CGU Insurance Limited v AMP Financial Planning Pty Ltd  HCA 36 (29 August 2007)-
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In 2000 and 2001, AMP Financial Planning Pty Ltd (AMP) purchased professional indemnity cover from CGU. Some years prior, AMP had issued authorities to Mr Ashok Pal and Mr Anthony Horwath to act as its securities representatives under the Corporations Law. Pal and Horwath conducted a financial advisory business through Macquarie Advisory Group Pty Ltd ("MAG"). In May 1999, Pal and Horwath traded outside their authority by investing approximately $3.4M of investor funds in a company in which Pal was a director and which was in real financial difficulty. The money was lost. In December 1999, MAG was placed into liquidation. ASIC banned Horwath and Pal from participation in the securities industry and from the management of companies. On 16 December 1999 and 5 September 2000, AMP notified CGU of facts or circumstances that might give rise to future claims.
On 14 February 2001, officers of ASIC met with AMP and expressed concern about the delay in compensating investors for losses arising from the conduct of Pal and Horwath. ASIC expected AMP to handle investor claims efficiently and fairly and for this obligation to override any insurance concerns. It was implicit that an inadequate response by AMP could place at risk its securities dealers licence. On 1 March 2001, AMP’s solicitors wrote to CGU’s solicitors enclosing, amongst other things, a summary of the investments that had given rise to demands for compensation. A few days later, AMP’s solicitors sent CGU a proposed procedure for the management of the claims, which became known as "the protocol", and asked for confirmation of cover for liabilities arising out of the conduct of Horwath and Pal.
On 6 April 2001, CGU’s solicitors acknowledged receipt of the protocol and reminded AMP to continue to act as a prudent uninsured. On 11 May 2001, CGU solicitors sent further correspondence in which they stated that their client agreed in principal to the protocol and that CGU would consider AMP’s claim for indemnity, on an investor by investor basis. Correspondence continued to be exchanged between the solicitors for insurer and insured. CGU remained non-commital.
On 5 October 2001, a meeting took place between AMP’s solicitors, CGU’s new solicitors and representatives of CGU. AMP’s solicitors set out the demands that had been made by investors. Later that day they sent a letter to CGU’s solicitors enclosing a spreadsheet which summarised the amounts of the separate demands, including those which had been paid and those which had been rejected or deferred. After the meeting, AMP’s senior legal counsel wrote an internal memorandum revealing that AMP was trying to resolve the claims as soon as possible in order to avoid CGU’s assumption of control of them. All of the settlements were effected by the end of 2001.
AMP considered 63 claims under the protocol, and reached settlements with 47 of those investors, paying out in total a sum of $3.23M.
On 14 November 2002, CGU formally declined indemnity in respect of the investor demands. This letter was allegedly sent to AMP’s broker (but never received; it was later resent). In that letter, CGU said:-
"We are advised that AMP’s solicitors’ legal opinion on the operation of section 819 (of the Corporations Law) is flawed and not supported by case law. We are also advised that for AMP to be liable under section 819 [Corporations Law] what is required on the part of the claimant is an actual belief that Mr Pal’s conduct in providing advice was performed in connection with AMP’s business. Moreover, the investors belief must be reasonably held. It is clear that none of the schedule A investors held the belief that Pal acted on behalf of AMP at the time that the advice was provided or the investments made."
AMP claimed damages from CGU for money paid out to the investors, plus interest and investigation costs.
At trial, AMP did not set out to establish that it was legally liable to the investors. It did not call them, nor provide evidence to show that liability for the investor’s losses attached to it. Rather AMP set out to demonstrate that the process it followed in settling the claims was reasonable in the circumstances by bringing with it, and admitting into evidence, numerous folders containing information relevant to each claim. CGU argued that AMP was not liable to investors by reason of s819(4) of the Corporations Law.
His Honour, Mr Justice Heery, at first instance, found in favour of CGU. Relevantly he held that:-
- CGU was not "estopped" from denying liability (ie. AMP argued that because of representations made by CGU, it entered into the settlements in the belief that it would be covered). His Honour held that until receipt of the letter of 14 November 2002, AMP recognised that CGU had neither admitted nor denied liability. In his view AMP paid the settlement sums because it considered that it was in its own interests to do so, particularly given the attitude of ASIC.
- There was no evidence to show that at the time the settlement sums were paid, CGU represented that it would not put AMP to legal proof of its liability to the investors. His Honour was also of the view that s819(4) may well have had the consequence of making MAG, rather than AMP, liable to the investors.
- CGU was not in breach of its duty of utmost good faith.
