A hard 'act' to follow
Insurers both in Australia and those overseas have often scratched their heads trying to come to terms with section 54 of the Australian Insurance Contracts Act 1984 (Cth) (ICA). Section 54 prevents an insurer from denying a claim solely on the basis of an act (or omission) of the insured or another person which occurred after the time the contract was entered into (provided the act did not cause the loss). Recently, both the Federal Court of Australia and West Australian Court of Appeal have weighed in on what is meant by the requirement for an 'act' under section 54(1) of the ICA. The two cases draw a useful dividing line between when section 54 will come to the aid of an insured and when it will not.
Case 1: Insurer runs aground on section 54
The first case, Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds1, involved a marine insurance policy for a luxury yacht which was wrecked off Cape Talbot, Western Australia. This policy contained an exclusion clause limiting coverage under the policy to damage that was sustained by the yacht while in Australian territorial waters. Under the terms of the clause, coverage was suspended from the time the yacht cleared Australian Customs and Immigration for the purpose of leaving Australian waters until the yacht cleared Australian Customs and Immigration upon its return. While the yacht ran aground within Australian waters, at the relevant time it was returning from Indonesia and had not cleared Australian Customs and Immigration. The insurer, therefore, denied the claim, grounding its refusal on the exclusion clause.
After review of the insurance policy in light of the relevant authorities, Foster J concluded that the exclusion clause must be read in light of the underlying purpose of the policy. In his Honour's opinion, this was to only extend coverage to the yacht while it was in Australian waters. As the exclusion clause did not go to the nature of the risk covered by the policy, the question became whether there had been an 'act' as contemplated by section 54(1).
Upon considering the cases put forward by both the insurer and the insured in regard to the relevant 'act', Foster J rejected both in favour of his own interpretation. According to his Honour, the relevant 'act' of the insured was the act of departing Fremantle harbour with an intention to leave Australian waters and clearing Australian Customs and Immigration at the commencement of the voyage. His Honour based his reasoning for this decision on the fact that this act was a necessary pre-condition to the suspension of the insurance policy under the exclusion clause.
As the insured's act did not cause the loss and the insurer suffered no prejudice, given the loss occurred in Australian territorial waters, section 54 operated to prevent the insurer from refusing the claim.
Case 2: A better 'state of affairs' for insurers
The decision by the Federal Court in Pantaenius can be compared with the recent decision of the West Australian Court of Appeal in Allianz Australia Insurance Ltd v Inglis.2 This case involved a claim on a home insurance policy following injuries sustained by a ten-year-old girl, Miss Georgia Inglis, who was accidentally run over by a ride on lawnmower while playing. The persons claiming indemnity under the policy were the father and brother of the injured girl. Significantly, the home insurance policy excluded coverage for 'injury to any person who normally lives with you'. The insurer declined to indemnify the insureds based on this exclusion.
At first instance, the Western Australian District Court found that Miss Inglis was a person who normally lived with the father and brother and that this was an act for the purposes of section 54(1). The insurer, therefore, was not entitled to rely on the exclusion clause in denying indemnity.
On appeal, the court considered the District Court's interpretation of an 'act' and concluded that living with another person is not an 'act'. In the Court of Appeal's opinion, the relevant facts were more appropriately defined as a 'state of affairs' or a 'description of a relationship'. This situation was to be inferred from the conduct of all relevant persons over a prolonged period of time and did not depend on any single act of a particular person on the day that the insurable event occurred. The conduct, therefore, could not amount to an 'act' within the meaning of section 54(1) and the insurers succeeded on appeal.
Again, the court also noted that a provision in a contract of insurance is to be informed by its context and the nature or type of the insurance.
How to act
The above decisions provide some clarity in regard to the operation of section 54 in a post Maxwell v Highway Hauliers Pty Ltd3 landscape. Although, as demonstrated in Pantaenius, section 54 continues to be applied broadly by the courts, Inglis illustrates that it is not a panacea for all claims.
The cases also operate as a timely reminder that the court will determine the meaning of a policy provision, including an exclusion provision, by reference to the text, context and purpose of the provision and the policy as a whole. Insurers, therefore, should approach the task of defining the limits of a policy with extreme care.
