AMP Financial Planning Pty Ltd v CGU Insurance Limited [2004] FCA 1330 | Case summary

subsection (2) and (3) do not apply, for the purposes of the proceeding, in relation to the indemnifying parties other than that person." 92 In final submissions CGU did not rely on the point which Mr Archibald and Mr Settle saw as an answer to liability under s 819, namely that the conduct of Pal and Howarth was not conduct in connection with a securities business or investment advice business carried on by AMPFP, within the meaning of s 819(1)(b)(ii). I think CGU's (implicit) view is correct. What is relevant, consistently with the underlying purpose of s 819, is not whether, as a matter of fact, Pal and Howarth were giving advice in connection with an AMPFP business of the kind indicated. Rather the questions are whether the Investors reasonably and in good faith believed two things: (i) that Pal and Howarth were giving advice on behalf of some other person (whether or not identified or identifiable, although in fact likely to be identified as MAG) and (ii) that the advice was in connection with a securities business or investment advice business carried on by that person (again, most likely MAG). 93 As I understand its case in final submissions, CGU did not argue for the non application of s 819; rather it submitted that AMPFP could have relied (and presumably still can rely) on the exculpatory provision in s 819(4). Issue 5: If yes to 4, in any proceedings by Investors could AMPFP have relied on s 819(4) of the Law to avoid liability under s 819(2)? 94 CGU contends that the evidence shows that in dealings with the Investors Pal and Howarth were acting as representatives of MAG. "Representative" means securities representative: s 9. They were securities representatives of MAG because they were employed by, or acted for or by arrangement with, MAG in connection with a securities business or investment advice business carried on by MAG: s 94(1). 95 CGU points in particular to the account given by Tim Mullaly of ASIC as to the role of MAG. Mr Mullaly's affidavit filed in Supreme Court of Victoria proceedings consistently refers to MAG as in effect the operating entity for Pal and Howarth's activities. For example, "MAG, via its directors, borrowed clients' funds from the MAG No 3 Trust Account" (par 42), "MAG, through its directors, loaned clients' funds to other companies of which Pal, Nixon [Pal's spouse] and/or Howarth were directors" (par 45), "MAG, through its directors and employees, offered…the opportunity to its clients to invest in shares in Tuska" (par 47). There are many references to files of MAG containing copy letters relating to investments. 96 Conversely, the liability reports prepared by Minter Ellison do not suggest the Investors thought they were dealing with AMPFP. Liability is predicated purely on the temporal connection between the relevant conduct and the holding of a proper authority. 97 AMPFP did not attempt to counter evidence of the kind just mentioned. Rather, it argued that s 819(4) only applies to proceedings brought by the Investors, and only if such proceedings were brought against MAG and AMPFP. 98 True it is, s 819(4) is directed to a setting where two or more "indemnifying principals" are "parties…to a proceeding in a court" and neither MAG nor the Investors are parties to the present proceeding. However, the present proceeding is concerned with insurance policies which provide a right of indemnity for certain kinds of claims for "civil liability", defined as liability for the damages, costs and expenses which a civil court orders AMPFP to pay on such claims. Central to this case therefore, including, amongst other things, the issues as to the reasonableness of the Settlements and the liability of CGU to provide indemnity for unpaid claims, is the question whether AMPFP would be liable if the Investors were to bring actions against it. In assessing the potential liability of AMPFP in such hypothetical and notional actions the possible defences which AMPFP might raise are plainly relevant. Indeed the potential defences under s 819(4) seem just as relevant as the potential liabilities under s 819(2). 99 It is sufficient for the purposes of s 819(4) that the indemnifying principals are (or, in the present context, would be) parties to the proceeding. The section would equally apply where an indemnifying principal is a party because it has been joined as a third party. MAG could be so joined although leave would be necessary since it is in liquidation. In any event, MAG could be joined as a defendant, which would overcome the difficulty Mandie J found in dealing with a similar argument in Newman at [225]-[226]. I would observe that the policy behind s 819(4) seems to be to mitigate to some extent the Draconian rigour of s 819, which creates liability whether or not the wrongdoer was the agent of the "indemnifying principal" and whether or not the client had even heard of the indemnifying principal in relation to the impugned conduct. At least where what might be termed the "real" principal is before the court, it seems reasonable that it alone should bear the burden, and s 819(4) has that effect. And this appears to be so irrespective of the solvency of the "real" principal. Issue 6: Were the Settlements reasonable? 100 On the view I take, this question is irrelevant. However, it formed a major issue in the case and it is desirable that findings be made. 101 Reasonableness is to be judged by an objective standard: Unity at [6] per Brennan J and [129] per Hayne J. That fact that legal advice was received which recommended settlement is relevant, but not conclusive: ibid. The onus of proving reasonableness is on AMPFP. 