Australia: The final(?) chapter in the HIH Claims Support saga - HIH Claims Support v Insurance Australia Ltd [2011] HCA 31
corporate risk and insurance update

By Ryan Lynch and Ray Giblett of Gadens Lawyers, Sydney

• The High Court has delivered the final blow to HIH Claims Support's long running contribution claim
• In rejecting the claim, the High Court confirmed the orthodox approach that the parties must share a 'common burden'

In our October 2009 Corporate Risk and Insurance Update, we discussed the long running saga of HIH Claims Support Ltd v Insurance Australia Ltd [2009] VSC 434 ( update). It involved a claim for equitable contribution by HIH Claims Support Limited (HCS), a scheme created by the Commonwealth Government to assist insureds affected by the collapse of the HIH group of insurance companies (HIH). In what is presumably the death knell for the claim, on 22 August 2011 the High Court dismissed HCS's appeal.

The collapse (scaffolding, not HIH)

When scaffolding collapsed causing damage to an expensive "Jumbotron" video during the 1998 Melbourne Grand Prix, Ronald Steele (Steele) was found liable for damages arising from the incident. Mr Steele had the benefit of cover under general liability policies issued by HIH and Insurance Australia Limited (IAL). He sought cover under the HIH policy and was granted indemnity just before the 2001 HIH Group collapse. Consequently, he sought assistance from the scheme. HCS provided that assistance but on the condition that Mr Steele assign to HCS his rights, including his right to prove in the liquidation of HIH.

HCS unsuccessfully sought contribution from IAL in the Supreme Court of Victoria and Victorian Court of Appeal and was subsequently granted leave to appeal to the High Court.

The last chapter

The appeal proceeded on the basis that the Victorian Court of Appeal erred in its characterisation of the relevant liabilities between the parties. It was also argued that the relationship between HCS and IAL was a "shared community of interest" and that it would be inequitable for the respondent to escape liability to contribute just because HCS had assumed responsibility for an insolvent insurer. HCS submitted that the facts in this case justified a "controlled departure" from the established principles of equitable contribution.

The High Court dismissed the appeal. In a joint judgment, Gummow ACJ, Hayne, Crennan and Kiefel JJ (Heydon J delivered a separate judgment also dismissing the appeal) applied the earlier High Court decision of Friend v Brooker [2009] HCA 21 and held that a duty to contribute applies where obligors are under a common burden or common obligation. It was held that the assignment of the insured's rights did not place the appellant in the same position as HIH. Under the scheme, HCS did not step into the shoes of HIH; rather, it stepped into the shoes of Steele, thereby entitling HCS to lodge a proof of debt in HIH's liquidation.

In relation to HCS's argument that the facts in this case justified a "controlled departure", the High Court found that no court before it had departed from the requirement that equitable contribution depends on obligors bearing a common burden. They went on to state that the proposition upon which HCS relied, namely that equity looks to substance rather than form, has never been invoked successfully to achieve a departure from, or modification of, that core requirement.

In short, the High Court held that the obligations of HCS to Steele under the scheme were not of the same nature and extent as the obligation of IAL in its capacity as co-insurer of HIH, the reasoning of which was distilled into three distinct categories:

• There was no common interest or common burden between the appellant and the respondent because, had Steele claimed indemnity from IAL before HIH, Steele and IAL would have been precluded from claiming a benefit from HCS and the potential for co-ordinate liability would never have arisen.
• Since HCS undertook no enforceable obligations under the scheme until a payment was made, IAL would never have had an opportunity to bring a claim for contribution against HCS.
• Since HCS's offer to indemnify Steele was conditional upon Steele's assignment of his rights under the HIH policy, the risk undertaken by HCS could not be described as the same risk undertaken by IAL.

The High Court's orthodox approach to equitable contribution would seem to confirm that equity will not intervene in the absence of a common burden. However, in what is seemingly a departure from the orthodox approach, the New South Wales Court of Appeal recently found in favour of equitable contribution despite the 'burden' involving two separate insureds¹. Whether the New South Wales authority survives after the High Court's decision is a matter for debate.

Closing the book

Whilst unanimously agreeing to dismiss HCS's claim, the various courts have placed differing emphases on notions of fairness and equity. The decisions do no detract from each other but rather highlight a range of important issues in dual insurance and equitable contribution cases.

In the first instance decision, the emphasis was on the important primary/secondary distinction between a contract of indemnity and a contract of insurance. The Court of Appeal placed weight on the importance of looking to outcomes and considering the commonality of interest, burden or risk in respect liabilities. The High Court decision highlighted that no court before it has departed from the requirement that equitable contribution depends on obligors bearing a common burden.

As discussed in our October 2009 update, it is important to remember that a contract of indemnity ordinarily amounts to a primary obligation whereas a contract of insurance generally constitutes a secondary obligation.Before claiming, it is wise to closely examine whether liabilities are truly co-ordinate in terms of the identity of the insured and the nature of the loss or liability being indemnified against. Further, caution should be exercised when settling claims if relying upon a potential claim for contribution (i.e. ensure the right of contribution is not illusory). This is particularly so in circumstances where the obligations in question are qualitatively different.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.

¹ Zurich Australian Insurance Ltd v GIO General Ltd [2011] NSWCA 47