This article was first published in the Lexis Nexis Australian Insurance Law Bulletin (newsletter) 2013.Volume 29 no 2
The recent decision of Almond J of the Supreme Court of Victoria in Bupa Australia Pty Ltd v Shaw1 provides some useful commentary on the principles of the right of subrogation, the principles of policy interpretation, and the principles that apply when an insurer makes good faith payments under a policy of insurance. The case also dealt with an issue that arose in relation to interpretation of a clause in a Deed of Release that clearly contained a typographical error.
Applying the relevant principles, the court found that the insurer had not lost its right of subrogation; that the policy should be given a narrow, purposive and commonsense interpretation; and (in obiter) that an 1896 decision of the Privy Council in relation to good faith payments by insurers remains good law. In addition, the court found that the drafting error in the Deed of Release should be remedied in favour of the plaintiff, as it provided the most sensible result.
In the end result, Bupa was permitted to recover the whole of the amounts it had paid in respect of an insured.
A Bupa Australia Health Pty Ltd2 (Bupa) insured, Mr Shaw, underwent surgery in September 2005. The surgery, originally to remove a tumour from the lining of the oesophagus, resulted in Mr Shaw undergoing a full gastrectomy, as a result of which he required ongoing treatment.
Mr Shaw claimed hospital and treatment expenses under his Bupa policy. Bupa ultimately paid approximately $340,000 for the benefit of Mr Shaw.
Mr Shaw commenced court proceedings against his surgeon for medical negligence (the negligence proceeding). He sought damages to cover past and future care, as well as damages to cover his medical and like expenses. The claim in relation to medical and like expenses included expenses Mr Shaw had claimed from Bupa.
In order to particularise Mr Shaw's claim in the negligence proceeding, his solicitors, Arnold Thomas & Becker (ATB), wrote to Bupa in March 2010 requesting details of all medical expenses Bupa had paid on behalf of Mr Shaw in relation to the surgery.
Bupa responded a few days later, providing ATB with an itemised list of the relevant expenses paid (the Bupa payments).3 It also asked to be kept informed of the proceeding, as any benefits that related to Mr Shaw's claim would have to be refunded to Bupa in the event that Mr Shaw's claim was successful.
Mr Shaw died on 2 May 2010, following which his wife, as executrix, continued the negligence proceeding on behalf of the estate (together with a joint executor). ATB remained the solicitors in the negligence proceeding.
The negligence proceeding was settled for $400,000 plus party/party costs in December 2011. Bupa was not consulted prior to, or notified of, the settlement. No refund of the Bupa payments was made to Bupa.
Bupa emailed ATB in February 2012, enquiring as to the progress of the negligence proceeding, and was informed by ATB that the proceeding had settled in December 2011 and that "[a]s part of the terms of settlement the Insurer of the [surgeon had] agreed to indemnify [the estate] against repayment to Bupa". The Deed of Release, which was later provided to Bupa, contained a clause to the effect that the surgeon would indemnify the estate in the event of any claim, demand or recovery action by Bupa. ATB recommended that Bupa contact the solicitors for the surgeon's insurer in relation to the refunding of the Bupa payments.
Bupa demanded repayment of the Bupa payments from the estate. The estate denied any liability to repay Bupa. (In practice, the situation was that effectively the insurer of the surgeon became liable to repay the Bupa payments pursuant to the indemnity provided in the Deed of Release, so, although the estate was making the denial, in reality the surgeon's insurer was refusing to refund the Bupa payments.)
Bupa commenced proceedings against the executors of the estate. The solicitors for the surgeon's insurer acted on behalf of the estate in defending the Bupa proceeding, pursuant to the indemnity in the Deed of Release.
QUESTIONS FOR THE COURT
The court was effectively called upon to answer the following questions.
- Was Bupa entitled to exercise its right of subrogation in respect of the Bupa payments?
- If "yes" to question 1, was Bupa's right of subrogation prejudiced by the terms upon which the negligence proceeding was settled?
- If "yes" to question 1, was Bupa prevented from exercising its right of subrogation as a consequence of its own conduct?
