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Class action constituted multiple ‘claims’ for purposes of civil liability insurance policy, leading to multiple retentions and effectively no cover

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21 Nov 2018

Bank of Queensland Ltd v AIG Australia Ltd [2018] NSWSC 1689 (6 November 2018)

In brief

  • A bank settled a class action suit against it by investors in money market deposit accounts.  The bank then sought indemnity under a civil liability insurance policy, seeking the loss and defence costs incurred in defending and settling the class action.
  • The court held that there were multiple “claims” under the policy, hence multiple retentions (deductibles), which in effect meant that the insurers had no liability to make any payment to the bank.
  • Although the decision turns on the wording of the particular policy, it still has significant implications for any entity that may become a defendant to a class action, and may find that it is not covered by insurance for a considerable liability in damages or legal costs.

Background

The Bank of Queensland (the Bank) offered customers a product known as a “Money Market Deposit Account” (MMDA) between March 2004 and January 2013. The bank worked through an agent, which in turn offered the MMDAs to customers through independent financial planners.  Each customer nominated an authorised signatory, which was usually the financial planner.  One such financial planner was Sherwin Financial Planners Pty Ltd (SFP), which went into liquidation on 27 February 2013.

Between 10 March 2004 and 24 January 2013, SFP advised at least 192 customers to deposit funds in MMDAs issued by the Bank.  The customers claimed that they were unable to recover the funds deposited to their MMDAs and that, in effect, SFP was operating a “Ponzi” scheme and had misappropriated those funds. 

On 11 March 2016, Petersen Superannuation Fund Pty Ltd (Petersen) began representative proceedings (commonly known as a “class action”) on behalf of itself and 191 other persons against the Bank and its agent in the Supreme Court of New South Wales.  Petersen alleged that the defendants had permitted withdrawals which were wrongful for a variety of reasons, including accepting instructions by email (not permitted by the Bank’s own mandate documents), or by persons who were not authorised signatories, or in other circumstances which should have aroused suspicion, or after the Bank had notice of SFP’s fraud.

The representative proceedings were settled at mediation on the basis that the Bank and its agent each pay A$6 million to Petersen (on its own behalf and on behalf of the other 191 represented persons who had signed a Class Member Registration Form).  The legal representatives of the parties executed Heads of Agreement on 26 February 2018 and a Deed of Settlement on 28 May 2018 documenting the settlement.

Claiming on the policy

The Bank sought indemnity under its civil liability insurance policy, seeking payment of the “Loss” and “Defence Costs” it incurred in defending and then settling the Representative proceedings.  The insurers rejected the claim, and the Bank commenced proceedings against them in the Supreme Court of New South Wales.[1]

The insurers defended the proceedings on the basis inter alia that the representative proceedings consisted of 192 separate “claims” for the purpose of the insurance policy, each of which was subject to a retention (deductible) of A$2 million, thus the effective result of the defence would be  that the Bank was not entitled to any payment under the policy.

The terms of the policy

The insuring clause in the Policy stated: “The Insurer shall pay on behalf of each Insured all Loss and Defence Costs resulting from any Claim first made during the Policy Period for any Wrongful Act.

Clause 2.2 of the policy provided that a “Claim” included “any suit or proceeding”, and “any verbal or written demand from any person that it is the intention of the person to hold an insured responsible for the results of any specified Wrongful Act”.  

The chausette to clause 2.2 contained an aggregation and disaggregation clause:

For the purposes of this policy all Claims arising out of, based upon or attributable to one or a series of related Wrongful Acts shall be considered to be a single Claim; conversely where a Claim involves more than one unrelated Wrongful Act, each unrelated Wrongful Act shall constitute a separate Claim.”

The definition of Wrongful Act included any act or error or breach of duty or omission or conduct “committed or attempted or allegedly committed or attempted by or of the Insured”.

The retention clause provided that the Insurer would only be liable for the amount of Loss and Defence Costs “arising from a Claim” which was in excess of the retention, which was stated in a schedule as being $2 million.

Determination - the class action registration forms each constituted a “claim”

The Bank’s proceedings were heard before Stevenson J. 

