Southern Classic Group Pty Ltd t/as Southern Classic Cars v Arch Underwriting at Lloyd's Ltd on behalf of Syndicate 2012

Mr Ivey's report

1. Mr Ivey opined that Gordan's "Entitlements to March 2012" were either some $256,000 (adopting Southern Classic's calculation of Gordan's personal expenses) or some $331,000 (adopting Gordan's calculation of his personal expenses). The parties referred to this aspect of Gordan's claim as the "Underpayment Claim".
2. Mr Donaldson SC, who appeared with Mr Carolan for Southern Classic, accepted that the policy does not respond to any amount that Southern Classic paid Gordan on account of his Underpayment Claim.
3. In relation to Gordan's "Ongoing Entitlements" Mr Ivey's report stated: "1.2 Ongoing Entitlements The Plaintiff's expected entitlements over 6, 12, and 18 months after the termination date have been calculated as follows. Base Commission Salary Super [Volkswagen] [Other] Sales Bonus Total 6 months $42,500 $15,007 $39,986 $84,256 $28,032 $209,781 12 months $85,000 $29,823 $88,356 $158,016 $66,622 $427,816 18 months $127,500 $45,327 $136,996 $237,588 $105,211 $652,622"

1. Mr Donaldson also accepted that the policy does not respond to any "Ongoing Entitlements" payments for "super" or for "bonus" that Southern Classic paid Gordan.

The Wotton + Kearney advice

1. On 14 February 2017, the day before the mediation, Wotton + Kearney provided Southern Classic with a detailed letter of advice.
2. Wotton + Kearney advised that, in their opinion: 1. it was likely the Court would find in favour of Gordan in relation to his "Termination Claim" (that he had been constructively dismissed and had not resigned, as Southern Classic contended in its defence); 2. the Court would likely conclude that Gordan was entitled to six months' notice of termination of his employment; and 3. an attempt should be made to settle Gordan's claim for $300,000, inclusive of costs on the basis that allowance should be made of: 1. $115,000 for Gordan's "pre-termination entitlements" (the "Entitlements to March 2012" referred to by Mr Ivey); 2. $110,000 for "post-termination entitlements" (being the "Ongoing Entitlements" referred to by Mr Ivey); and 3. approximately $100,000 for Gordan's costs.
3. Wotton + Kearney noted that the Insurer's "contribution is currently capped at $80,000 (inclusive of costs)". Evidently this was increased to $100,000 by the time the matter settled.

Was the settlement reasonable?

1. The settlement at the mediation, $375,000 plus costs as agreed or assessed, was considerably more than Wotton + Kearney had recommended ($200,000 plus costs estimated to be $100,000).
2. Wotton + Kearney's advice was that Gordan was likely to succeed in establishing he had been constructively dismissed or that Southern Classic terminated his employment. That appears a reasonable position for them to adopt.
3. Mr Donaldson submitted that Wotton + Kearney's recommendation underestimated Southern Classic's likely exposure to Gordan's claim in that: 1. it assumed that the Court would conclude that Gordan was entitled to only six months' notice of termination of his employment (which Mr Donaldson submitted was a conservative estimation in all the circumstances); and 2. Wotton + Kearney's "allowance" of $110,000 for "post-termination entitlements" assumed that the minimum amount that Gordan could be expected to recover for unpaid sales commissions was $36,000, whereas Mr Ivey had opined that the minimum figure was in the order of $125,000.
4. The notice to which Gordan was entitled was a vital integer in the calculation of the damages Gordan was likely to receive if his case went to trial.
5. It was a question about which minds could reasonably differ.
6. Mr Donaldson drew my attention to cases in which it has been held that individuals in senior management positions in commercial enterprises were entitled to 10 to 12 months' notice of termination of their employment (Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567 at 580 - 581 (Ashley J); Howard v Pilkington (Australia) Ltd [2008] VSC 491 at [142] - [143] (Judd J) and Ma v Expeditors International Pty Ltd [2014] NSWSC 859 at [53] - [61] (Nicholas AJ)).
7. Each case will be determined by reference to its own facts and, as Mr Donaldson submitted, a somewhat broad brush approach is necessarily involved.
8. Had Gordan's case proceeded to trial, he may well have persuaded the Court that he was entitled to 12 months' notice of his termination. This conclusion was fairly open to Southern Classic, and those advising it, at the mediation. After all, Gordan had worked in the Southern Classic business for some 20 years and held a senior position in the company.
9. For that reason, I accept Mr Donaldson's submission referred to at [38(1)] above.
10. Mr Donaldson was also correct to submit that Wotton + Kearney had underestimated the value of Gordan's claim for unpaid sales commission (see [38(2)] above). Mr Ivey's calculation of the benefits to which Gordan was entitled is three times greater than Wotton + Kearney's allowance.
11. The negotiations that occurred at the mediation were, of course, confidential.
12. In his affidavit in these proceedings, John said: "After the mediation concluded, I considered that it was [in Southern Classic's] best interests to make a further attempt to achieve settlement. I telephoned my brother and made a final offer of $375,000, plus costs as agreed of assessed. That offer was subsequently accepted".
13. The only other insight as to how the settlement figure was arrived at comes from an email that Mr Todd Marskell of counsel, who was giving advice to John during the mediation, sent John on the evening of 15 February 2017: "I confirm my advice to you earlier today that the amount you have agreed to pay is in excess of your likely worst case scenario should the matter be determined by the Court and I do not recommend it. However, I note that you wish to resolve the matter today once and for all."
14. John gave evidence before me that Mr Marskell said to him: "Whether you give me the money or you give your brother the money it's going to cost you the same and by the looks of it you're never going to get anything out of him, you're better off to settle."
15. During cross-examination, Ms Horvath, who appeared with Mr Senior for the Insurer, did not suggest that John was influenced by anything other than commercial considerations when arriving at the figure he ultimately put to Gordan to settle the matter.
16. Ms Horvath very fairly accepted that, in light of the evidence given by John that I have set out at [49], she could not press the submission, foreshadowed in her written opening, that John had settled contrary to the advice given by Mr Marskell.
17. John's evidence of his conversation with Mr Marskell suggests that John was motivated to settle with Gordan by a fear that the costs of continuing to defend Gordan's claim would likely be irrecoverable, even if Southern Classic were successful; and that the benefits of settlement would, in any event, outweigh any disadvantage in making a more generous offer than that made at the mediation.
18. In those circumstances my conclusion is that the settlement is reasonable.
19. It was also reasonable for the settlement to be on a "plus costs" basis. It is unlikely that anyone could have predicted that Gordan's costs, when assessed, would exceed $300,000 (triple Wotton + Kearney's estimate).