Bupa argued that it was entitled to exercise its right of subrogation in respect of the Bupa payments. The relevant equitable principles governing the doctrine of subrogation are uncontroversial and well established.4
Bupa argued that the doctrine of subrogation gave it two distinct rights:
- the right to require Mr Shaw to pursue any rights against a third party, in this case, the surgeon — this right included the right to commence proceedings in Mr Shaw's name to recover the Bupa payments against the surgeon (a right which Bupa did not ultimately seek to exercise itself, as Mr Shaw commenced proceedings in his own name seeking damages including in respect of the Bupa payments, that proceeding later being continued, and then settled, by the estate); and
- the right to recover from Mr Shaw (or, later, his estate) any amount that was received in respect of the Bupa payments — the rationale of this principle is that Bupa should be compensated for any amount it could not recover against the surgeon in respect of the Bupa payments by reason of the settlement of the negligence proceeding.
The familiar upshot of these two asserted rights is that if Mr Shaw had commenced proceeding against the surgeon seeking heads of damages that did not include the Bupa payments, Bupa could have insisted that damages be sought for the Bupa payments. Alternatively, had Mr Shaw not commenced proceedings against the surgeon, Bupa could have done so in its own name. Further, as Mr Shaw's claim for damages included amounts in respect of the Bupa payments, Bupa was entitled to recover from Mr Shaw's estate any amount it received in respect of the Bupa payments. This right effectively exists as Bupa is estopped from commencing its own proceedings against the surgeon, if the estate has already settled the entire proceeding, including in relation to the Bupa payments. In that respect, Bupa's rights of subrogation would have been prejudiced by the settlement of the negligence proceeding.
The defendants conceded that the Bupa health insurance policy was a policy of insurance, but argued the following.
- The terms of the policy excluded or modified Bupa's right of subrogation or its exercise.
- Bupa did not have an obligation to indemnify Mr Shaw under the policy. As such, the Bupa payments must have been paid in error. As there was no requirement to make the Bupa payments by way of indemnification, the right of subrogation did not arise.
- Bupa's terms provided for recovery of payments made in error within two years of payment. Bupa did not attempt to do so within that period. As such, the payments were no longer recoverable.
THE TERMS OF THE BUPA POLICY
The terms of the health insurance policy between Bupa and Mr Shaw were contained in Bupa's Fund Rules. The relevant Fund Rules consisted of General Conditions and Schedules, which set out the benefits payable for particular treatments. It was uncontroversial that an insured's entitlement to payment of benefits was governed by the Fund Rules as in force on the date a treatment was rendered to the insured person.
The Fund Rules included provisions to the following effect.
- Payments made to a policy holder in error could be recovered by Bupa if it notified the policy holder within two years of the date of payment.
- Bupa could make ex gratia payments if it wished to do so.
- Benefits were not payable if the policy holder claimed and received, or established a right to receive, a payment by way of compensation or damages from a third party.
- Where Bupa believed that the policy holder may have a right to claim compensation or damages, Bupa could require the policy holder to sign an undertaking requiring the policy holder to make a claim for compensation or damages and to include benefits paid by Bupa, with a further requirement that proceeds from the claim were to be reimbursed to Bupa for any benefits that were paid by Bupa. In addition, benefits were not payable in circumstances where Bupa believed that the policy holder may be entitled to payment of compensation or damages from a third party, but had not yet established the right to such payment. The onus was then on the policy holder to establish such a right. If it could not establish a right, Bupa would then pay benefits.
- Bupa could cease payments where a policy holder established a right to compensation or damages and accepted a settlement, and such settlement included terms specifying that moneys paid were not in respect of past or future expenses with regard to which benefits would otherwise be payable, or part of the claim was abandoned or compromised so that such expenses were excluded or represented a nominal amount only.
It was argued by the defendants that the comprehensive nature of the Fund Rules was such that the Fund Rules formed a code that regulated Bupa's entire rights in respect of subrogation, or else excluded those rights entirely. Further, the defendants argued that the right to recover payments made in error within two years of the date of the payment was inconsistent with the maintenance of the right of subrogation.
Specifically, the defendants argued as follows.
- As Mr Shaw was someone who "may have a right to claim compensation or damages", Bupa could have required him to sign an undertaking requiring him to make a claim for compensation or damages and to include benefits paid by Bupa in that claim.
- Bupa was not required to pay any benefits to or on behalf of Mr Shaw in those circumstances until such time as he established that he did not have a right to claim compensation or damages.
- Unless Bupa obtained an undertaking from Mr Shaw, Bupa had no obligation to indemnify, and any payments already paid by Bupa to the benefit of Mr Shaw were made in error, and therefore only recoverable for a two-year period from the date of each payment.
- Alternatively, the payments were made by Bupa ex gratia and were therefore irrecoverable.