External evidence presented in the context of Wellington Motions in Quebec
Quebec law on motions to compel an Insurer to defend its insured under a liability policy, also known as 'Wellington Motions,' has evolved over the years. The Quebec Court of Appeal recently added to this body of law by rendering a judgment that overturned a Quebec Superior Court decision allowing the introduction of external evidence to support a liability Insurer's denial of coverage.4 The Court of Appeal, in this case, shed more light on how Wellington Motions should be viewed.
The plaintiffs, the Quebec Government and a school board, were claiming from a series of defendants damages from a fire allegedly caused by welding operations on the roof of a school. One of the defendants, Technologies CII Inc. (CII), was the contractor in charge of installing heating and ventilation components for the school. CII's work involved some welding operations on the roof, and a fire broke out while CII's employees were working at the school. The fire caused approximately C$16 million in damages.
Northbridge Financial Corporation (the Insurer) was also named as a co-defendant as CII's Insurer. In the context of the proceedings, the Insurer filed its plea stating that there was no coverage for CII for this loss because CII's employees had breached one of the warranties included in the policy by neglecting to use fireproof screens or blankets during the welding operation. In support of its plea, the Insurer had filed a copy of its statutory examination of CII's president, who admitted that CII's employees did in fact breach this warranty.
Shortly after the Insurer filed its plea, CII filed a Wellington Motion to compel the Insurer to defend the claim.
Quebec Superior Court decision
The first question addressed by the Superior Court was whether the Insurer was allowed to submit 'external' evidence to support its denial of coverage based on the breach of warranties. As an example, the Insurer wanted to show, using CII's president's statutory examination, that CII's employees failed to use any fireproof shielding.
The court determined that, in the context of this hearing, the Insurer could provide the court with such external evidence to support its decision to refuse to defend CII. However, the court added, this should be done in a strict and summary procedural context, which must not become a 'trial within a trial.' The court therefore concluded that it should look to the evidence already submitted by plaintiffs and the Insurer, including the statutory examination of CII's president. Moreover, the court held that it should consider as true all the facts that flow from this external evidence.
After a lengthy debate as to whether the warranties included in the Insurer's policies were indeed known by the insured, the court determined that the Insurer was successfully able to show that its insured had indeed breached one of the warranties in the policy. The court based its finding largely on the statements of CII's president during his statutory examination. As a result, the court found that the Insurer had no duty to defend the claim made by plaintiffs against CII seeing as, at the stage of the proceedings, it had not been shown that the policy applied to the loss.
Court of Appeal decision5
On appeal, the Court of Appeal unanimously overturned the trial judge's decision. In a very short judgment, the panel found that the first judge should not have concluded, based on the external evidence provided by the Insurer, that the fire that damaged the building was necessarily caused by the welding operations that were the focus of the warranties in the Insurer's policy.
Moreover, the court found it was not clear from that evidence that CII's employees were actually conducting welding operations on the building shortly before the fire. More importantly, the Court of Appeal noted its 'surprise' at the first judge's decision to allow external evidence (i.e., most likely referring to CII's president's admissions in his statutory examination) to be considered in the context of the Wellington Motion. The court reiterated that only a minimal amount of evidence should be heard at that stage, since the insured is not afforded the right to respond to the evidence put forward by the Insurer. The Court of Appeal therefore struck down the first judgment and ordered the Insurer to defend the claim against CII.
Further defining the scope of the Texas Prompt Payment Act
In Health Care Service Corporation v Methodist hospitals of Dallas, no. 15- 101546, the Fifth Circuit grappled with whether the Texas Prompt Payment Act ('TPPA') applies to third-party administrators of self-funded ERISA (i.e. Certain employer-provided health benefit) plans.
The Texas Prompt Payment act
The TPPA requires insurers to pay unproblematic, or 'clean' claims submitted by preferred providers within 45 days for non electronically filed claims or 30 days for electronically-filed claims. The TPPA applies to 'each preferred provider benefit plan in which an insurer provides, through the insurer's health insurance policy, for the payment of a level of coverage ...'. It further defines 'insurer' as 'a life, health, and accident insurance company, health and accident insurance company, health insurance company, or other company operating under Chapter 841, 842, 884, 885, 982, or 1501 [of the Texas Insurance Code], that is authorised to issue, deliver, or issue for delivery in this state health insurance policies.'
