What happened
The litigation arose from the collapse of investments recommended by two financial advisers, Mr Pal and Mr Howarth, who held proper authorities from AMP Financial Planning Pty Ltd as a licensed securities dealer under the Corporations Law. Their company, Macquarie Advisory Group Pty Ltd (MAG), went into liquidation after ASIC investigations revealed serious misconduct, including investments in Hibiscus Spa where client funds were lost. AMP notified its professional indemnity insurer, CGU Insurance Limited, of potential claims in December 1999 and September 2000 under two successive policies.
Following a February 2001 meeting with ASIC, which emphasised that investors should be compensated promptly without the need for court proceedings and that AMP's obligations to investors overrode insurance concerns, AMP proposed a detailed protocol for managing investor complaints. The protocol required notification to CGU, preparation of liability reports, and instructions from CGU within 14 days on whether to settle or defend. CGU responded that, pending a decision on indemnity, AMP should "act as a prudent uninsured" and later agreed "in principle" to the protocol while reserving its position on indemnity. AMP's solicitors repeatedly pressed for confirmation of indemnity and warned that settlements would proceed to protect AMP's licence and reputation.
Between October and November 2001, AMP settled 47 investor claims for approximately $3.23 million without any investor commencing legal proceedings. These settlements occurred while CGU was still questioning liability, had indicated it would seek senior counsel's opinion, and had not committed to indemnity. CGU ultimately denied indemnity in November 2002, asserting that AMP had no legal liability under s 819 of the Corporations Law. AMP commenced proceedings in the Federal Court seeking indemnity, relying on estoppel arising from the protocol and CGU's representations, breach of the duty of utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth), and the objective reasonableness of the settlements.
Heerey J dismissed AMP's claim. He found that the policies responded only to "Claims" defined as originating processes in legal proceedings, that no estoppel prevented CGU from requiring proof of liability, that there was no breach of utmost good faith (which he equated with dishonesty), and that the settlements were unreasonable because they were driven by ASIC pressure rather than an assessment of litigation risk and failed to consider the possible application of s 819(4) of the Corporations Law. The Full Court of the Federal Court (Moore and Emmett JJ, Gyles J dissenting) allowed AMP's appeal and remitted four specific questions concerning inducement to assume that proof of liability by admissible evidence would not be required, reliance, whether CGU was estopped or would lack good faith in so asserting, and whether the settlements were on reasonable terms. CGU appealed to the High Court, which allowed the appeal, set aside the Full Court's orders, dismissed the appeal to the Full Court, refused AMP's application for special leave to cross-appeal, and remitted a separate costs issue.
The majority (Gleeson CJ, Crennan, Callinan and Heydon JJ) held that Heerey J's undisturbed findings left no room for the remitted questions, that AMP had not established estoppel or a breach of s 13 that relieved it of its evidentiary burden, and that the settlements were not reasonable. Kirby J dissented, emphasising CGU's protracted delay and prevarication as contrary to the duty of utmost good faith.
Why the court decided this way
The majority reasoned that the policies provided cover only for "Claims for Civil Liability" where "Claim" was defined as an originating process in a legal proceeding or arbitration and "Civil Liability" meant liability ordered by a civil court. Because AMP had deliberately structured its response to avoid formal claims (partly to satisfy ASIC and prevent CGU from taking over conduct under cl 7.5), the insuring clause was not directly engaged. This context was critical when evaluating estoppel and good faith arguments. The majority accepted Gyles J's view that CGU was estopped from relying on cl 7.6 (prohibiting admission of liability or settlement without consent) or the absence of formal claims, but emphasised that this did not relieve AMP of proving that the settlements were reasonable and that it was actually liable to the investors.
On estoppel, the majority held that CGU's repeated statements to "act as a prudent uninsured" and agreement in principle to the protocol did not convey a representation that AMP "would not subsequently be required to prove its liability to the investors with whom it had settled by calling those investors as witnesses in its case in any subsequent legal proceeding". Heerey J had found that AMP knew CGU had not accepted liability, that AMP paid for its own commercial reasons (including preserving relations with ASIC and its licence), and that AMP had a motive to settle while the indemnity issue remained unresolved so as to reduce the risk of CGU assuming conduct. These findings, which were not set aside, negated both reliance and the requisite detriment. The questions posed by the Full Court for remitter therefore achieved nothing; they had already been answered adversely to AMP.
