Sometimes an insured can be in a hard place: possible claims on one side that you would like to settle, and uncertainty as to whether an insurer will step up. Yesterday the High Court gave some useful guidance on what you can do in that situation, and also clarified the meaning of insureds' and insurers' duty of "utmost good faith".
The insured and the insurer
In this case, two financial advisers who held proper authorities issued by the insured acted outside those authorities, causing loss to investors. ASIC investigated, and took the position that, notwithstanding any defences which the insured might wish to explore or obligations toward insurers, it expected the insured to settle the investors' claims promptly and in full. Failure to do so would potentially endanger its dealer’s licence, putting it in an uncomfortable position.
The insured made a claim on its insurer, which reserved its rights and told the insured to act as a "prudent uninsured" until a decision had been made on liability and policy coverage. Meanwhile a protocol was agreed between the two to resolve the investors’ claims. Relying on that protocol, the insured settled some claims after telling the insurer that it proposed to do so, and then sought reimbursement from the insurer. Those claims were denied on the basis that the insured had not established that it had a liability toward the investors.
What you should do if you want to settle
The main problem in this case was one of timing. Basically, the insured (for its own quite valid reasons) wanted to settle the possible claims as soon as possible, and settled without an agreement by (although with the knowledge of) its insurer.
The heart of the dilemma for the insured, however, is that the insurer had not agreed to waive the fundamental precondition of a claim under a liability policy (that the insured establish its liability to the third parties) nor led the insured to believe that it had. Since the insurer had neither repudiated nor breached the contract, the insured could not argue that it was mitigating its damage by settling and so was now left having to make the original claimants' cases against itself, in order to recover under the policy.
The other lesson to be drawn from this case is that there may be other ways to force an insurer to a decision. Many policies include a "senior counsel" clause, under which the advice of a senior counsel can be obtained. If that had been exercised in this case, it's possible that the advice would have been to do exactly what the insured did. As a result, the insurer's position would have altered.
Utmost good faith - what is it?
The High Court decided that:
you don't need to establish dishonesty. A lack of utmost good faith can be shown by actual impropriety which may fall short of dishonesty usually, a lack of utmost good faith requires positive action; passivity normally won't be enough
utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests
an insurer's statutory obligation to act with utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured.
a court cannot make a finding of liability against an insurer as a punitive sanction for not acting with utmost good faith.
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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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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