The dispute and its resolution
In anticipation of Methodist filing suit for purported violations of the TPPA, Health Care Service Corporation d/b/a Blue Cross Blue Shield Texas (BCBSTX), filed suit requesting a declaration that: (1) the TPPA does not apply to thirdparty administrators of self-funded ERISA plans; and (2) ERISA pre-empts the TPPA such that the third-party administrators of self-funded ERISA plans cannot be held liable for TPPA violations. Methodist counterclaimed for over US$31 million in penalties, interest, and attorneys' fees. The trial court sided with BCBSTX.
On appeal, Methodist argued that the TPPA applied to BCBSTX because it was an 'insurer' subject to the TPPA. BCBSTX argued that while it does act as an insurer, the actions complained about by Methodist were undertaken by BCBSTX in its role as a third-party administrator under Chapter 4151 of the Texas Insurance Code, not in its role as an insurer under other chapters of the Texas Insurance Code.
Methodist argued further that the word 'provides' in the TPPA was broad enough to encompass not only the entity with the ultimate financial burden of payment, but to the thirdparty administrator who facilitates that payment. Moreover, Methodist contended, BCBSTX maintains a 'health insurance policy' by maintaining administrator agreements and preferred provider network agreements.
The fifth circuit disagreed with Methodist. The court held that, even if BCBSTX were an 'insurer,' it did not 'provide[ ] ... For ... Payment.' The court focused on the fact that when discussing third-party administrators, the TPPA describes their function as 'process[ing] or pay[ing] claims,' which the court said suggests that the 'provides ... For ... Payment' phrase does not encompass payments by others that are facilitated or distributed by a third-party administrator.
Perhaps more importantly, the court found that even if BCBSTX 'provide[d] ... For ... Payment,' it did not do so through its 'health insurance policy.' The TPPA defines 'health insurance policy' as 'a group or individual insurance policy, certificate, or contract providing benefits for medical or surgical expenses incurred as a result of an accident or sickness.' The court noted that, 'any benefits [BCBSTX] furnished to beneficiaries derive[d] from the plans of others, wholly independent of any contractual relationship with BCBSTX' and held that 'BCBSTX, as an administrator, [did] not confer any benefits for medical expenses on beneficiaries and therefore does not provide for payment through its 'health insurance policy.''
The court also rejected the argument that the TPPA applied to BCBSTX by way of a provision extending the TPPA's application to 'a person ... With whom an insurer contracts to' perform certain administrative services. The court highlighted the fact that in order for the TPPA to apply to BCBSTX by way of this provision, it would have to contract with an insurer. The court opined that self-funded health benefit plans and state government-sponsored health benefit plans did not fall within the aforementioned definition of 'insurer' because: (1) those plans do not operate under any of the insurance code chapters mentioned in that definition; and (2) the plans are not authorised to 'issue, deliver, or issue for delivery' health insurance policies in Texas. In other words, while self-funded and state government-sponsored benefit plans do provide health benefits to employees, they are not technically 'insurance.'
The broader context: the ongoing controversy over the TPPA's scope
This case is yet another chapter in the book of controversies over the breadth of the TPPA's scope. Plaintiffs' lawyers regularly test the boundaries of its scope, in large part thanks to the windfalls they can secure in the form of statutory penalties and the shifting of attorneys' fees to a losing defendant.
A major success for the plaintiffs' bar in this regard was Lamar Homes, Inc. v Mid-Continent Casualty Company, 242 s.w.3d 1 (Tex. 2007). There, the dispute focused on a different portion of the TPPA, which applies to 'first-party claim[s],' and is not limited to claims submitted by preferred providers in the health insurance context. The Texas Supreme Court held that this provision of the TPPA applied to defence costs an insured incurred in defending a lawsuit and for which the insurer was later found to have wrongfully denied coverage.
The court explained that its past decisions distinguished between a first-party claim, which 'is stated when "an insured seeks recovery for the insured's own loss,"' and a thirdparty claim, which 'is stated when "an insured seeks coverage for injuries to a third party"' ... 'based upon that distinction,' the court held, 'a defense claim is a first-party claim because it relates solely to the insured's own loss.' Accordingly, the court held that a wrongful denial of a defense can lead to penalties under the TPPA.