102 The Settlements must be reasonable from the point of view of CGU as well as AMPFP, that is to say they must be based on a reasonable assessment of the risk faced by AMPFP if the Investors' claims were to proceed to trial and judgment and CGU were liable to provide indemnity. Factors personal to the insured, such as fear of the adverse publicity of a trial, might reasonably influence the insured but they are not proper to be taken into account as between insured and insurer: Distillers at 32 per Stephen J; CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2001) 188 ALR 439 at [64]. 103 In the present case, it is plain that the desire to placate ASIC was the major factor motivating AMPFP in entering into the Settlements. While that was perfectly understandable, indeed commendable, as between AMPFP and ASIC, it was not relevant to the assessment of the claims for which CGU might become liable for indemnity under the Policies. CGU's contractual promise was to indemnify AMPFP against legal liabilities of a defined kind; its promise did not extend to providing indemnity against payments which AMPFP might make, however reasonably, to comply with the demands of regulators or to preserve its business reputation. 104 CGU submitted the following: 1. The actual decision-maker at AMPFP, its managing director Mr Greg Kirk, was not called. There was no evidence identifying the matters or documents he considered. 2. There was a conflict of interest in Minter Ellison acting for both AMPFP and Hillross where the latter's insurer (HIH) was insolvent. 3. The investigation was one-sided. Pal and Howarth were not interviewed. 4. The chronology demonstrated that the driving force between the entire process of investigating, managing and paying Investor claims was the pressure imposed by ASIC for swift satisfaction of investor complaints. Between May 1999 (when complaints first surfaced) and January 2001, almost nothing had been done by AMPFP to deal with those complaints. The meeting held on 14 February 2001 with representatives from ASIC dramatically altered the stance adopted by AMPFP. Thereafter, there was an ever-present fear that ASIC might revoke the dealer licence held by AMPFP. In the meeting on 14 February 2001, the representatives of ASIC were adamant that AMPFP ought ensure that its own obligations to the client investors should override any concern about its insurance cover; ASIC stated that the position of the insurer should be irrelevant in the eyes of AMPFP. AMPFP knew that it had to proceed with management of the investor claims consistently with such views and it did so. Promptly, a plan was prepared that was expressly designed to give effect to the requirements of ASIC and was designed to ensure that "the bulk of claims should be resolved within the three months". This plan was designed without any communication with CGU. The first step in implementing the plan - writing letters to investors - was also implemented without CGU having any opportunity to have an input. Even the Protocol, which derived from the overall project plan and directly reflected the requirements of ASIC, was not proposed to CGU as something to discuss or negotiate, but was being implemented even before it was received by CGU. The letter of 26 March 2001, which enclosed the proposed Protocol, was sent on the same day as another letter enclosing the first liability report, prepared in accordance with the proposed Protocol. By that date, pursuit of the Protocol was a fait accompli; CGU's attitude was irrelevant. 5. The requirements of ASIC extended to the precise manner in which investors should be compensated. According to Mr David Heyworth, a Hillross officer who led the investigation on behalf of that company and AMPFP, ASIC required, in "very strong terms", that all clients be compensated with replacement of capital, reasonable interest and costs. The attitude adopted by AMPFP was that, consistently with the requirements of ASIC, the claims should be settled and the question of recovery from "other parties" (including CGU) could wait until later. Throughout the process, AMPFP was adamant that it would not seek to negotiate less than full compensation for claimants. 6. AMPFP deliberately hastened the Settlements so as to make as many as possible before CGU reached a decision on indemnity. Another illustration of this approach is that there were a total of 23 instances in which on the same day that CGU's solicitors were informed that a particular investor was making a claim against AMPFP, Minter Ellison forwarded the liability report relevant to that investor and informed CGU's solicitors that AMPFP proposed to make an offer of settlement in accordance with the liability report in 14 days. 7. In 34 cases AMPFP paid more than 100 per cent of the amount claimed by Investors in their interview records. Mostly the excess over that claim was constituted by interest. Typically the amount paid was between 110 and 120 per cent of the amount claimed. 8. The amounts paid to investors were unreasonable because the assessment of the prospects of AMPFP being adjudged liable to each of the investors failed entirely to take into account the provisions of s 819(4) of the Law. 105 I have not overlooked the fact that AMPFP was acting on the advice of a leading firm of commercial solicitors and obtained the advice of senior counsel, although in the latter case confined to the operation of s 819. 