Regarding s 13 of the Insurance Contracts Act 1984 (Cth), the majority accepted the broader view that utmost good faith is not confined to dishonesty and may require an insurer to act with due regard to the legitimate interests of the insured. However, the Act does not empower a court to impose liability as a punitive sanction for breach. Even assuming CGU's delay throughout 2002 breached the duty, most settlements had already been paid in 2001 when CGU was expressly questioning liability. The asserted want of good faith was CGU's litigation stance that AMP must prove liability by admissible evidence, not mere delay. Because AMP itself had not acted with reciprocity—it prioritised ASIC demands, explicitly ignored CGU's interests, failed to consider s 819(4), and did not invoke the senior counsel clause in cl 7.8—the duty could not be invoked in its favour.
On reasonableness, the majority upheld Heerey J's finding that the settlements failed the objective test in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd. The process was "so dominated by pressure from ASIC" that settlements would not have been reached on the same terms absent that pressure. AMP did not merely fail to give proper weight to CGU's interests; it was told by ASIC to ignore them. Additionally, the settlements ignored the potential s 819(4) defence that could have rendered MAG rather than AMP liable. AMP had tendered 30 lever-arch files only to prove its state of mind at the time of settlement, not the underlying facts of liability. Heerey J was not required to examine every document in detail when senior counsel for AMP had indicated it was sufficient to observe the pattern. The hypothesis underlying the Full Court's remitter—that AMP had not proved liability by admissible evidence—meant that Heerey J could form only a tentative view on the limited material, which supported unreasonableness. Emmett J's criticisms did not alter the outcome because the primary judge had done what he was asked to do on the evidence presented.
The second appeal concerning costs orders was remitted because the Full Court had not dealt with CGU's cross-appeal on construction issues once it allowed AMP's appeal. The majority's disposition therefore restored Heerey J's orders (subject to the costs remitter) and confirmed that AMP had not established an entitlement to indemnity.
Before and after state of the law
Prior to this decision, the precise content of the duty of utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth) was unsettled. Some authorities, including dicta in CIC Insurance Ltd v Barwon Region Water Authority and Kelly v New Zealand Insurance Co Ltd, suggested that want of utmost good faith required proof of dishonesty. There was also uncertainty about whether an insurer's delay in responding to a claim could constitute a breach, and the extent to which the duty was reciprocal. The decision in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd had established that an innocent party forced into third-party litigation by a contract-breaker's breach could recover a reasonable settlement, but its application to insurance where no formal "Claim" had been made and the insurer was not yet in breach remained unclear. The operation of s 819 of the Corporations Law, particularly the exculpatory effect of sub-s (4), had produced judicial disagreement.
After the decision, it is clear that the duty under s 13 is broader than dishonesty. It may require an insurer to act consistently with commercial standards of decency and fairness and with due regard to the insured's legitimate interests, potentially including a timely response to claims. However, a breach does not automatically create or expand contractual liability; there must be a principled link to the contract of insurance. The duty is explicitly reciprocal, so an insured that manoeuvres for commercial advantage (for example, to satisfy a regulator while preserving rights against the insurer) cannot readily invoke the insurer's want of good faith. The case reinforces that, where an insured settles without a formal Claim as defined in the policy, it bears the onus of proving both its underlying liability and the objective reasonableness of the settlement, judged from the perspective of the risk the insured faced at the time. Regulatory pressure, while relevant, does not excuse failure to consider all defences or the insurer's interests. Estoppel will not lightly relieve an insured of these evidentiary burdens where the insurer has reserved its position and the insured knew indemnity had not been accepted. The senior counsel clause in policies (cl 7.8 here) assumes greater practical importance as a mechanism for resolving disputes efficiently.
