Recent months have seen three major attempts by plaintiffs to get access to the insurance policies of companies and their directors targeted for litigation. Only one has been successful, but the rapid growth of litigation-funded securities class actions suggests that this is going to be a hot topic for the foreseeable future.

Successful

As we reported in April, a shareholder in listed flooring manufacturer Style Ltd applied for access to its D&O policies. The shareholder wanted to determine if it was worthwhile taking court proceedings against Style's directors for alleged breaches of duty.

The shareholder relied on his statutory rights to apply for access to his company's books. Although this was the first time that the statutory right had been directed at D&O policies, the shareholder's application was successful.

Lehman Bros

A more high-profile application followed in May, when Wingecarribee Shire Council applied for access to the insurance policies of Lehman Brothers Australia Limited.

In late 2007 Wingecarribee had begun legal proceedings against Lehman Bros for alleged breaches of duty and misleading or deceptive conduct in connection with investments made by it through Lehman Bros. In 2008, Lehman Bros went into voluntary administration. Wingecarribee wrote to the administrators, asking for copies of Lehman's professional insurance indemnity policy and D&O policy. That request was refused.

Lehman's largest creditor proposed a Deed of Company Arrangement. Under the Deed, creditors' claims (included Wingecarribee's) would be extinguished.

Following the refusal of the request for the production of Lehman's insurance policies, Wingecarribee applied under s 23 of the Federal Court Act for an order to produce the policies in the litigation which it was conducting against Lehman. The Council's argument was that the Deed process was an abuse of process because:

  • adoption of the Deed would kill the Wingecarribee's action against Lehman; and
  • without the insurance policies, the vote on the Deed would be made with inadequate information.

The Full Court of the Federal Court rejected the application. It said that there was no demonstrated causal link between the two arms of the alleged abuse of process. The second arm would more appropriately have been addressed by an application to have the Deed set aside under the Corporations Act rules relating to voluntary administration. Subsequently, the City of Swan and Parkes Shire Council commenced proceedings in the Federal Court to have the Deed set aside. Wingecarribee has been joined as a plaintiff to those proceedings. The Councils have sought production of documents in the proceedings, including Lehman's insurance policies.

Securities class action

Centro was the subject of a securities class action by investors, alleging non-compliance with the ASX continuous disclosure rules.

The parties were ordered into mediation. Centro's investors then applied to the Federal Court to force discovery of Centro's insurance policies. The investors' legal advisers basically argued that they couldn't give their clients meaningful advice in the mediation if they didn't know what insurance Centro carried, and that the Court would be unable to determine whether any offer of settlement was fair, reasonable and adequate in the interests of the investors.

The Court disagreed. It thought that knowledge of the insurance policies was a commercial bargaining chip rather than an essential legal component of the mediation.

"I do not accept that a lack of knowledge by the applicant and his advisers of the existence and extent of insurance cover held by the respondents would, at this early stage, preclude the applicant's advisers from forming, pursuant to s 33V of the Act, an opinion on the reasonableness of any proposed outcome of negotiations in a mediation. Nor do I accept that a mediation occurring in the absence of that knowledge would be `hollow' or inconsistent with the principles which this Court has developed for the mediation or case management of disputes like the present."

In addition, the Court did not think that the existence or terms of Centro's insurance policies fell with the category of discoverable documents in O 15 r 11 of the Rules of Court.

Comment

The introduction of third party litigation funders has undoubtedly resulted in an explosion of litigation, particularly securities class actions. Most securities class actions only make commercial sense if the defendants have deep pockets (very unlikely in the case of a distressed company) or good insurance. For that reason, the cases noted above are unlikely to be the last of their kind.

Insurers may draw some comfort from the Lehman Bros case, especially since it was a Full Court decision. However, it was also based on a fairly unusual set of circumstances. The Centro decision has wider application, but it is only a single judge decision. The Style case is likely to encourage applications for access to insurance information when one of the actual or potential claimants is a shareholder of the target company.

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