The policy

1. The policy provided various heads of cover including cover for "Employment Practices Breach".
2. The insuring clause in respect of that part of the policy provided that the Insurer would pay on behalf of Southern Classic: "All loss on account of any claim against the company for an employment practice breach".
3. "Loss" is defined in the policy to mean, relevantly: "Damages, compensation, settlements to which we have consented, claimant costs and defence costs which a person or entity becomes legally obliged to pay on account of a claim".
4. "Employment Practice Breach" is defined to mean, relevantly: "Unfair or wrongful dismissal from or termination or discharge of employment (either actual or constructive, including breach of an implied contract)…".
5. The policy excludes liability for claims "in connection with…any employment-related benefits" or any "contractual liability" of Southern Classic.
6. I will return to the exclusions in more detail below.

Was there "loss" for the purposes of the policy?

1. The definition of "loss" makes specific reference to settlements by use of the phrase "settlements to which we have consented" (see [57] above).
2. The Insurer did not consent to the settlement achieved at the mediation.
3. In those circumstances, Ms Horvath submitted that Southern Classic has suffered no "loss" for the purposes of the policy.
4. I do not agree.
5. Speaking generally, liability policies which cover an insured's liability for damages or compensation respond to a claim where the insured reasonably settles a claim against it and thereby agrees to pay third party damages or compensation. This is so even when the Insured's liability to pay damages or compensation has not been determined by a court or tribunal.
6. Thus in Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100 Barrett AJA said at [63] and [64]): "The notion that an agreement between the parties may be the source of a liability of the insured for the purposes of a liability policy was recognised by the House of Lords in Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363…Lord Denning MR was there of the opinion (at 373-374) that, under a policy specifying that the insured only acquired rights against the insurer when his or her liability to the injured person had been established, it was necessary that that liability be 'ascertained and determined to exist, either by judgment of the court or by an award in arbitration or by agreement'. Lord Salmon said (at 377) that 'whether or not there is any legal liability…can, in my view, only be finally ascertained either by agreement…or by an action or arbitration'. In Orica Ltd v CGU Insurance Ltd (2003) 59 NSWLR 14; [2003] NSWCA 331…, Spigelman CJ referred to these observations of Lord Denning and Lord Salmon when saying (at [15]): 'There is a line of authority with respect to policies of liability insurance that the liability of the insurer arises only as and when the liability of the insured is established in the sense of being crystallised by settlement, arbitration or verdict'."
7. Meagher JA expressed a similar opinion at [3] and White JA at [15].
8. I have concluded that the settlement was reasonable. It should therefore be treated as a release from an asserted liability for the purposes of the insuring clause.
9. If the Insurer intended the result for which Ms Horvath contended, it would have included in the definition of "loss" words to the effect "settlements but only if we have consented".
10. The actual words of the insuring clause suggest that the parties' intention was that "loss" would, without more, be established if Southern Classic settled a claim with the Insurer's consent.
11. On the other hand if Southern Classic settled a claim against it without the Insurer's consent, as occurred here, it would have to demonstrate that the settlement was reasonable in order to cause the policy to respond.
12. That has been established in this case.
13. Accordingly, Southern Classic has demonstrated "loss" for the purposes of the policy.

