Unless there is an express contractual right to do so, an insurer which has paid part of an insured's loss does not have authority to conduct and control the insured's right to recover their entire loss, both insured and uninsured (Johnston v Endeavour Energy  NSWSC 1117). In this case, this meant that insurers were not authorised to file opt out notices for over 550 of their insureds to remove them from an existing class action and commence their own class action including the claims by those insureds.
As insurers will look to include this right, policyholders should be cautious of insurance policy wordings which seek to confer broad recovery rights upon an insurer, particularly where the value of uninsured loss may be significant and when control of the recovery action may affect priorities if the amount ultimately recovered is not sufficient to fully recover both the insured and uninsured losses.
Opt out notices filed by insurers
In May 2014, a representative proceeding was commenced by Mr Johnston against Endeavour Energy for damages arising from the 2013 Blue Mountains bushfires (the Johnston proceedings).
On 10 October 2014, the legal representatives for Insurance Australia Group Ltd and other related insurers filed notices purporting to opt out 565 identified individuals and entities that they insured from the Johnston proceedings.
They then did two things:
- they sent letters to the insureds noting the opt out and asserting that the insurers were entitled to, and better placed to, conduct the recovery action; and
- commenced a second representative proceeding against Endeavour Energy, with their insureds as group members, seeking recovery for both insured and uninsured losses arising from the bushfires (the Insurer proceedings).
The central issue before the Court was the validity of the opt out notices. The insurers asserted contractual rights under the policies which enabled them to authorise the execution and filing of the opt out notices and commence the Insurer proceedings for both insured and uninsured losses.
Insurers’ entitlement to recover uninsured losses generally
Justice Garling held that under the general principles of subrogation (absent any express contractual terms to the contrary):
- unless an insurer had fully indemnified an insured for all losses arising from an event, the insured remained "dominus litis" and retained the right to commence and control recovery proceedings for both insured and uninsured losses free from interference by the insurer;
- in those circumstances the insurer has an equitable interest by way of a lien over the monies recovered by insured;
- if an insured has the conduct of recovery proceedings which include losses paid by the insurer the insured will be obliged to have proper regard to the insurer's interests when conducting the action; and
- the insurer's rights do not include the right to claim any sum of money in excess of the amounts paid by the insurer. As a result, the insurers had no entitlement to recover any uninsured losses, nor to opt out the insureds from the Johnston proceedings in circumstances which limited the opt out to the amount paid by insurers, as that is not permitted under the representative proceedings regime in New South Wales.
Did the insurance policies give these rights to the insurer?
The next question was whether the insurance policies gave the insurers the express right to opt out in respect of claims covering both insured and uninsured losses.
The 24 types of insurance policies were grouped as follows:
- seven policies covering a small number of group members. It was conceded the Insurers had the authority under these policies to execute and file the opt out notices;
- eight policies covering over 550 group members (Group 1 policies); and
- nine policies covering another small set of group members (Group 2 policies).
The Group 1 policies did not contain any clauses by which the insured assigned their rights or contractually authorised the insurers to take proceedings against a third party covering uninsured losses. Two policies contained clauses giving the insurer the right to decide if it would recover any uninsured losses for the insured, but only where the insured had notified the insurer of the uninsured loss, requested that the insurer recover those losses and entered into an agreement about the recovery of the losses. The Court found that as there was no evidence that any of those pre-conditions had been satisfied in relation to the Group 1 policies (covering the majority of the group members who were opted out), the insurers had no contractual right to claim uninsured losses and were not entitled to opt out the insureds.
In contrast, all but one of the Group 2 policies gave the insurer “rights to claim from anyone else” for an incident or event covered under the policy. Justice Garling construed this broadly as an assignment of the insureds’ rights of recovery against third parties in respect of both insured and uninsured losses. These policies therefore authorised the insurers to opt out of the Johnston proceedings and commence their own proceedings for both insured and uninsured losses. However, he warned that:
"Such an interpretation will undoubtedly have the effect of placing onto the insurer some significant obligations owed to the insured with respect to litigation in which claims are made for losses over and above that which the insurer has paid. Such obligations would include but not be limited to obtaining the agreement of the insured to any settlement proposal."
Practical implications for policyholders and insurers
Following the decision, it is likely that insurers will seek to amend their policy wordings to give them broad recovery rights, including the right to recover both insured and uninsured loss. In doing so, insurers will need to be mindful of Justice Garling's warning and ensure that they act towards the insured with utmost good faith.
Policyholders should carefully consider any wording which (explicitly or as a matter of construction) amounts to a complete assignment of rights or gives the insurers the right to pursue recovery of all losses, and seek to negotiate appropriate terms to protect their rights in respect of uninsured losses.
Policyholders should also note the potential implications of giving their insurers a broad right to pursue recovery on their behalf. Under section 67 of the Insurance Contracts Act 1984 (Cth), priority to recovered amounts depends upon whether the amount is recovered by the insurer, the insured or the insurer and insured jointly. The current section 67 was introduced in 2013 and the operation of the clause where an amount is recovered by the insured as a group member of a representative proceeding is yet to be tested.
For class actions, this decision will make it more likely that corporate defendants will only have to face one large, consolidated action, rather than splintered claims, making management of their defence somewhat easier.
There are two matters that still might lead to further dispute as a result of this decision, however.
First, the Court held that unless an insurer had fully indemnified an insured for all losses arising from an event, the insured retained the right to commence and control recovery proceedings for both insured and uninsured losses free from interference by the insurer. It is unclear if this principle applies where the only loss not insured is the excess payable by the insured.
Secondly, where the insurer has an equitable interest by way of a lien over the moneys recovered by insured, but the amount recovered is not sufficient to cover the insured and uninsured losses, the insurer's lien will no doubt be subject to priorities created by statute or under the insurance policy.