AMP appealed to the Full Court of the Federal Court of Australia. By a 2:1 majority, the Full Court ordered that the matter be remitted to the trial judge for consideration of the certain questions relevant to whether CGU was estopped from denying liability, whether it had acted with the utmost good faith and whether the settlements were reasonable. In remitting the matter to the trial judge, the majority acknowledged that CGU might still succeed at first instance. They simply insisted that such success should be based on a proper trial of all the issues.
CGU obtained special leave to appeal to the High Court. It disputed the basis on which the Full Court of the Federal Court remitted the matter to the trial judge on the issues of estoppel and good faith. By a majority of 4:1, the High Court upheld CGU’s appeal. Justices Callinan and Heydon said that the Full Court was mistaken in remitting the matter back to the trial judge. They held that the questions remitted by the Full Court had not been litigated at trial, were not open on appeal, and in any event could not be answered favourably to AMP in this court. They held:-
"We have already foreshadowed that in our opinion the conduct of [CGU] did leave something to be desired. It does seem to us that there was certainly a degree of opportunism on the part of [CGU] in dealing with the claims against AMP (by the investors). As Kirby J pointed out, this insurance was effected in a market in which ASIC had an important and powerful presence. It follows that it ought to have been within the contemplation of [CGU] that [AMP] might come under pressure from ASIC to settle claims. . . but there were other factors in play. [AMP] seems to have been just as keen to stay out of court as ASIC was to keep the investors out of court. [AMP] was anxious to protect its name and goodwill, and to keep [CGU] at a distance from the management of the claims."
and went on to say:-
"Having regard to the failure to invoke [a senior counsel clause] in the policies, [AMP’s] determination to settle the investor’s claims quickly for its own reasons, and its failure to consider the possibility of exoneration under section 819(4) of the Corporations Law, even if there had been an absence of good faith on the part of [CGU] as to which we make no conclusive finding, there was not such a degree of reciprocal good faith on the part of [AMP] as would entitled it to relief against [CGU]."
Chief Justice Gleeson and Justice Crennan accepted that at the time AMP paid the settlement amounts to the various investors, it was concerned not to put CGU in a position where it might decide to exercise its rights to take over and defend a claim in the name of AMP. Their Honours referred to the internal memorandum prepared by AMP’s senior legal counsel following the meeting on 5 October 2001. Their Honours noted that most of the money was paid out to investors in October and November 2001 (ie. at a time when it was evident to AMP that CGU was not committing to indemnify it). They considered that the settlements were in fact made at a time when CGU was questioning whether AMP liable at all to the investors.
Justice Kirby dissented. He was very critical of CGU’s conduct and let his feelings be known. He said:-
"When the full detail of this extended prevarication and humbug is understood, it is apparent that CGU’s conduct was quite contrary to the honourable and proper conduct of insurers in relation to insureds that should be observed in Australia in accordance with the [Insurance Contracts Act]."
"To condone and endorse, as lawful, the conduct of the insurer in this case, as the majority do, sends quite the wrong signal to Australian insurers concerning their obligations under the Act in their dealings with insureds. It is not a signal that I would endorse. It is not one that this Court should send."
- The High Court emphasised that the duty of utmost good faith is a two way street. There was ultimately no finding that CGU had breached the duty of utmost good faith that it owed to AMP. If it were not for the evidence that AMP was acting in the manner to deliberately settle claims without CGU’s involvement there may have been a finding of breach. The High Court upheld the appeal but made it clear that it wasn’t pleased with CGU’s conduct.
- The main criticism levelled against CGU was the lengthy period that it took to decide upon, or at least inform AMP that it was denying indemnity. The delay may well have had a lot to do with the fact that four firms of solicitors acted for CGU over that period. AMP retained one firm throughout.
- It is difficult to imagine a similar case coming before the Court now with the General Insurance Code Of Practice in place. The Code places stringent obligations on insurers to keep insured’s informed and make prompt decisions on cover.
- The case illustrates the difficult situation that corporations may be placed in when the subject of an ASIC inquiry. In similar circumstances, insureds ought to involve their insurers in all discussions with ASIC from the outset.
- Underpinning the judgement was also the fact that it was never shown that AMP was liable to the 47 investors with whom it settled. Indeed the suggestion was that AMP may have escaped liability if it had relied upon s.819(4) Corporations Law.
- Justice Kirby’s frustration may stem from the fact that he was the chairman of the Australian Law Reform Commission Committee responsible for the report which formed the basis of the Insurance Contracts Act (1984). This may explain the greater emphasis that Justice Kirby placed on the duty of utmost good faith as a deciding factor.
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