His Honour first considered the definitions of Claim in the policy.  One of these referred to a “suit or proceeding” (singular).  Stevenson J held that the representative action was a suit or proceeding and thus constituted only one “Claim”, notwithstanding the fact that it was brought by multiple parties.

However, each of the 191 represented plaintiffs had signed a Class Member Registration Form, by which they signified their agreement to join the Representative Proceedings, and in which each was described as “the Claimant” and set out the particular amount of its claim.  Stevenson J held that each of these forms constituted a separate “Claim” under the policy, being a written demand showing an intention to hold the insured responsible for a wrongful act.

Thus, his Honour concluded that there was a “Claim” constituted by the Representative Proceedings, and a further 192 “Claims” constituted by each of the Class Member Registration Forms.

The aggregation clause – meaning of “series of related wrongful acts

Stevenson J also found an alternative basis for finding in the insurers’ favour, being the operation of the aggregation/disaggregation clause found in the chausette to clause 2.2:

For the purposes of this policy all Claims arising out of, based upon or attributable to one or a series of related Wrongful Acts shall be considered to be a single Claim; conversely where a Claim involves more than one unrelated Wrongful Act, each unrelated Wrongful Act shall constitute a separate Claim.”

It was thus necessary for the Bank to show that the acts upon which the claims were based were “a series of related Wrongful Acts”, in order for the court to find that there was only one retention or deductible.   

The parties were unable to direct Stevenson J to any authority which had considered an aggregation clause in precisely the same terms.  His Honour referred to authority that for events to be in a series, they must have more than “mere contiguity of time or place”; and must share an “integral relationship”.[2]

His Honour also noted the judgment of the UK Supreme Court in AIG Europe Ltd v Woodman,[3] that in the phrase “series of related matters or transactions”, use of the word ‘related’ implies that “there must be some interconnection between the matters or transactions”.  His Honour also noted United States authorities on aggregation clauses holding that claims are “related” if there is a “logical or causal connection” between them.[4]  Australian academic authority suggested that “there must be a unifying factor or common cause no more remote than the act or omission that actually constituted the cause of action”.[5]

Stevenson J disagreed that all the impugned withdrawals from the MMDAs shared such a logical or causal relationship.  They did share a common factor in that all occurred within the broader fraudulent scheme perpetuated by SFP, but his Honour held that this was a factor more remote than the Wrongful Act required by the Policy.

The impugned withdrawals were alleged in the pleadings in the Representative Proceedings to be wrongful for different reasons: (i) some had been in response to instructions by email which was not an authorised mode of instruction in the Bank’s MMDA documentation; (ii) others were made on instructions from persons who were not Authorised Signatories; (iii) others were said to be suspicious instructions that should have been questioned; and (iv) still others were said to have been made after the Bank acquired knowledge of the fraud.

His Honour thus held that the mere fact that wrongful acts occurred within the broader, more remote scheme of a fraudulent practice was not sufficient to aggregate the Claims.  The result was that the Bank would have to forego a retention or deductible on each claim of $2 million, which meant in practical terms that it would receive no payments from the insurers.

Implications

  • Insureds who are at risk of being the recipient of a class action should carefully consider the terms of their policy, in particular the basis on which a retention (deductible) applies. 
  • As this decision demonstrates, an insured may be left with effectively no cover at all, if the wording of the policy means that every participant in the class action counts as a separate claim.  
  • Careful attention to policy wording by insureds and brokers is required, particularly during a period where banks and other financial institutions are coming under increased observation and criticism.

[1] The defendants were the lead insurer AIG Australia Limited and a following insurer Catlin Australia Pty Ltd under a Civil Liability Insurance Policy issued on 10 September 2012.  By the time of the trial, the Bank had settled with another following insurer, Zurich Australian Insurance Limited.

[2] See e.g. Attorney-General v Cohen [1937] 1 KB 478 at 490 per Greene LJ

[3] [2017] UKSC 18; (2017) Lloyd’s Rep IR 209 at [19]

[4] American Automobile Insurance Co v Grimes 2004 US Dist LEXIS 1696 at [6]-[7]

[5] D K Derrington and R S Ashton in The Law of Liability Insurance (3rd ed, 2013, Lexis Nexis Butterworths) at [8.486]-[8.488]