24 Oct 2013
Class actions undercut by insurance
by Fred Hawke, Mark Waller
The court held each class action plaintiff's claim was a separate claim, and subject to the claim excess under the policy.
It is possible for a successful class action to turn out to be almost worthless, according to a new Federal Court decision (Morgan, in the matter of Brighton Hall Pty Ltd (in liq)  FCA 970).
The Court held that, where damages were payable out of a defendant's insurance, each class action plaintiff's claim was a separate claim. This meant that each claim was subject to the claim excess under the policy.
Brighton Hall was a financial services company. It advised some clients to invest in Westpoint. When Westpoint collapsed, some of those clients began class actions against Brighton Hall for negligent advice. Brighton Hall claimed indemnity from its PI insurer in respect of the class action claims.
By now under the control of liquidators, Brighton Hall arrived at a settlement with its insurer. Under that settlement, the insurer agreed to pay the full policy limit of $2 million on the condition that the liquidators were to distribute that money in accordance with section 562 of the Corporations Act. If there was any money left over, it was to be repaid to the insurer.
The Court was asked for directions on two points:
- did the class actions give rise to one claim or multiple claims under the insurance policy?
- could the liquidators recoup their remuneration out of the insurance money?
One claim or multiple claims?
Under the insurance policy, the insurer's liability for "each claim" was limited to the excess over the deductible. The insurer said that, although the payout was in response to two class actions, those class actions each involved multiple "claims" within the meaning of the policy (each of which would, therefore, be individually subject to the deductible).
Two arguments were raised against this:
- each class action was a single "claim" within the meaning of the policy;
- if each class action was not a single "claim", all the individual claims could be aggregated within the terms of the policy which provided that "all claims that arise from any one act, error or omission, or series of related acts, errors or omissions, are deemed to constitute one claim".
The Court rejected both arguments.
It held that the very nature of a class action was that there were multiple claims:
"[T]he whole essence of the representative claim is that there are multiple claims before the Court. The character of each claim is not changed by the proceeding which embraces it. The representative proceeding is simply designed to facilitate an efficient and cost-effective way to resolve multiple individual claims. "
The argument that these individual claims should be aggregated under the policy foundered because the test for whether multiple claims can be brought together in a class action was a lot looser than the insurance policy's requirement that the claims "arise from any one act, error or omission, or series of related acts, errors or omissions":
"Although it might be said that inclusion of the Westpoint products on [Brighton's 'Approved Product List'] or even orally recommending those products consistently to clients of the Company might be a common feature, there were different products, different clients, different times of investment, different circumstances of taking advice, different levels of investment and perhaps most importantly, different circumstances and times and amounts of sustaining loss. Without the loss, there can be no cause of action in each instance."
This decision has potentially major significance for class action claimants, litigation funders and insurers. To take an extreme example, in the English case of Standard Life Assurance Ltd v Oak Dedicated Ltd & Ors  EWHC 222 (Comm), the effect of inability to aggregate underlying claims against an insurance policy deductible meant that the company which settled these claims for over £100 million had effectively no insurance protection, even though it had purchased £75 million of cover. The £25 million self-insured retention applied to "each and every claim and/or claimant".
Since many companies rely on their liability insurances in the event of class actions, and likewise the successful plaintiffs and their litigation funders, the excess aggregation language assumes critical importance. The widest-reaching wording based on the cases, which is generally available in the financial liability insurance markets, is that which applies one excess in respect of all claims or losses "arising out of or in connection with a single source or originating cause."
While the operation of any insurance term will depend in some part on the facts of the case, clearly this formula offers a much better prospect of applying only one excess to accumulated class action claims. Policyholders who may be at risk of class actions should review their liability insurances and, if in doubt, obtain advice on the aggregation language used.
(And, for the record, the Court also held that, where the insurance proceeds are virtually the only assets available, a liquidator's remuneration is payable out of the proceeds as a priority ahead of claimants – another blow to claimants.)
You might also be interested in...