the Protocol but had not yet decided to confer indemnity.

On 26 July 2001, a meeting was held at which CGU put forward its position that AMP would not be liable to investors.

In August, there was further correspondence between AMP and CGU in which AMP expressed disappointment that CGU had not yet decided to confer indemnity. CGU maintained that AMP should continue to act as a prudent uninsured in respect of the claims.

On 5 October 2001, CGU’s solicitors met with AMP’s solicitors. CGU’s advisers indicated that they required more information to enable questions of liability to be considered and indicated that they would seek the advice of Mr Archibald QC.

On 5 October 2001, AMP’s advisers wrote to CGU stating that CGU had earlier agreed to the Protocol for handling claims and that AMP had settled claims in accordance with the Protocols. AMP referred to its responsibilities under its dealer’s license and the requirement of ASIC that investor claims be settled promptly. AMP indicated that it was not prepared to put its business or commercial reputation at risk because CGU had not made a decision on indemnity. It indicated that AMP would continue to act in good faith as a prudent uninsured.

Between October 2001 and November 2001, AMP settled or dealt with most of the investor claims.

There was further correspondence from AMP’s solicitors to CGU’s solicitors indicating an expectation on AMP’s part that it would be reimbursed by CGU. CGU still had not made a decision in relation to indemnity.

On 8 April 2002, CGU wrote to AMP’s solicitors stating that the procedure adopted by AMP for settling investor claims was in breach of condition 7.2 of the policy and in breach of s 13 of the Insurance Contracts Act. The letter did not confer indemnity. It did indicate that CGU was prepared to consider the insured’s claim on an individual basis. Reference was made to senior counsel’s advice in respect of which privilege was claimed. There was still no clear decision by CGU to repudiate the Protocol or to deny liability. CGU did not explain why it said AMP had no liability to investors.

There was further correspondence in relation to whether indemnity would be granted.

AMP wrote to CGU on 31 December 2002 asking CGU to confirm whether it admitted that the policies responded to the demands made by AMP.

There was no response to that letter because, unbeknown to AMP, CGU had written on 14 November 2002 denying liability.

On 22 January 2003, AMP’s solicitors requested that CGU review its rejection of liability and requested a copy of Mr Archibald QC’s advice.

On 28 March 2003, CGU wrote to AMP, again maintaining its denial of indemnity.

THE POLICIES

By cl 3.1 of the policies, CGU agreed to provide cover for Claims (as defined) for Civil Liability (as defined) arising from conduct of the Insured Professional Business Practice (as defined), so long as conditions relating to timing of claims were satisfied.
By cl 3.2 of the policies, it was agreed that cover would be provided in respect of various types of Civil Liability Claims. These included:
“(a) Breach of duty (including a duty of confidentiality)
(b) …
(c) …
(d) Dishonest, fraudulent, criminal or malicious acts or omissions by an Employee or Principal of the Insured …
(e) …
(f) Breaches of the Trade Practices Act 1974 or similar Fair Trading legislation enacted throughout Australia (but not for criminal liability)”

Clause 7.1 and 7.2 provided
“7.1 We must be told about Claims.

The Insured must tell Us in writing about a Claim or loss as soon as possible and while this Policy is in force. If this is not done the Insured’s right to cover under this Policy may be affected.

7.2 Claims co-operation

Each insured must:
(a) diligently do, and allow to be done, everything reasonably practicable to avoid or lessen the Insured’s liability or loss n relation to a Claim;
(b) immediately give Us al the help and information that We reasonably required to:
(i) Investigate and defend the Claim or loss; and
(ii) Work out Our liability under this Policy.”

Clause 7.6 provided that:
“7.6 An Insured must not admit liability for or settle any Clam

An Insured must not:
(a) admit liability for, or settle any Claim; or
(b) incur any costs or expenses for a Clam
without first obtaining our Consent in writing.
If Our prior consent is not obtained, the Insured’s right to cover under this Policy may be affected.”