The decision also illustrates that s 819(4) of the Corporations Law can operate to shift liability to another "indemnifying principal" (here MAG) where both principals are before the court and it is proved that the representative acted for that other person. Failure to consider such a defence can render a settlement unreasonable.
Key passages with plain-English translation
Paragraph [4] (Gleeson CJ and Crennan J): "Payment of the settlement amounts was not within the terms of the cover provided by the contract of insurance. (There were, in fact, two contracts, covering successive years, but it is convenient to refer to the insurance cover in the singular.) Under the insuring clause, CGU agreed to provide cover for 'Claims for Civil Liability' arising from the conduct of AMP's 'Insured Professional Business Practice' made while the policy was in force. 'Civil Liability' was defined to mean liability for damages, costs and expenses which a civil court ordered the insured to pay on a claim. 'Claim' was defined (so far as presently relevant) to mean any originating process in a legal proceeding or arbitration. None of the investors to whom settlement amounts were paid made a claim, as defined."
Plain-English translation: The policies only paid out if someone actually sued AMP and a court ordered it to pay. Because AMP settled everything before any writ was issued, the policy wording did not automatically cover the payments. This background colours every argument about whether CGU behaved badly or is stuck with the bill.
Paragraph [8] (quoting Gyles J): "AMP was entitled to rely upon that assurance. It follows that CGU is estopped from denying liability to indemnify AMP for any payment pursuant to a settlement reached accordingly, notwithstanding any policy conditions to the contrary. Whether it did in fact act as a prudent uninsured in making the payments is another and, in my opinion, the main, issue. If it did so, it would have acted to its detriment."
Plain-English translation: CGU cannot hide behind the policy clauses that stop AMP admitting liability or settling without consent, because it told AMP to behave as if it had no insurance. But that concession only gets AMP so far; it still has to show that what it paid was a sensible amount that a careful uninsured person would have paid.
Paragraph [15] (Gleeson CJ and Crennan J): "However, the Act does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. If there is found to be a breach of the requirements of s 13 of the Act, there remains the question how that is to form part of some principled process of reasoning leading to a conclusion that the insurer is liable to indemnify the insured under the contract of insurance into which the parties have entered."
Plain-English translation: Even if CGU did breach its good-faith duty, a judge cannot simply order it to pay as punishment. There must still be a logical legal path from the breach to actual liability under the insurance contract. That path was missing here.
Paragraph [20] (Heerey J, approved by majority): "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 ... 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."
Plain-English translation: ASIC was leaning on AMP so hard that the settlements were not commercial decisions based on what might happen in court; they were regulatory compliance exercises. On top of that, AMP never even thought about a defence that might have let it off the hook entirely. That makes the payments unreasonable from an insurance perspective.
What fact patterns trigger this precedent
This precedent is triggered whenever an insured under a claims-made professional indemnity policy settles third-party demands without those demands ever crystallising into formal "Claims" as defined (originating processes in legal proceedings or arbitration). It is especially relevant where the insured faces regulatory pressure from a body such as ASIC to compensate quickly and without technical defences, develops a protocol for handling claims, obtains the insurer's agreement "in principle" to that protocol, and is told to "act as a prudent uninsured". The case applies when the insurer reserves its rights, delays deciding on indemnity while questioning liability, and ultimately denies cover on the basis that the insured was never actually liable or that the settlements were unreasonable.
Key triggers include: (1) the insured's internal documents or evidence showing that settlements were motivated primarily by commercial or regulatory concerns (licence protection, reputation, avoidance of insurer takeover of claims) rather than an objective assessment of litigation risk; (2) failure to consider all available defences, such as statutory exculpatory provisions like s 819(4); (3) tender of investigative materials only to prove the insured's state of mind rather than the underlying facts of liability; (4) absence of any invocation of a senior counsel clause to resolve disputes about whether claims should be defended; and (5) lack of reciprocity by the insured in its own conduct towards the insurer. The precedent is engaged in any dispute where the insured seeks to rely on estoppel or s 13 to shortcut the need to prove both liability and reasonableness of voluntary payments.
