Australia: Accessing the deep pockets - when will a court let others inspect your liability insurance policy?

Last Updated: 14 July 2011
Article by Fred Hawke

In recent Alerts we have been following a number of cases that have dealt with applications by claimants and potential claimants for access to details of liability insurance held by a defendant or target defendant.

A number of these cases arise from actions falling out of the GFC, including the class actions and other litigation involving Lehman Brothers, Great Southern and Centro. They have involved claimants bringing applications for access to Directors and Officers (D&O) liability policies and other liability insurance, such as civil liability and professional indemnity insurance, usually for the purpose of assessing whether to commence or proceed with litigation by determining if there are funds available to meet their claim.

The success or failure of attempts to access D&O and related insurance policies has depended upon the basis for the claimant's application. In the last few years we've seen courts allow – and refuse – third parties to inspect liability insurance policies. We are seeing a trend emerge from recent cases suggesting that claimants and potential claimants in shareholder actions are likely to have an advantage over other litigants by reason of section 247A of the Corporations Act 2001 (Cth). That trend has been confirmed by the recent Federal Court decision in London City Equities Limited v Penrice Soda Holdings Limited [2011] FCA 674.

The Usual Rule

The usual rule is that a defendant is not required to disclose or provide access to a claimant or potential claimant of liability insurance policies that the defendant holds. This is because a defendant's insurance arrangements – as with any other information regarding the defendant's financial position – are considered to be confidential and commercially sensitive, and generally not relevant to any issue in the litigation (such that it should be required to be disclosed as part of the discovery process in the litigation). There are some limited exceptions to this usual rule, but the Courts have historically been reluctant to require a defendant to disclose its insurance position.

Why London City Equities got access to the D&O policies

London City Equities Limited is a shareholder of Penrice. It had some concerns about Penrice and applied to inspect various books of Penrice under section 247A. Included in the application were all documents "recording, referring or relating to Penrice's Directors and Officers insurance policies for the periods from 1 July 2008", as London City Equities was contemplating suing some of the directors.

Under section 247A, a shareholder can seek access to inspect a company's books. The Court can allow that access if the applicant is acting in good faith and the inspection is to be made for a proper purpose.

Penrice argued that it should only be ordered to produce documents concerning the investigation of the facts potentially in issue – that is, whether London City Equities had a legitimate case. The D&O policies, on the other hand, would only reveal the financial position of potential defendants rather than shed light on any facts potentially in issue – that is, it would only reveal to London City Equities whether, financially, it was worth commencing litigation. Penrice argued that in deciding whether to grant London City Equities access to the information sought, the Court should take into account confidentiality concerns and the possible "magnet" effect in other potential litigants following suit.

Justice Robertson reviewed the previous cases dealing with section 247A, specifically Re Style Limited and Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed). In both cases, shareholders were given access to inspect D&O policies because the scope and nature of the cover were considered to be relevant factors in any decision as to whether to sue the directors. As Justice Le Miere explained in Snelgrove, courts try to avoid time and money being wasted in litigation. Allowing possible plaintiffs to have access to a defendant's insurance information before deciding whether or not to sue could avoid the situation where litigation is commenced that is ultimately a waste of time and money. According to Justice Le Miere that supported the finding that access was required for a proper purpose under s247A.

Justice Robertson agreed. However, his Honour considered that the category of documents to which access was sought was too wide. Instead of all documents relating to Penrice's D&O policies, London City Equities was allowed to inspect Penrice's D&O insurance policies for the period from 1 July 2008 to the present date.

Why have other cases not succeeded?

The key difference between cases such as Style, Snelgrove, and London City Equities, on the one hand, and Kirby and Lehman Brothers on the other, is the route available to the applicants.

In the successful cases, the applicants were shareholders, and could therefore rely on section 247A. In the unsuccessful cases, the applicants either argued for access based on traditional discovery rules or, in Lehman, made a novel argument about the need to grant access to avoid a possible abuse of process.

The rationale behind the finding that the shareholder applicants were entitled to access and were acting in good faith and for a proper purpose under section 247A included the fact that giving access is consistent with the court's objective of avoiding wasted of time and money in litigation. Although these considerations apply to any litigation, it appears that shareholder claimants have been afforded a special advantage by reason of section 247A.

Given this trend, we anticipate that litigation funders will view shareholder class actions as the more certain way to get access to D&O and other liability insurance policies, and obtain information that is crucial to making an assessment of the commercial viability of a class action.

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