There was a “senior counsel clause” in clause 7.8 which provided:
“7.8 Senior Counsel
(a) Unless a Senior Counsel, that We and the Insured both agree to instruct, advises that the Claim proceedings should be contested, then neither We not the Insured can require the other to contest any legal proceedings about a Claim if the other does not agree to do so.
(b) In formulating his or her advice, Senior Counsel must be instructed to consider:
(i) The economics of the matter; and
(ii) The damages and costs likely to be recovered; and
(iii) The likely costs of defence; and
(iv) The insured’s prospects of successfully defending the claim.
(c) The cost of Senior Counsel’s opinion is to be taken as part of the Claim Investigation Costs.
(d) If Senior Counsel advises that the matters should be settled and if the terms of settlements are within limits which are reasonable (in Senior Counsel’s opinion and n the light of he matters he / she is required to consider) then:
(i) the Insured cannot (subject to Section 7.7, Insured’s right to contest) object to the settlement; and
(ii) the Insured must immediately pay the relevant Excess or Excesses listed in the Schedule.”

The indemnity provided was set out in clause 12. Relevantly cl 12 provides:
“12.1 Civil Liability

Liability for the damages, costs and expenses which a civil court orders the Insured to pay on a Claim … It includes the legal costs of the person making the Claim, for which the Insured becomes liable.

12.2 Claim
Any originating process (in a legal proceeding or arbitration), cross claim or counter clam or third party or similar notice claiming compensation against and served on an Insured.

12.3 Claim Investigation Costs

The legal costs and expenses of investigating, defending or settling any Claim (or anything which might result in a Claim), which would be covered by this Policy at the time the legal costs and expenses arise. Refer Section 3.3, Claims Investigation Costs.

12.4 Covered Claim
Claims which We have agreed to cover, under this Policy. See Section 7.12(b), the Excess.”

THE PLEADINGS

AMP pleaded a cause of action in contract however led no direct evidence to establish a legal liability on the part of CGU to indemnify it under the policy. AMP’s alternate claims were based on estoppel. AMP sought to show that, acting as a prudent uninsured, its settlements of demands by third parties were reasonable in all of the circumstances and were made in good faith. AMP also relied on s 13 of the Insurance Contracts Act 1984 (Cth) and sought to argue that the requirement by CGU that it prove its liability to third party investors by admissible evidence was contrary to what CGU had asserted since before the trial and was a breach of CGU’s duty of utmost good faith.

By its defence CGU accepted that it would not deny cover to AMP on the basis that “Claims” as defined had not been made, nor on the basis that AMP had settled with Investors without CGU’s consent. CGU did put in issue however, AMP’s ultimate liability to investors and whether the liability was such that the policies responded. It also sought to rely on s 817, 818 and 819(4) of the Corporations Law as entitling CGU to refuse indemnity on the basis that AMP was not itself liable to investors. Simply put, CGU argued that AMP had no liability to investors and, if it did, any such liability was not within the policies.

DECISION AT FIRST INSTANCE BY HEEREY J

Heerey, J. held on a number of grounds that AMP had not established a right to indemnity from CGU in respect of the settlement amounts. His Honour held that:
AMP could not rely on estoppel because there was no reliance by AMP
There was no detriment shown by AMP because CGU’s defence made it clear that it did not deny AMP’s claim for indemnity on the basis of cll 12.1, 12.2 and 7.6. Accordingly, AMP was no worse off by having entered into the settlements with the investors vis a vis its policy rights.
An allegation of a breach of the duty of utmost good faith requires proof of some want of honesty. There was no want of honesty on the part of CGU. Therefore there was no failure to act toward AMP with the utmost good faith.
Section 819 of the Corporations Law creates liability whether or not the wrongdoer was the agent of the indemnifying principal and whether or not the client had even heard of the indemnifying principal in relation to the impugned conduct. Section 819(4) has the effect of making the real principal bear the burden. AMP could have relied on the exculpatory provision in s 819(4) of the Law.
The settlements reached with investors were not reasonable because the whole process was dominated by pressure from ASIC.
The demands by investors were for breach of duty and therefore within cl 3.2 of the policies
His Honour rejected the argument that the ambit of the “Insured Professional Business Practice” of AMP was limited to its own activities and did not extend to those of authorized agents for which it might be liable under the law.
The demands of investors were not excluded from AMP’s indemnity by cl 6.3(e) of the Policy

His Honour entered judgment for CGU.

DECISION OF THE FULL FEDERAL COURT

A majority of the Full Federal Court (Moore and Emmett JJ, Gyles J dissenting) allowed AMP’s appeal and set aside the orders of Heerey J and remitted the matter for further hearing. AMP argued that the trial judge had misapprehended AMP’s case on estoppel. CGU argued that AMP had shifted the content of the estoppels relied upon and had altered the way it had invoked s 13 of the Act.

