REASONS FOR JUDGMENT
1 By a notice of motion filed on 30 June 2011 the cross-claimant, Peter Fitzgerald, seeks leave to file an amended second cross-claim against the fourth and fifth cross-respondents, Chubb Insurance Company of Australia Limited and Allianz Australia Limited (together the insurers).
2 Mr Fitzgerald is a former employee of Westpac Banking Corporation (Westpac). The insurers and Westpac (formerly St George Bank) are parties to a contract of insurance under which cover is extended to Mr Fitzgerald as an officer of Westpac.
3 In various proceedings brought against it by former employees Westpac cross-claimed against some of its former officers, including Mr Fitzgerald. Mr Fitzgerald sought indemnity under the contract of insurance. Although the cross-claim by Westpac against Mr Fitzgerald (and the other former officers) has been resolved, Mr Fitzgerald's cross-claim against the insurers (the second cross-claim) continues.
4 By the proposed amendments Mr Fitzgerald seeks to make two primary claims against the insurers. Mr Fitzgerald's first claim is for defence costs (paras 27 to 35 of the draft amended second cross-claim). The insurers consent to leave being granted to Mr Fitzgerald to make these amendments. Mr Fitzgerald's second claim is for damages based on alleged breach of the insurers' duty to act in the utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act) (paras 36 to 43 of the draft amended second cross-claim and the claim for damages in para B1). The insurers contend that leave should not be granted to make these amendments as they are futile, there being no legal basis for the claim for damages. According to the insurers, s 13 of the Insurance Contracts Act (the only possible source of the claim for damages), construed properly and in accordance with relevant authority, applies only to parties to the contract of insurance and not to persons (such as Mr Fitzgerald) who are covered by the contract of insurance as provided for in s 48 of that Act.
5 Although it was suggested on behalf of Mr Fitzgerald that I should defer consideration of this issue until the hearing proper, this suggestion was not, as I understand it, made on the basis that the position might be affected in any way by the evidence or by findings on disputed issues of fact. The issue is one of law and is to be determined as a matter of construction of the provisions of the Insurance Contracts Act. Mr Fitzgerald (and the other officers of Westpac in the same position as Mr Fitzgerald, this notice of motion also being a test case for their proposed amended cross-claims) either do or do not have a proper legal foundation for the claim for damages. If they do not, the quickest, most efficient and most inexpensive way to resolve this issue is in the context of the present application for leave to amend. In the case of Mr Fitzgerald in particular, the effect of deciding that the proposed amendments are futile would be the refusal of leave to amend to that extent; the equivalent to the summary dismissal or striking out of the claim had it been made initially. Although the consequence of resolving the issue as part of the application for leave to amend is that the unsuccessful party on the motion, if they wish to appeal immediately, will require leave to do so (whereas leave would not be required if the issue were resolved as part of the final hearing), those circumstances can be taken into account in any application for leave. On balance, and having regard to s 37M of the Federal Court of Australia Act 1976 (Cth), I am satisfied that it is appropriate to resolve this issue as part of the application for leave to amend.
6 As noted, there is no relevant factual dispute. Westpac and the insurers are parties to a contract of insurance, being directors' and officers' liability policy number 93256393 (the policy). The policy covers claims in the period 29 October 2008 to 29 October 2009. Mr Fitzgerald was an officer of Westpac and thus is an "insured person" within the meaning of the policy. The disputed claim is for damages. The parties agree that the common law duty of utmost good faith between insurer and insured does not permit any claim for damages for its breach, the duty being in the way of an obligation imposed as an incident of the relationship between the parties to the contract rather than an implied term or condition of the contract itself (Khoury v Government Insurance Office (NSW) (1983) 165 CLR 622 at 637). Accordingly, the only proposed basis of the claim for damages is that pleaded in paras 37, 42 and 43 of the proposed amended second cross-claim. Paragraph 13 pleads an implied term of the policy requiring the insurers to act towards Mr Fitzgerald in any matter arising under or in relation to the policy with the utmost good faith (defined as the statutory duty). Paragraph 42 pleads conduct of the insurers said to be in breach of the policy. Paragraph 43 pleads loss and damage by reason of the alleged breaches of the statutory duty.