How later courts have treated it
The High Court's reasoning has been treated as settling the proposition that a breach of s 13 does not, without more, create contractual liability where the policy terms are not satisfied. The majority's insistence on a "principled process of reasoning" linking any breach to the contract has been influential in confining the remedial scope of the section. The affirmation of Heerey J's findings, despite Emmett J's criticisms in the Full Court, underscores that a trial judge's assessment of reasonableness will not lightly be disturbed where the insured has presented its case on a limited evidentiary basis (state of mind rather than proof of facts).
The decision distinguishes between the estoppel that arises against reliance on policy conditions such as cl 7.6 (which the majority accepted) and any wider estoppel that would relieve the insured of proving its underlying liability (which was rejected). Later analysis has treated the reciprocal nature of the s 13 duty as requiring the insured to demonstrate diligence and regard for the insurer's interests, particularly where the insured has manoeuvred to keep the insurer at arm's length. The treatment of ASIC pressure as a factor that can render settlements unreasonable when it displaces objective assessment of litigation risk has narrowed the circumstances in which regulatory intervention can be used to justify voluntary payments.
The remitter mechanism employed by the Full Court was characterised as futile once it was recognised that Heerey J's undisturbed findings already answered the remitted questions. This has reinforced the principle that an appellate court should not remit for further consideration issues that have, on a fair reading of the primary judgment, already been determined. The majority's approach to s 819(4) has been treated as confirming that an insured must turn its mind to all available statutory defences at the time of settlement if it wishes to characterise the payment as reasonable.
Still-open questions
The decision leaves open the precise point at which an insurer's delay in responding to a notification of circumstances crosses the line into a breach of s 13, particularly where the insured event (a formal Claim) has not yet occurred. While the majority accepted that timely response may be required, it did not articulate a bright-line test or the circumstances in which delay before the insured event would ground relief.
The exact content of the reciprocal obligation on the insured under s 13 remains unsettled in detail. The majority noted AMP's lack of diligence and its prioritisation of its own interests, but did not exhaustively catalogue what an insured must do to maintain reciprocity when under regulatory pressure. Whether an insured that has been expressly told by a regulator to ignore the insurer's interests can ever satisfy the duty is unclear.
The interaction between a regulator's demands and the objective reasonableness test for settlements requires further elaboration. The majority accepted that ASIC pressure dominated the process but did not address whether, and to what extent, an insured can rely on regulatory expectations that conflict with the insurer's legitimate interests without rendering the settlement unreasonable.
The proper approach to assessing s 819(4) defences on a claim-by-claim basis where evidence is incomplete also remains open. Heerey J formed a tentative view on the limited material; the majority held that was all he could do. Future cases may need to clarify the evidentiary burden on an insured that has settled without calling third parties when the insurer later raises a statutory defence that was not considered at the time.
Finally, the practical utility of senior counsel clauses in policies (cl 7.8 here) when both parties have acted with some lack of candour is unresolved. The majority noted the clause had not been invoked; whether an insurer's failure to suggest its use could itself constitute want of good faith was not decided.
Gotchas
Most practitioners still assume that once an insurer says "act as a prudent uninsured" and agrees in principle to a protocol, the insured is home free on liability and need only show the settlements were commercially sensible. The majority quietly buried that assumption: the estoppel is narrow and does not dispense with the need to prove the insured was actually liable and that the payments were objectively reasonable. Another trap is treating s 13 as a get-out-of-jail-free card for the insured; the duty is reciprocal, and an insured that prioritises its regulator over its insurer, fails to consider statutory defences, and deliberately keeps the insurer at arm's length will struggle to invoke the section. The case also contains a hidden warning about tendering 30 lever-arch files "to show state of mind only"—it may satisfy the trial judge that you followed a process, but it will not prove the underlying liability or reasonableness if the judge concludes the process was distorted by external pressure. Finally, most lawyers forget the senior counsel clause until it is too late; had AMP invoked cl 7.8 early, the entire dispute might have been resolved on economics and prospects rather than years of expensive litigation. These nuances justify close attention because they turn on the precise wording of findings that are easily missed on first reading.