Emmett accepted the submission that the trial judge had misapprehended AMP’s case on estoppel and had erred in his treatment of the issue of AMP’s reliance on s 13 of the Act. Emmett J considered that a proper consideration of these issues was essential to a just and lawful determination of AMP’s claim for indemnity by CGU. Emmett J noted AMP’s argument that it was induced to assume from its course of dealing with CGU (including agreement in principle to the Protocol) that it would not be required to establish by admissible evidence that it was legally liable to the investors in order to be indemnified by CGU. If it were required to establish by admissible evidence that it was legally liable, it has adversely affected its capacity to obtain indemnity from CGU. If AMP’s assumption was induced by CGU it would be unconscionable for CGU to depart from that assumption by insisting that AMP establish by admissible evidence that it was legally liable to each investor.

Emmett J noted CGU’s complaint that the estoppel relied on was outside the pleadings but said that the contention advanced by AMP was within the pleadings.

The trial judge did not make a finding in relation to the assumption and detriment for which AMP contended. The mistaken treatment of these issues had caused the trial to miscarry. For that reason the majority ordered that the proceedings be remitted to the primary judge for further consideration.

The questions remitted to Heerey J included whether AMP was induced by CGU’s conduct to assume that if it settled demands on reasonable terms, it would not be required to establish by admissible evidence that it was legally liable to that investor in order to be reimbursed by CGU; if so, whether AMP settled that demand in reliance on that assumption; whether CGU was estopped from asserting that, or whether it would be a want of utmost good faith for CGU to assert that AMP is required to establish by admissible evidence that it was legally liable to that investor in order to be reimbursed by CGU and whether AMP settled that demand on reasonable terms.

DECISION OF THE HIGH COURT

A majority of the High Court (Gleeson CJ, Callinan, Heydon and Crennan JJ, Kirby J dissenting) held that the appeal by CGU should be allowed with costs and the orders of the Full Court of the Federal Court should be set aside.

In a joint judgment, Gleeson CJ and Crennan J agreed with the dissenting decision of Gyles J in the Full Federal Court. Their Honours referred to the fact that the payment of the settlement amounts was not within the terms of the cover provided by the contract of insurance. There were no claims for Civil Liability within the meaning of the contract of insurance. Whilst this was not necessarily fatal to AMP’s right to be indemnified, it was part of the context in which the conduct of CGU was to be evaluated.

Their Honours considered that AMP, for its own commercial reasons adopted a procedure for dealing with investors which was designed to ensure that claims for civil liability within the meaning in the policy were not made. Their Honours noted that it is difficult for notions of good faith to require an insurer to inform an insured before an insured event has occurred, whether the insurer will accept liability if and when it occurs. Delay in accepting or rejecting liability was not the possible breach of the requirement of good faith contemplated by the majority of the Full Federal Court.

Secondly, AMP’s conduct was designed to ensure that CGU did not take over and defend any claim in the name of AMP. AMP was manoeuvring events to serve its commercial purposes of satisfying ASIC, whilst preserving, as best it could, its rights against CGU.

All settlement amounts were paid by AMP between October and December 2001 when it was plain to AMP that CGU was not committing itself to accepting liability to indemnify AMP. On the contrary, CGU was questioning whether AMP was under any liability to investors.

Their Honours accepted that the conduct of CGU in relation to the Protocol did involve a representation by CGU that it would not rely on cl 7.6 of the policy or upon the absence of any formal claim. CGU repeatedly told AMP it should act as a prudent uninsured. However there was nothing in the conduct of CGU which conveyed a representation to AMP that it would not be required to subsequently prove its liability to investors. Further, AMP’s conduct in paying the settlement amounts does not support a conclusion that it relied on any such representation.

Gleeson CJ and Crennan J then considered the requirements of the duty of utmost good faith. Their Honours accepted the wider view of the requirement of the utmost good faith adopted by the majority in the Full Court. That is, it is unnecessary to establish dishonesty to establish a breach of the duty of utmost good faith.

Their Honours noted that an insurer’s obligation of utmost good faith may require the insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. In doing so, their Honours adopted the comments of Stephen J in Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 31. Their Honours accepted that such an obligation may affect the conduct of an insurer in making a timely response to a claim for indemnity.

