25 Mar 2010

Clearer guidance on when third parties can access corporate insurance policies

Shareholders or members of managed investment schemes who need to know if it makes financial sense to sue a company and its directors will take comfort from the recent decision in the Western Australia Supreme Court, Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed) [2010] WASC 51, which allowed plaintiffs to access the insurance policies of the company to assess the viability of legal action.

We've been following this issue for some time now, first with the Style decision, in which a shareholder was granted access, followed by two more cases, Lehman Brothers and Centro, in which access was denied to investors.

In Snelgrove, members of a managed investment scheme sought access to the scheme's insurance policies. The liquidators of the scheme had four arguments why the court should refuse the application:

  • the plaintiffs did not have standing to bring the application
  • the insurance policies providing indemnity to the responsible entity or its officers were not books of the scheme managed by the responsible entity
  • the use of section 247A of the Corporations Act to access such insurance policies was not a "proper purpose" within the meaning of section 247A; and
  • it is not appropriate in the circumstances that the court exercise its discretion in favour of the plaintiffs.

The court held that:

  • as the scheme had not been wound up, the plaintiffs were still members of the scheme and had standing to bring the application
  • "books of the scheme" should be given a broad construction so as to facilitate the inspection of documents relevant to the affairs and interests of the Scheme. Insurance policies which may respond to the plaintiffs' claims are for the benefit of the members as well as the responsible entity. The documents constituting or evidencing the insurance policies are not distinct from the affairs of scheme members
  • it is a proper purpose to inspect the company's books for the purpose of investigating whether there are good grounds for seeking to bring a derivative action or a personal action against the company. Here, the plaintiffs wanted to assess the financial viability of pursuing their proposed action against the company
  • as knowledge of the insurance policies and the cover would help the plaintiffs in deciding whether to launch their action, an order giving them access to the policies would prevent the resources of the parties and public resources being wasted. It was therefore appropriate for the court to exercise its discretion to make the order.

What this means for insurers and corporate insureds

For potential plaintiffs, particularly in a securities class action, insurers, and corporate insureds, this is another straw in the wind in the emerging trend of plaintiffs (and litigation funders standing behind them) attempting to access corporate insurance policies.

It's worth pointing out one of the key factors for the WA Supreme Court here in exercising its discretion to grant the application - the need to ensure case management is just, quick and cheap - is a factor in many - but not all - jurisdictions. Another court in another State might not be so swayed by that consideration.

Snelgrove is certainly not the last word on the issue, and we'll continue to monitor future developments in this important area.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.