The defendants had, in fact, admitted the following in their pleadings.
- The claims were made, and Mr Shaw was paid, pursuant to the terms of the policy, which was valid at all relevant times.
- The terms of the policy provided that benefits were payable to Mr Shaw to cover the costs of hospital treatment and general treatment.
- The payments were made pursuant to the terms of the policy and as a consequence of the claims made by Mr Shaw.
THE COURT'S DECISION
Uncontroversially, Almond J found:
An insurer's right of subrogation, whether as a contractual term implied by law, or a right that arises in equity as a necessary incident of an indemnity contract, may be expanded, modified or excluded either expressly or impliedly by the terms of the contract.5 The right of subrogation may be excluded either wholly or in part by express terms or as a result of inconsistency with the terms of the contract.6
It is clear that there are no express terms in the Rules which exclude or waive the right of subrogation.7
In relation to question 1, Almond J further found as follows.
- The Fund Rules, read as a whole, were consistent with the right of subrogation, and that right (or its exercise) was not therefore excluded.
- Bupa's contractual obligation to indemnify Mr Shaw was clear.
- The defendants' argument that the Bupa payments were made in error would require a wide construction of the term "benefits are not payable" where it occurred in the Fund Rules. The effect of such a construction would be to effectively exclude or limit Bupa's prima facie contractual obligation.
- The principles of construction8 do not support such a limitation being placed on those words when the policy is read as a whole.
The practical effect of the construction sought by the defendants would be that policy holders were dissuaded from later making a claim for compensation or damages, because benefits received under the policy (and already spent) would become immediately reimbursable to the insurer. That outcome cannot have been intended.
- The Fund Rules in relation to Bupa obtaining an undertaking from a policy holder who may have a claim against a third party were permissive; Bupa was not required to obtain an undertaking as a pre-condition to paying or continuing to pay benefits. As such, Bupa not requiring an undertaking from Mr Shaw after it was informed of the negligence proceeding did not invalidate any payments it made before or after being informed of the proceeding.
- There was insufficient evidence from which to infer that payments made (either before or after Bupa became aware of the negligence proceeding) were made as a result of an error.
- Even if the Bupa payments had not strictly been payable under the terms of the policy (which was disputed), Bupa retained a right of subrogation in circumstances where such payments were made in good faith.9 This was true of both the payments made prior to Bupa becoming aware of the negligence proceeding and the payments made after that time. The Canadian decision of Wellington Insurance Co Ltd v Armac Diving Services Ltd10 was distinguished as that case related to a payment made by an insurer in settlement of litigation, rather than as a payment under the insurance policy.
The answer to question 1 — "Was Bupa entitled to exercise its right of subrogation in respect of the Bupa payments?" — was, therefore, "yes".
In relation to question 2, two issues of construction arose. The first question was in relation to whether the settlement sum included or excluded the Bupa payments. The second question was whether the release given by the estate to the surgeon released rights to which Bupa would otherwise have been entitled to enjoy against the surgeon under its right of subrogation.
Almond J further found as follows.
- The settlement sum of $400,000 included the Bupa payments.
- While a typographical error existed in the Deed of Release, it was clear under the Deed of Release that the estate released all rights of action that arose out of the surgeon's medical treatment of Mr Shaw, thereby extinguishing any right of subrogation Bupa might otherwise have had.
The answer to question 2 — "Was Bupa's right of subrogation prejudiced by the terms upon which the negligence proceeding was settled?" — was, therefore, "yes".
In relation to question 3, the defendants argued that Bupa elected to not exercise, or waived, its right of subrogation. This argument was raised on the basis of correspondence between Bupa and the solicitors for Mr Shaw, and on the basis that Bupa took no step to intervene and take over the running of the negligence proceeding and, alternatively, on the basis that, upon being notified of the negligence proceeding, Bupa took an inconsistent position as to whether it was demanding immediate repayment of the Bupa payments or whether it was claiming an entitlement to reimbursement out of any settlement.
Almond J found as follows.
- The correspondence relied upon by the defendants did not demonstrate any election not to exercise its right of subrogation, or any waiver of its right. In fact, Bupa sought to ensure that the estate had regard to Bupa's interests, and made clear that it expected the estate to account to it in respect of amounts recovered from the surgeon. Further, ATB advised Bupa that it would contact Bupa on the day of mediation to discuss any offers made. Had Bupa been on notice that it was likely that the mediation would result in the settlement that it did, there would have been a firmer foundation for an argument that Bupa could have sought injunctive relief, and its failure to do so constituted a waiver.