In relation to s 13 of the Insurance Contracts Act , their Honours said that the Act does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. If s. 13 is breached, this does not, of itself, lead to the conclusion that the insurer is liable to indemnify the insured under the contract of insurance.

Their Honours considered that there was no action on the part of CGU that gave rise to an estoppel. AMP did not enter into the settlements in reliance on any commitment or representation by CGU. Shortly before the settlement amounts were paid between October and December 2001, CGU had indicated to AMP at the meeting on 5 October 2001 that it did not consider that AMP had liability to the investors. The evidence did not support a representation by CGU.

The final issue considered by Gleeson CJ and Crennan J was whether the settlements had been shown by AMP to be reasonable. Their Honours noted that Heerey J considered the limited material available to him and formed a tentative view that s 819(4) of the Corporations Law could have applied. Their Honours noted that senior counsel for AMP told Heerey J that he did not need to read the 30 lever arch files and it was sufficient to observe the pattern of procedures adopted by AMP. Heerey J himself had noted that there was no direct evidence from investors. Bearing in mind the haste and external pressure under which the settlements were made, Gleeson CJ and Crennan J stated that the objective reasonableness of the settlements could not be divorced from the question whether AMP was liable to the investors with whom it settled.

Callinan and Heydon JJ were the other judges comprising the majority. Their Honours analysed the facts of the case and then considered the reasoning of Heerey J. Their Honours held that the findings of Heerey J on the facts were clearly correct. That is estoppel was not made out. AMP had no belief that CGU had accepted liability. On the contrary, it knew that it had not. AMP’s decision to settle with investors was made, not in reliance on any commitment or representation by CGU, but because AMP considered the settlements desirable in their own interests, especially having regard to the attitude of ASIC. The findings of Heerey J were not either within nor relevant to, the questions which the majority in the Full Federal Court said should be remitted to the trial judge.

Their Honours next noted that in the appeal to the Full Court of the Federal Court the parties had disputed the ambit of the issues that had been litigated, AMP contending that Heerey J had failed properly to consider its case in estoppel. Callinan and Heydon JJ stated that the Full Federal Court had dealt very briefly, and without reference to the pleadings with the submission of CGU that the estoppel relied upon by AMP was a marked departure from the estoppel pleaded. Callinan and Heydon JJ held that CGU’s argument was correct and the appeal to the Full Court by AMP should have been dismissed. Their Honours considered that the questions remitted by the Full Federal Court had not been litigated at trial and were not open on appeal.

On the question of whether AMP had made out a case that CGU had breached s13 of the Insurance Contracts Act, their Honours held that it had not.

As had Gleeson CJ and Crennan J, their Honours noted that a lack of good faith is not to be equated with dishonesty. Whilst not attempting a comprehensive definition, their Honours considered the sort of conduct that might constitute an absence of utmost good faith. They said that:
“an absence of good faith may have elements in common with an absence of clean hands according to the equitable doctrine … it invokes notions of reciprocity which are of relevance here. That is not to say that conduct falling short of actual impropriety might not constitute an absence of utmost good faith of the kind which the Insurance Contracts Act demands. Something less than that might well do so. Utmost good faith will usually require something more than passivity: it will usually require affirmative or positive action on the part of a person owing a duty to it.”

Their Honours observed that the conduct of CGU did leave something to be desired. They noted that there was a degree of opportunism on the part of CGU in dealing with the claims against AMP by the investors, particularly in circumstances where CGU would have been aware that AMP might come under pressure from ASIC. However, they also noted that AMP had been just as keen as ASIC to keep the investor claims out of court and to protect their own reputation and goodwill.

Their Honours stated that:
“Temporizing by an insurer can be just as damaging to an insured as outright rejection of a claim. To preserve their businesses, business people often need to act expeditiously.”

After making reference to the Senior Counsel clause in the policy and the fact that AMP had not sought to invoke it, their Honours concluded that even if there was a lack of the utmost good faith on the part of CGU, as to which they made no conclusive finding, there was not such a degree of reciprocal good faith on the part of AMP as would entitle it to relief against CGU.

Kirby J dissented. His Honour analysed the facts of the case, the provisions of the relevant policies, and the pleadings. His Honour then considered the decision of Heerey J and the decision of the Full Federal Court.