7 The relevant statutory provisions are ss 13 and 48 of the Insurance Contracts Act.
8 Section 13 is in these terms:
A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
9 Section 48 provides as follows:
(1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract.
(2) Subject to the contract, a person who has such a right:
(a) has, in relation to the person's claim, the same obligations to the insurer as the person would have if the person were the insured; and
(b) may discharge the insured's obligations in relation to the loss.
(3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured.
10 The insurers submitted that the implied term for which s 13 provides is a term requiring only that the parties to the contract act towards each other with the utmost good faith. Mr Fitzgerald is not a party to the policy. Section 48 does not deem him to be a party to the policy. Moreover, ss 13 and 48 have been construed in a manner which precludes treating Mr Fitzgerald as if he were a party. Accordingly, in Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pte Ltd (2009) 240 CLR 391; [2009] HCA 50 (Zurich) at [24] French CJ, Gummow and Crennan JJ said:
Section 48 confers a statutory right of recovery upon a non-party referred to or specified in a general contract of insurance as a person insured or to whom cover extends. It does so directly. Its enactment predated the extension, by the decision of this court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, of common law rights of recovery for non-party insured persons under an insurance policy. Section 48 does not deem such a person to be a party to the insurance contract thus attracting the rights conferred on a party. It does not purport to confer contractual or equitable rights upon such a person. There is therefore no basis in s 48 for assimilating the position of a non-party insured to that of a person who has "entered into" a contract of insurance within the meaning of s 45(1).
11 Further, in Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Insurance Cases 90-123; [2005] NSWCA 214 (Hannover) Santow JA (with whom Spigelman CJ and Tobias JA agreed), at [37], noted that:
The trial judge recognised that Mr Sayseng was not a party to the policy whereas the cases referred to involved a direct contractual relationship between the insurer and the claimant. Therefore, not being a party to the policy, Mr Sayseng could not rely upon the provisions of s 13 of the Insurance Contract Act 1984 (Cth) which implies into the contract of insurance a provision requiring each party to act towards the other party in respect of any matter arising under or in relation to it with the utmost good faith.
12 Santow JA repeated this proposition at [46], where his Honour identified the question for resolution as the nature and content of the insurer's obligation where, amongst other things:
the employee not being a party to the insurance contract:
(i) cannot rely on s 13 of the Insurance Contracts Act 1984 (Cth) to imply a statutory duty of utmost good faith…
13 In answer it was submitted for Mr Fitzgerald that both Zurich and Hannover concerned circumstances different from those of the present case. Further, it was said that the purpose of s 48 is to place the insured person in the same position as the parties to the contract of insurance. By that section the insured person has the "right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract." Such loss must include the loss arising from breach of the duty of utmost good faith implied by s 13. If it were otherwise s 48 would not serve its purpose.
14 I am unable to accept the submissions for Mr Fitzgerald. I am persuaded by the insurers' submissions that the reasoning in both Zurich and Hannover is inconsistent with any construction of ss 13 and 48 of the Insurance Contracts Act which overlooks the distinction between a party to the contract and an insured person. Section 13 implies into a contract of insurance a statutory duty of the utmost good faith between the parties to the contract. Section 48 vests in an insured person who is not a party to the contract a right to recover the amount of the person's loss notwithstanding that the person is not a party. On its terms, the section does not deem an insured person to be or to have the same rights as a party to a contract of insurance. Nor does it deem s 13 to apply as between an insurer and an insured person who is not a party to the contract. The proposed amendments in dispute are thereby futile, and leave to amend the second cross-claim should be refused to that extent. On this basis, it is unnecessary to consider certain more limited objections to the same paragraphs taken by the insurers. Costs of the motion and the amendments may be argued.
I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.