Australia: Duelling Indemnities: HIH continues to have impact: case law on equitable contribution

Insurance Update March 2012

HIH Insurance Ltd was notorious for its claims management approach to third party claims litigation with a fierce reputation for not being afraid to test the boundaries of legal principle. As a result the law reports are replete with significant superior court decisions in which HIH companies or their insureds feature in the development and understanding of Australian law and insurance law in particular. The group in liquidation has continued to add to the development of legal principle in the areas of insolvency law, reinsurance law, directors' duties, shareholders rights: the list goes on. Its most recent contribution arises out of the remnants of the Dragon Scaffolding case following the Federal Government's bailout of the HIH group. In the latest High Court case, HIH Claims Support Scheme (HCSL) has sought to extend the law in relation to equitable principles of dual insurance.

The decision of the High Court in HIH Claims Support Ltd v Insurance Australia Ltd [2011] HCA 31 (the HCSL case) provides a useful statement of the principles of equitable contribution and when the obligations of two or more parties may result in coordinate liabilities.

HCSL was created by the Commonwealth Government to assist insureds affected by the collapse of the HIH group of insurance companies, by providing a partial or complete indemnity for third party and first party losses, subject to specified criteria being satisfied.

In general terms, dual insurance exists where two insurance policies insure the same entity against the same risk. The insured entity is entitled to call upon either policy to the value of the agreed indemnity. Under the principles of dual insurance, the indemnifying insurer is entitled to claim an equitable contribution from the other insurer.

The HCSL case involved an appeal by HCSL against a unanimous decision of the Court of Appeal of the Supreme Court of Victoria (Warren CJ, Mandie JA and Beach AJA). The Court of Appeal held that, for the principles of dual insurance to apply, the liabilities of the relevant insurers must be 'coordinate' or 'of the same nature and to the same extent'. The Court found that the liabilities of HCSL and an insurer are not coordinate and therefore HCSL cannot rely on the principles of dual insurance to seek an equitable contribution from an insurer.

The High Court in the HCSL case unanimously dismissed the appeal.

Gummow ACJ, and Hayne, Crennan and Kiefel JJ found that the assignment of the insured's rights, which was central to the HCSL Scheme, did not place HCSL in the same position as HIH either 'effectively or "in substance"'. Under the Scheme, HSCL did not step into the shoes of HIH and become exposed to all claims under HIH policies or to contribution claims from co-insurers of HIH. Rather, HCSL stepped into the shoes of the insured, who assigns his/ her rights to HCSL thereby entitling HCSL as assignee creditor to lodge a proof of debt in HIH's liquidation. That aspect of the Scheme, which applied to all eligible insureds, was fundamental to maximising recovery of public funds utilised for the purposes of the Scheme.

Further, the High Court found that the obligations of HCSL to the insured under the Scheme 'were not "of the same nature and to the same extent" as the obligation of' the respondent insurer (IAL) in that:

  1. there is no common interest or common burden between HCSL and IAL because, if IAL had paid the insured under its insurance policy before HCSL formed the contract between it and the insured, the insured would not have satisfied the eligibility criteria for assistance under the Scheme. The insured and HCSL would never have entered into contractual obligations with each other and the possibility of double indemnification in respect of the insured's loss would not have arisen
  2. since HCSL 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 HCSL
  3. the offer of assistance under the Scheme was conditional upon the insured's assignment of rights under the HIH policy, covering events which had already occurred. This means that the risk undertaken by HCSL could not be described as the same risk undertaken by IAL. It could not be said that HCSL's contract to indemnify the insured, made after the HIH Group's insolvency and coming into existence upon payment, and IAL's contract of insurance covering the insured 'were the "one insurance"'.

The High Court held that IAL's ability to claim the benefit of satisfaction, because of HCSL's payments in respect of the insured, does not give rise to a common burden. The High Court found that 'a "community of interest" between obligors is not a sufficient condition for the operation of an equity to contribute in circumstances where the obligations in question are qualitatively different'.

On the basis of the above, the High Court concluded that the obligations of HCSL and IAL 'are not "of the same nature and to the same extent"' and are not co-ordinate liabilities.

In a separate written judgment, Heydon J was somewhat critical of the situation in which HCSL found itself, identifying what he calls a number of 'striking' features of the case. Namely, that:

  1. whereas HIH was unable to pay but willing to do so, IAL was able to meet its liability to indemnify but has been unwilling to do so
  2. normally, where a person is insured by two insurers, the liquidation of the first operates adversely to the interests of the second by rendering it liable to indemnify the insured completely, without contribution. IAL does not dispute that, if HIH had not gone into liquidation but had indemnified the insured, IAL would have been liable to make contribution to HIH
  3. IAL has, despite its 'stroke of good fortune in the Federal Government's intervention', resisted paying anything towards alleviation of HCSL's burden of indemnifying the insured, which, but for that intervention, it would have had to bear.

Notwithstanding the above, Heydon J concluded that the reasoning of the majority was correct and the appeal must be dismissed.

Heydon J confirmed that 'contribution is a remedy which rests on a type of mutuality' and found that mutuality did not exist. If the insured had proceeded against IAL, IAL would not have had contribution rights against HCSL because HCSL was not an insurer of the insured and IAL was not eligible to claim under the Scheme.

Heydon J noted HCSL's argument that, if it lost the appeal, this would result in a 'windfall' to IAL. However, Heydon J considered that HCSL had presented no reason for developing the doctrine of contribution to overcome this difficulty. He considered that to develop the law to benefit HCSL in these circumstances 'would not be to develop the law relating to contribution, but to revolutionise it' and 'it would be a revolution having the tendency to produce idiosyncratic and uncertain results'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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