Kirby J held that there was no error on the part of the majority of the Full Federal Court in ordering the remitter. The primary judge had erred in his treatment of the issues of estoppel and of AMP’s reliance on s 13 of the Act. Because a proper consideration of those two issues was essential to a just and lawful determination of AMP’s claim to indemnity by CGU, the mistaken treatment of those issues had caused the trial to miscarry.

His Honour next considered CGU’s complaint that the estoppel relied on by AMP was outside the pleadings. Kirby J noted that arguably for CGU to depart from assumptions it induced in the course of its dealing with AMP (including agreement in principle on the Protocol) would amount to unconscientious dealing. Gleeson CJ and Crennan J had rejected AMP’s claim based on estoppel because reliance and representation were lacking. However, Kirby J considered that each of the suggestions had been fully answered by Emmett J and the estoppel argument by AMP was valid. However, His Honour considered that the whole point of the remitter was for the liability of CGU to be properly determined. The remitter should therefore not be disturbed.

In relation to the issue of whether there had been a breach of the duty of utmost good faith, Kirby J first considered what the contents of the duty required. His Honour referred to the fact that s 13 of the Act, being the statement of the general principle as a legal obligation separate from the implication of a provision in a contract, had the effect of introducing larger reciprocal obligations between the insurer and the insured than had previously been the case.

Secondly, His Honour stated that the absence of honesty on the part of the insurer will, if proved, attract the provisions of s 13 of the Act. However, this does not mean that a want of honesty is an essential feature of a want of good faith. His Honour considered that good faith requires timely decisions and clear statements of position on indemnity rather than delay and inaction by insurers. He considered that delay in denying liability can be a breach of the requirement of good faith.

Kirby J then considered the objective reasonableness of the settlements and the question of whether the remitter was futile. He observed that the primary judge was concerned with AMP’s desire to satisfy ASIC and the fact that the settlement of investor demands was dominated by pressure from ASIC. Kirby J noted that Emmett J in the Full Federal Court had analysed the process by which AMP had proceeded to settle the investor’s claims. Kirby J found no error in Emmett J’s process of reasoning save for the conclusion that it was unnecessary for AMP in effecting individual settlements to consider the reasonableness of the settlements as between itself and CGU.

In relation to the application of s 819(4) of the Corporations Law, Kirby J considered that without analyzing the individual claims it was impossible for Heerey J to have reached a justifiable conclusion on the application of s 819(4).

In conclusion, Kirby J summarized the law in relation to the duty of utmost good faith and considered the principle for which the case stands. He stated that:
“…parties to insurance contracts in Australia, unlike most other contracts known to the law, owe each other, in equal reciprocity, an affirmative duty of the utmost good faith. This is so now by s 13 of the Act. In the context of that section, emphasis must be placed on the word “utmost”. The exhibition of good faith alone is not sufficient. It must be good faith in its utmost quality.”

The resulting duty is therefore a mutual duty. The duty is more important than an implied contractual term giving rise to remedies for breach, although, as his Honour noted, by virtue of s 13 it is also that.

Specifically, in the context of this case, Kirby J said that the case stands for the proposition that an insurer cannot tell an insured to act as a prudent uninsured and then allow the processing of claims to proceed to settlement without indicating whether or not indemnity will be granted or denied. It cannot ignore invitations to seek further information or fail to give timely responses. An insurer is required to make up its mind one way or another and not sit on the fence.

IMPACT OF THE DECISION

Duty of Utmost Good Faith

Traditionally the common law requirement that insurer and insured act towards each other with the utmost good faith was recognized in relation to the insured’s duty of disclosure, that is a requirement by an insured to pay due regard to the legitimate interests of the insurer. However, the High Court has now put beyond doubt, that the duty of utmost good faith is a reciprocal duty. It also requires an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests.

The High Court has accepted the wider view of the requirement of good faith. That is, a lack of good faith is not to be equated with dishonesty only. Other conduct short of dishonesty may suffice.

