In the 2011 Federal Court decision of London City Equities Ltd v Penrice Soda Holdings Ltd [2011] FCA 674, shareholders were granted access to the directors and officers (D&O) liability insurance policies by the parties against whom they were considering commencing litigation. Does this decision mean that a plaintiff in or contemplating litigation will be permitted unrestricted access to an insured's insurance policies?
Key Points
Potential plaintiffs may be granted access to inspect the insurance policies of another party, in particular where shareholders seek to inspect the directors and officers (D&O) liability insurance policies for the purpose of determining the economic viability of pursuing litigation.
Recent decisions may provide a foothold for successful applications for access to insurance policies to be granted to a wider class of applicants.
Background
Insurers generally require their insured keep confidential the terms of any policies of insurance, and even the fact of the existence of any policies of insurance. This is often for the practical and strategic reason that where a potential plaintiff is aware another party has insurance to cover a claim, that plaintiff may be more willing to commence litigation, even if they are advised their cause of action is weak, as they may expect an insurer may be willing to "pay something" to avoid the costs of litigation.
Historically, a defendant has generally been able to refuse a plaintiff's request for disclosure of its insurance policies on the basis that those policies are not relevant to any issue in litigation, and are indicative only of the defendant's ability to meet a judgment. For example, a request for disclosure of insurance policies in advance of a mediation was refused in Kirby v Centro Properties Ltd [2009] FCA 695, with Ryan J of the Federal Court characterising knowledge of insurance policies as a "commercial bargaining chip" rather than an essential legal component of the mediation, and so considered the existence or terms of Centro's insurance policies did not fall within the category of discoverable documents under the rules of the court.
However, recently courts have granted access to the insurance policies of a party in litigation or where litigation is threatened, typically in the context of shareholder class actions, in certain circumstances. Two significant instances are the decisions in Re Style Ltd [2009] FCS 314 and Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed) [2010] WASC 51, both of which involved applications initiated by shareholders under s247A of the Corporations Act 2001 (the Act) in which the courts ordered access to D&O insurance policies. That provision of the Act permits a member of a company (including a shareholder) to apply for such orders, provided the applicant is acting in good faith and the inspection is to be made for a proper purpose, including a purpose connected with applying for leave to commence proceedings against any directors or officers of the company on behalf of the company (a statutory derivative action).
In Style, the evidence before the court was that the applicant shareholder knew of the existence of a policy, but not the extent of cover granted under it. The court considered this was relevant to the decision to be made by the applicant whether to apply for leave to bring proceedings on behalf of the company against the directors or officers, and exercised its discretion to grant access to the D&O insurance policies on that basis.
In Snelgrove, Le Miere J also exercised a discretion to allow access, considering that a "proper purpose" of seeking access to insurance policies is that it assists in considered the economic viability of pursuing a proposed action against the directors or company. Le Miere J went further to say that it was appropriate to grant access due to the court's case management principles, stating [at 68]:
The disclosure of the existence and extent of the relevant insurance cover is likely to assist the plaintiffs in determining whether or not to commence or proceed with the proposed action. If the company does not have insurance which covers the plaintiffs' claims or the quantum of the cover is such that it is likely to be substantially exhausted in legal costs then the plaintiffs may well not proceed with the proposed action. That would prevent the resources of the parties and public resources being wasted. The thrust of the approach to litigation enshrined in the case management rules of this court and other superior courts in Australia is to avoid waste of time and cost and to ensure as far as possible proportionate and economical litigation. It is an appropriate exercise of the discretion of the court to make an order granting access to the plaintiffs to the company's relevant insurance policies.
Decision
In London City Equities Ltd v Penrice Soda Holdings Ltd, the plaintiff shareholder, London City Equities Ltd, applied to inspect certain categories of Penrice's company books under procedure established by s247A of the Corporations Act 2001. The shareholder was considering whether to bring proceedings against one or more of Penrice's current or former directors and wanted to inspect the books to decide whether it had a viable claim against those directors (and which of them) and whether they would be able to pay a judgment if made in the plaintiff's favour. In particular, the plaintiff sought "all documents recording, referring to or relating to Penrice's Directors and Officers insurance policies" for a certain period.
In response to the application, Penrice argued access to documents should be limited to those concerning the plaintiff's investigation of the facts to determine whether it had a cause of action, and not those which were relevant only to whether a cause of action was worth pursuing. Penrice submitted that the court in Style and Snelgrove did not pay sufficient regard to competing considerations, such as confidentiality.
Despite these submissions, Robertson J did not consider the approach of the court in Style and Snelgrove as being clearly wrong, and followed it, but permitted access only to the policies themselves rather than the much broader scope sought by the plaintiff, which would have required Penrice to make available any documents "recording, referring to or relating" to the policies. In doing so, Robertson J had regard to the interests of the company, insofar as he approved a statement in Style that it was not appropriate to allow the applicant shareholder to undertake a wholesale and general inspection of the company's books, as this would cause unnecessary disruption, but any such inspection should be limited to those books (including the insurance policies) that bear on and are particularly relevant to the purpose for which the inspection is sought.
Implications
This decision follows the recent trend to allow access to directors and officers insurance policies where the economic viability of pursuing a cause of action is the subject of investigation. The approach as established in Style, Snelgrove and London City Equities was again followed in Hanks v Admiralty Resources NL [2011] FCA 894, in which the plaintiff shareholder (who held 0.00005% of the company's issued capital) successfully applied under the Corporations Act procedure for access to certain categories of the company's books, including its D&O policies.
It is to be seen whether these decisions expand the category of insurance policy to which a potential plaintiff might be granted access beyond the D&O policies sought by shareholders by the procedure established by s247A of the Corporations Act. The courts may be swayed by prospective litigants arguing that the case management considerations discussed by Le Miere J in Snelgrove entitle them to access to any insurance policy to determine whether they should progress threatened litigation, as not to do so may result in a waste of time and costs.
A further question is whether these decisions result in an increase in litigation against directors and officers whose insurance policies are disclosed, as this would undoubtedly have an upward effect on the risk to insurers writing these policies.
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.