The Wrong Trousers: German Supreme Court rules that brokers may not settle claims on behalf of insurers
In a recent decision delivered on January 14, 2016 (case reference I ZR 107/14), the German Supreme Court ruled that a broker may not be authorised by the insurer to handle third-party claims on behalf of the insurer.
The facts of the case are as follows:
- A chain of dry cleaners had placed their third-party-liability insurance via a broker. The broker's commission included a lump sum for the ongoing review of the insured value and the claims handling on behalf of insurers. For this purpose the broker had a general power of attorney from the insurer.
- The dispute was sparked by a claim from a customer who claimed compensation for a pair of trousers that was lost by the dry cleaner. The customer claimed compensation not just for the lost trousers but also the costs of the dry cleaning, expenses for the cost of telephone calls and the bus fare for his futile attempt to collect his trousers. The broker answered the claimant with a letter on behalf of the insurer and explained that given that the claimant could not present any proof for the value of the trousers, the broker had instead estimated that value and deducted a lump sum for the fact that the trousers were used and also the costs of the dry cleaning since obviously the trousers were stained when the customer handed them to the dry cleaner. The broker then explained that for legal reasons, there would be no compensation for costs such as telephone or bus fare covering the futile attempt to collect the garment.
- The letter somehow came to the attention of the local Bar association. The Bar association filed an action for injunction and asked to prohibit the broker from handling legal matters such as the customer's claim. The first instance court and the court of appeal rejected that action, but the German Supreme Court overruled these decisions and held that the broker rendered illicit legal services and thus, had to abstain from further action.
The legal point that was determined
The legal problem behind the case can be found in the German law on legal services. In Germany, only lawyers who are duly qualified and registered with the Bar association may render legal services. Legal services is defined in a very broad way as 'any service for somebody else's business that requires a legal assessment of the particular circumstances'. The reasoning behind that law is to protect the general public from unqualified legal advice and to ensure that only duly qualified lawyers with professional indemnity insurance in place are allowed to practice the law.
The law provides for an exception to the general prohibition to render legal services, if the legal services are supplementary to another task that requires legal knowledge.
The first and second instance courts discussed the question whether the task of checking different heads of damages in relation to the loss of a pair of trousers really requires a legal assessment of the particular circumstances or whether this is a more trivial task that does not even qualify as legal services in the sense of the law. In consequence, they left this question undecided and relied on the exception that supplementary services to an allowed service do not require a full legal qualification as a lawyer. In this respect, it was decided that claims handling is a typical supplement to the business of a broker and that a broker has the relevant legal qualification to handle these questions.
In its decision of January 14, 2016, the German Supreme Court overruled the lower instances and focused more on the conflict of interest. It held that the interests of the insurer and the insured are not necessarily aligned and thus, the broker cannot act for the insurer and insured at the same time. As well, the Supreme Court held that the main obligation of the broker is to place insurance on behalf of the insured so the obligation to handle claims on behalf of the insurer cannot be 'supplementary' to this obligation, for the simple fact that the claims handling is undertaken for another principal.
The full text of the Supreme Court decision will only be published in a few months' time, but the brokers' associations who support the respondent broker in this matter have already announced to take this case to the European Court and possibly the German Constitutional Court as this decision restricts the freedom of services for foreign brokers in Germany and discriminates German brokers with regard to foreign brokers abroad who are not restricted in a similar way.
Nevertheless, the decision is final and insurers and brokers will have to review their arrangements carefully to ensure compliance with the position of the Supreme Court. A violation of the statute on legal services may be prosecuted by the Bar associations with actions for injunctions as in the case described above. In addition, the fact that a broker acting as claims handler for the insurer violates the law, renders the whole agreement between broker and insurer and the power of attorney null and void.
1 FCA 1.
2 WASCA 25.
3 HCA 33.
4Technologies CII Inc. v Société d'assurances générales Northbridge, 2016 QCCA 41 (Que. C.A.).
5Québec (Procureure générale) v Services énergitiques Ecosystem inc., 2015 QCCS 1988 (Que Sup Ct).
65th cir. Feb. 10, 2016.