Without attempting a comprehensive definition of the duty, the majority of the High Court has given some guidance in relation to the type of conduct which will amount to a breach of the duty of utmost good faith. This includes conduct which:
is inconsistent with commercial standards of decency and fairness and fails to give due regard to the interests of the insured by an insurer
has elements in common with an absence of clean hands as that term is understood in equity.
falls short of actual impropriety may be sufficient.
Utmost good faith will usually require something more than passivity. It will usually require affirmative or positive action on the part of the person owing the duty

Good faith may also require:
clear, candid and decisive conduct by insureds and insurers
an insurer to make timely decisions
an insurer to make up its mind to either accept or deny indemnity
prompt and business like processing of claims for indemnity
an insurer to consider further information provided by an insured and to respond to further invitations for information from an insured;
to tell an insured to act as a “prudent uninsured” and then to allow claims to be settled without either admitting or denying indemnity.

Because the High Court has not attempted a comprehensive definition of conduct falling short of utmost good faith, and because the High Court has accepted that good faith is not to be equated with dishonesty only, this leaves open for debate what conduct will constitute a breach of the duty of utmost good faith. This opens a wide area of discourse for lawyers.

Once an assessment has been made that conduct could be a breach of the duty of good faith, it may also be necessary to assess that breach of duty in light of all the circumstances of the case. Has there been such a degree of reciprocal good faith on the part of the party seeking to rely on the breach of good faith, as would entitle it to relief against the party in breach?

Section 13 Insurance Contracts Act – consequences of breach

Section 13 of the Insurance Contracts Act implies into a contract of insurance a provision to the effect that the parties act towards each other in respect of any matter arising under or in relation to he Policy, with the utmost good faith. The section provides that:
“A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.”

The consequences of breach of s 13 of the Insurance Contracts Act remain unclear particularly in circumstances where an insurer would not otherwise by required to indemnify an insured under the insurance contract. Gleeson CJ, Crennan J and Kirby J all speak of s 13 as imposing a duty beyond an implied contractual term. Kirby J refers to the duty as being more important than a term implied in the insurance contract giving rise to remedies for breach, although he acknowledges that by s 13, it is also that. The question arises, if the duty of utmost good faith is something beyond an implied contractual duty, as Gleeson CJ and Crennan J observed,
“how does a breach of the requirements of s 13 form part of a principled process of reasoning leading to a conclusion that the insurer is liable to indemnify?”

Is it possible for a breach of s 13 to be used to impose additional obligations to indemnify on an insurer which would otherwise vary the express terms of the contract? The Act does not authorize a finding of liability against an insurer as a punitive measure for not acting in good faith. So arguably a breach of s 13 is not necessarily a breach of the Act. That is, s 13 does not create a separate and distinct cause of action.

However, the comments by Gleeson CJ and Crennan J, and Kirby J which refer to s 13 as imposing an overriding duty of utmost good faith beyond an implied contractual term, suggest that a breach of s 13 could also be a breach of the Act. This is far from clear. Even if a breach of s 13 was a breach of the Act, it would not necessarily mean that an insured could succeed in an action for breach of statutory duty. Nor would it establish the requisite link between the breach of statutory duty and the requirement to indemnify.

It might perhaps be queried whether it is necessary to even consider causes of action for breach of statutory duty when implied into the contract of insurance is a provision requiring each party to act towards the other party with the utmost good faith. Breach of this provision gives rise to a remedy of damages for breach of contract. That being so, it may be queried whether it was correct to say that the estoppel argument was crucial if AMP was to get to first base, in the face of the terms of the policy.

Even if AMP could not have established a breach by CGU of the express terms of the contract, should it not have been sufficient for AMP, to sue for breach of the implied term of the contract requiring the parties to act towards each other with the utmost good faith? Delay in conferring or denying indemnity may be a breach of the duty of good faith. This means that an insurer who has delayed in conferring or denying indemnity, but which otherwise has a valid defence to a claim, may be required to indemnify an insured.

Under the proposed Insurance Contracts Act Amendment Bill 2007, it is proposed that a failure by a party to a contract of insurance to comply with the provision implied in the contract of insurance by subsection (1) of s 13 of the Insurance Contracts Act will be a breach of the requirements of the Insurance Contracts Act. Such a breach will not be an offence and there will be no penalty for breach. The proposed amendments will put beyond doubt that a breach of s 13 is a breach of the Act.

Effect of settlement by insured without consent

The decision also makes it clear to insureds that, if liability of an insured to third parties is at issue, if an insured settles a claim without consent, there is a risk for the insured that the insurer will not provide indemnity. This is so particularly where the insured cannot demonstrate the insured’s liability to third parties and the objective reasonableness of the settlement. So, it seems, insureds will need to be able to establish, by admissible evidence, their liability to third parties.