- Bupa did not have a right to take over conduct of the proceeding, as the proceeding related to amounts in addition to the amounts that Bupa sought to recover. In those circumstances, according to the principles in Santos Ltd v American Home Assurance Co,11 an insurer cannot take control of a proceeding.
- Although there was some ambiguity in the terms of the correspondence, Bupa did not demonstrate an inconsistent position and is not prevented from exercising its right of subrogation as a consequence of any conduct on its part.
The answer to question 3 — "Was Bupa prevented from exercising its right of subrogation as a consequence of its own conduct?" — was, therefore, "no".
In a somewhat unusual setting, given that the estate was effectively a front for the professional indemnity insurer of the surgeon, this case provides a useful discussion of the principles of the right of subrogation, the principles of policy interpretation, and the principles that apply when an insurer makes good faith payments under a policy of insurance.
Almond J reminded us that the decision of State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd remains good law, as:
It is settled law that an insurer who has paid the amount of a loss under a policy of indemnity is entitled to the benefit of all the rights of the insured in the subject matter of the loss and by subrogation may enforce them. This right of subrogation is inherent in the contract of indemnity.
It is also settled law that an insured may not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation. On occasions an attempt by the insured to do so will be ineffective against the insurer because of the knowledge of the circumstances which the person under obligation to the insured may have. On other occasions when the insured's act has become effective as against the insurer, the insured will be liable to the insurer in damages, or possibly, on some occasions for money had and received.12
The defendants' arguments that Bupa had excluded or modified its right of subrogation or its exercise were not accepted.
In addition, Almond J reminded us that, when considering the principles of construction that apply in relation to exclusion or limitation clauses in insurance policies, the comments by the majority in Darlington Futures Ltd v Delco Australia Pty Ltd13 remain the touchstone, so that:
The interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity ... [T]he same principle applies to the construction of limitation clauses.
The defendants' argument that Bupa's payments were made "in error" and were therefore not recoverable would, in the opinion of the court, have given the relevant policy words too wide an interpretation, and were therefore not accepted.
Finally, in accordance with the Privy Council decision in King v Victoria Insurance Company Ltd,14 Almond J accepted Bupa's proposition that where an insurer has accepted a claim made by an insured which the insurer was not strictly obliged to pay under the terms of the policy, upon making the payment, the insurer nevertheless becomes entitled to rely on the doctrine of subrogation, where that payment was intended to indemnify the insured for a risk covered under the policy. Almond J distinguished the Canadian decision of Wellington Insurance Co Ltd v Armac Diving Services Ltd15 on the basis that that case related to a payment made by an insurer in settlement of litigation, rather than as a payment under the insurance policy.
1Bupa Australia Pty Ltd v Shaw (as Joint Executor of Estate of Shaw)  VSC 507; BC201313192.
2Bupa Australia Health Pty Ltd later changed its name to Bupa Australia Pty Ltd.
3By the time it was notified of the negligence proceeding, Bupa had paid approximately $305,000 for the benefit of Mr Shaw.
4See, for example, State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228;  ALR 417; BC6900700.
5Woodside Petroleum Development Pty Ltd v H & R–E & W Pty Ltd (1997) 18 WAR 539 at 568–570; (1997) 10 ANZ Ins Cas 61-395; BC9706737 (Anderson J); Woodside Petroleum Development Pty Ltd v H & R–E & W Pty Ltd (1999) 20 WAR 380 at 389–390; (1999) 10 ANZ Ins Cas 61-430; BC9900998 (Malcolm CJ, Pidgeon, Ipp JJ).
7Above, n 1, at –.
8The principles of construction are well settled. See, for example, Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500;  HCA 82; BC8601387. The principles apply equally to insurance contracts: Australian Casualty Co Ltd v Federico (1986) 160 CLR 513;  HCA 32; BC8601440 and McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579;  HCA 65; BC200007594.
9See King v Victoria Insurance Company Ltd  AC 250.
10Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462.
11Santos Ltd v American Home Assurance Co (1986) 4 ANZ Ins Cas 60-795 at 74,877.
12State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 at 240–241; (1969) 43 ALJR 456; BC6900700.
13Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510;  HCA 82; BC8601387.
14King v Victoria Insurance Company Ltd  AC 250.
15Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462.
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