106 Nevertheless I am not satisfied that the Settlements were reasonable. For the reasons advanced by CGU and summarised above, the whole process was so dominated by pressure from ASIC that I am quite unable to conclude that the Settlements would have been reached in the agreed amounts, or indeed at all, had that pressure not existed. As Hayne J pointed out in Unity at [129], the reasoning is important. A settlement can fail the reasonableness test because of flaws in the process by which it was reached, quite apart from an assessment of settlement sum against predicted result of litigation. In the present case the reasoning that led AMPFP to make the Settlements in the way that it did was not to reach a compromise based on an assessment of the prospects of success of the claims, but to satisfy the demands of ASIC. AMPFP did not merely fail to give proper weight to the interests of CGU; it was explicitly told by ASIC to ignore those interests, and did so. 107 Apart from the question of process, the Settlements were unreasonable because they failed to take into account the availability of the s 819(4) defence. This might have been from ASIC's point of view a "technical" defence and thus something which should have been ignored. But it seems not to have been considered at all. Issue 7: Were the Civil Liability Claims of the Investors within the terms of cl 3.2 of the Policies? 108 Clause 3.2 provides: "3.2 The types of Claim We cover We provide this cover in respect of any of the following types of Civil Liability Claim arising in the conduct of the Insured Professional Business Practice: (a) Breach of duty (including a duty of confidentiality). (b) Defamation. (c) Loss of or damage to Documents which were in the Insured's physical custody or control at the time of loss or damage. (d) Dishonest, fraudulent, criminal or malicious acts or omissions by an Employee or Principal of the Insured (but there is no cover to that Employee or Principal for these Claims). (e) Infringement of any patent, copyright, design or trademark. (f) Breaches of the Trade Practices Act 1974 or similar Fair Trading legislation enacted throughout Australia (but not for criminal liability). With one exception, the words or phrases appearing in bold type in these clauses are defined in cl 12 of the Policies. 109 CGU argued that, according to the liability reports, the liability to which AMPFP asserts it was subject was the statutory liability created by ss 817 and 819 of the Law and was therefore not within (a) to (f) of cl 3.2. 110 I do not agree. The Investors alleged Pal gave negligent advice as a result of which they suffered loss and damage. Negligence as a legal cause of action necessarily involves breach by the defendant of a duty owed to the plaintiff. Under ss 817 or 819 the Investors sought to make AMPFP liable under what might be termed a vicarious responsibility imposed by statute. The liability claims against AMPFP can therefore be properly characterised as being for breach of duty. This is the type of claim for which the Investors sought to make AMPFP liable. It is no different from a claim made against AMPFP for a defamatory publication made by an employee in the course of his employment. Put another way, the duty referred to in cl 3.2(a) does not necessarily have to be one owed by the insured. It is sufficient that the claim for which the insured is sought to be made liable is one that can be characterised is one alleging breach of a duty. Issue 8: Did the Civil Liability Claims of the Investors arise in the course of the "Insured Professional Business Practice" of AMPFP? 111 "Insured Professional Business Practice" is defined in cl 12.10 as "The business of provision by the Insured of the professional services stated in the Schedule". These in turn are defined as: "Finance, Investment and Insurance Advisors, Licenced Security Dealers and Mortgage Originators". 112 Clause 4.1 provides that "the conduct of the Insured Professional Business Practice by or on behalf of the Insured" includes: " … acts, errors or omissions of agents or consultants of the Insured while undertaking work which is reasonably incidental to the conduct by the Insured of the Insured Professional Business Practice and for which the Insured is liable." 113 In special condition 4 it is provided that the Insured shall be indemnified " … in accordance with the terms, conditions, exceptions and limitations of this Policy in respect of its liability as a principal and licensed securities dealer for acts or omissions of its authorised representatives, but only on the basis that CGU Professional Risks Insurance retain the rights of subrogation against the authorised representatives." 114 CGU argued the Policies do not cover the Investors' claims since AMPFP was not liable for the acts of Pal or Howarth under common law principles of agency. Further it said that in special condition 4 the reference to liability "as a principal" for the acts of others is also tied to common law agency. 115 In my view the obvious purpose of special condition 4 was to provide indemnity for the kind of liability which AMPFP might incur by way of statutory extension of common law principles of agency. These liabilities were imposed on AMPFP by legislation specific to the kind of business which seems to have been its principal undertaking. By conducting this kind of business AMPFP was going to be exposed to liability for the acts of others in circumstances where common law liability would not attach. It would be a very uncommercial construction of the Policies to limit the liability to that which might exist at common law. Issue 9: Were the Civil Liability Claims of the Investors excluded from indemnity by cl 6.3(e) of the Policies? 116 Clause 6.3(e) of the Policies provided: "6. We do not cover any of the following Claims (or losses): … 6.3 Assumed duty or obligation Claims: … (e) arising from any business not conducted for or on behalf of the Insured firm or Incorporated body." 117 CGU says that each of the Investors' claims arose from the business conducted by Pal and Howarth either on their own behalf or on behalf of MAG, not AMPFP. CGU also points to evidence that Pal and Howarth held proper authorities on behalf of other dealers. 