Kirby J seems to suggest that if an insurer’s interests are taken into account and an insurer is given ample opportunity for presentation, consideration and discussion of material put forward by an insured, it should be reasonable for an insured to settle without consent. Despite this, the practical question remains for both insurers and insureds, when will it be reasonable for an insured to settle without consent?

When will a settlement by an insured without consent be reasonable?

There are many situations similar to the fact situation in the CGU v AMPFP case which can be envisaged. For instance it is usual for finance companies with businesses like AMP’s, to take out liability policies covering them in respect of negligent advice to investors. In determining whether a settlement is reasonable, there will always be a degree of tension between the insured’s commercial interests in not wanting matters to be litigated and for a quick resolution with third party investors on the one hand and an insurer’s right to deny liability on the other hand. One view is that if an insured can establish liability to third party investors, then commercial considerations are not relevant. However, it is not that simple, particularly in a climate where ASIC, APRA or regulators are involved. Practically speaking, there is no simple answer. To assess the reasonableness of a settlement will of necessity require consideration of all the circumstances of each case.

What evidence is required to establish that a settlement reached by an insured without an insurer’s consent is reasonable?

The further subsidiary issue is the extent of evidence an insured will be required to produce to establish that it is liable to third parties, such that a settlement with such third parties was reasonable. This is a difficult question. Heerey J at first instance suggests that direct evidence from investors was required, particularly where a defence might otherwise be available to the insurer.

Senior Counsel Clauses

One final matter alluded to by Callinan and Heydon JJ was the importance of the senior counsel clause in the policies. Their Honours noted that the senior counsel clauses were not invoked. Their Honours noted that AMP could have sought to use these clauses but it chose not to. For its own commercial reasons, AMP did not want to litigate investor claims. To do so would no doubt have undermined AMP’s strategy of avoiding legal proceedings. However, the failure to invoke the clause was at least part of the circumstances which Callinan and Heydon JJ considered needed to be balanced against any conduct on the part of CGU when assessing whether AMP was entitled to rely on an argument that CGU had breached its duty of good faith. In future, in order to demonstrate the requisite degree of reciprocal good faith, parties may need to have invoked such clauses.

Anna Robertson is a barrister on Greens list practising at the Victorian Bar in civil and commercial litigation including insurance law. She gratefully acknowledges the input of Nicole Wearne, Partner, Deacons, in the preparation of this paper.
[98]-[105] per Kirby J
Gleeson CJ and Crennan J at [17]
ibid at [22]
supra at [8]
supra at [10]
supra [15]
supra [16]
supra [17]-[22]
supra [26]-[29]
Callinan and Heydon JJ at [184]-[237]
supra [244]-[250]
supra [249]
supra [251]
supra at [257]
ibid
Callinan and Heydon JJ at [258]
[261]
Kirby J at [45]-[75]
supra at [83]-[86]
supra at [87]-[91]
supra at [98]-[105]
supra at [106] and following
supra at [120]
supra at [127]
supra at [129]-[131]
supra at [139]
supra at [136]
supra at [148]
supra at [167]
supra at [176]
supra at [177]
supra at [178]
Supra at [179]
Gleeson CJ and Crennan J referring with approval to Stephen J in Distillers (Co) Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; Kirby at [127]; Callinan and Heydon JJ at [257]-[258] and [261]
Gleeson CJ and Crennan J at [15]; Kirby J at [136]-[137]; Callinan and Heydon JJ at [257]
Callinan and Heydon JJ at [257]
Gleeson CJ and Crennan J at [15]
Callinan and Heydon JJ at [257]
ibid
supra
Kirby J at [72]
Gleeson CJ and Crennan J at [15]; Kirby J at [134]; Callinan and Heydon JJ at [259]
Kirby J at [180]; Callinan and Heydon JJ at [259]
Kirby J at [139]
Kirby J at [179]
ibid
Callinan and Heydon JJ at [259]
Gleeson CJ and Crennan J at [16]; Kirby J at [127]
Kirby J at [178]
Gleeson CJ and Crennan J at [16]
Kirby J at [113]
Schedule 1, Part 1 of the Insurance Contracts Act Amendment Bill 2007
Kirby J at [146]
Note s 819(4) Corporations Law has been amended