118 The Policies are commercial documents which have to be construed objectively in the light of their text and the surrounding circumstances known to the parties: Pacific Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045 at [22]. Here the circumstances which must be taken to have been known to the parties include the fact that AMPFP was a licensed securities dealer, that it would be likely to give proper authorities to securities representatives and that the statutory vicarious liability imposed by the Law would apply to it. Further it is to be inferred that there was nothing unusual about securities representatives having proper authorities on behalf of more than one dealer. 119 As already mentioned, special condition 4 was designed to make it clear that this particular feature of AMPFP's business was covered. To the extent that there is a conflict between cl 6.3(e) and special condition 4, the application of two canons of construction has the effect that the latter prevails. 120 A typed (as special condition 4 is) or handwritten clause superadded to a printed form will be given greater effect. The typed or written words are the immediate language and terms selected by the parties themselves for the expression of their meaning and the printed words are a general formula adapted equally to their case and that of all other contracting parties upon similar occasions and subjects: Chitty on Contracts 29th ed. 2004 at 12-070. Where different parts of an instrument are inconsistent, effect must be given to that part which is calculated to carry into effect the real intention of the parties as gathered from the instrument as a whole, and that part which would defeat it must be rejected: Chitty at 12-078. Issue 10: Would any liability under the Policies include AMPFP's investigation costs and legal costs? 121 AMPFP claimed as part of its damages $105,121.74 for internal investigation costs. This included the time cost of its employees and expenses such as travel and accommodation. At the same time there was an investigation of claims against Hillross. There were 61 AMPFP claims and 62 Hillross claims. In money terms AMPFP constituted 63 per cent of the total claimed. AMPFP's claim in the present case is for the same percentage of the total AMPFP and Hillross internal investigation costs. 122 Investigation costs are dealt with in cl 3.3 of the Policies as follows: "3.3 Claim Investigation Costs We also pay … Claim Investigation Costs. We only pay these, however, if either: (a) We incur them; or (b) the Insured incurs them after first obtaining Our agreement in writing and the costs and expenses are in Our view reasonable." 123 There was no prior written agreement in the present case. AMPFP argued that the costs were recoverable as damages for breach of contract in accordance with ordinary contractual principles. A party placed in a difficult situation by reason of the breach of a duty owed to him will not be held disentitled to recover the cost of remedial measures merely because the party in breach can suggest other less burdensome measures might have been taken: Banco de Portugal v Waterlow [1932] AC 452 at 506, cited with approval in Unity at [36]. 124 But for the reasons already explained these expenses were incurred before there was any breach by CGU. 125 AMPFP claims also legal costs paid to its solicitors. Costs for investigation of particular claims including in some instances apportionment between AMPFP and Hillross on the same basis as before and total $231,904.72. General investigation costs, also apportioned, total $214,927.21. 126 Again there was no prior written agreement. Ebsworth and Ebsworth's letter of 11 May 2001 does not mention costs. Issue 11: Should there be a declaration that CGU is obliged to indemnify it under the Policies in respect of unpaid claims? 127 This issue received virtually no attention at the trial although it is raised in par 1 of AMPFP's application. AMPFP's case was directed, understandably enough, towards recovery of the amounts it has paid out. It did not articulate an alternative case based on the assumption that it failed in its recovery claim but (as I have now held) succeeded on issues concerning terms of the Policies. The Policies are still on foot; there has been no suggestion of avoidance for non disclosure or like grounds. 128 I think it is reasonable that the parties be given the opportunity to make further submissions on this issue, in the light of my findings. The matter will be stood over for that purpose. Summary of findings 129 AMPFP had to establish by admissible evidence, and not merely by proof of the Settlements, that it was legally liable to Investors. CGU is not liable in damages for AMPFP's payouts on Settlements made before any breach of the Policies by CGU. AMPFP cannot avoid that result by reason of any estoppel or waiver, or any unconscionable conduct, misleading and deceptive conduct, or breach of the obligation of utmost good faith on the part of CGU. AMPFP would probably have been liable to Investors under s 819(2) of the Law but probably would have had a defence under s 819(4). The Settlements were not reasonable. The claims of the Investors were Civil Liability Claims within cl 3.2 of the Policies. The claims were in the course of the Insured Professional Business Practice of AMPFP. The claims are not excluded from indemnity by cl 6.3(e). Any liability under the Policies does not include AMPFP's investigation costs and legal costs. The question of CGU's liability to indemnify AMPFP for unpaid claims is adjourned for further submissions. I certify that the preceding one hundred and twenty nine (129) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

AMP Financial Planning Pty Ltd v CGU Insurance Limited

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Judgment (66 paragraphs)

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