Is the claim excluded?

1. The policy excludes liability for certain "employment-related benefits".
2. Ms Horvath submitted that the claim was thereby excluded on a number of bases. They are: non-monetary benefit, severance or redundancy payment, incentive payment and contractual liability. I will address each in turn.

Non-monetary benefit

1. First, by reason of cll 6.1(d) and 9.19(a) liability for non-monetary benefits such as mobile telephone costs and car travel allowances are excluded.
2. A small part of Gordan's claim was for such amounts. The policy does not respond to these claims.

Severance or redundancy payments

1. Second, by reason of cll 6.1(d) and 9.19(d) a claim for "severance or redundancy payments or entitlements" is excluded.
2. Ms Horvath submitted that Gordan's claim should be so characterised.
3. Again, I do not agree.
4. Gordan's claim in the District Court was for damages suffered by reason of not being given the notice of termination that his contract of employment required. It was not for a redundancy or severance payment.
5. Further, were Gordan's claim to be characterised as a claim for a severance or redundancy payment, and to be thereby excluded from cover under the policy, it would render this aspect of the policy to be of almost no value.
6. Gordan's claim was for damages for dismissal without due notice.
7. On the face of it, that claim appears to fall squarely within the definition of "Employment Practice Breach": "wrongful dismissal from or termination or discharge of employment" (see [58] above).
8. If the effect of the "severance or redundancy payments" exclusion was to exclude such a claim it would remove from the ambit of the policy a very obvious, and perhaps the most commonly encountered, form of "Employment Practice Breach" likely to occur.
9. Ms Horvath accepted that this construction of the exclusion would result in the cover of it by the policy as being "very narrow" but submitted that the policy would nonetheless respond to the Insurer's liability to pay compensation under orders made under ss 390 and 392 of the Fair Work Act 2009 (Cth).
10. I see no reason to read the policy so narrowly. I see nothing in the policy to suggest that the parties intended that the policy have such a limited response.

Incentive payment

1. By reason of cll 6.1(d) and 9.19(f) liability is excluded for any payments by way of "bonus or incentive payments".
2. A part of Gordan's claim was for the loss of bonuses. As I have mentioned, Mr Donaldson accepted that the policy did not respond to that aspect of Gordan's claim (see [32] above).
3. Another part of Gordan's claim was for commissions on car sales lost by reason of not having been given adequate notice of termination of his employment.
4. Gordan was a car salesman. His remuneration comprised a relatively modest base salary plus commissions on car sales. Those commissions comprised the bulk of his remuneration.
5. Although the prospect of earning commissions no doubt provided an incentive for Gordan to promote Southern Classic's business I do not think that commission payments can be characterised as being an "incentive payment".
6. The expression "incentive payment" appears in the policy as part of the more global expression "bonus or incentive payments" and was, in my opinion, intended to exclude from liability under the policy one-off or occasional payments designed to provide encouragement or incentive to employees of an insured. The words were not, in my opinion, intended to exclude an insured's liability to compensate an employee for loss of the major component of his or her remuneration, in the event of an "Employment Practice Breach".

Contractual liability

1. By reason of cll 6.1(a) and 9.19(g) payments to which an insured was contractually entitled, including superannuation payments, are excluded. Mr Donaldson accepted that the policy does not respond to Gordan's claims for lost superannuation (see [32] above).

Is Southern Classic entitled to indemnity for that proportion of the settlement as reasonably relates to claims to which the policy responded?

1. As I have said, Mr Donaldson accepted that the policy does not respond to all aspects of Gordan's claim. He accepted that, accordingly, Southern Classic is not entitled to indemnity under the policy for the entirety of the $375,000 it agreed to pay Gordan at the mediation.
2. Nonetheless he submitted, in my opinion correctly, that Southern Classic is entitled to indemnity under the policy for the proportion of the $375,000 that fairly represents the components of Gordan's claim to which the policy does respond.
3. Ms Horvath did not submit to the contrary.
4. Southern Classic's entitlement under the policy is for indemnity for the "loss" it has suffered by reason of an "Employment Practice Breach".
5. Wotton + Kearney advised Southern Classic that there had been an "Employment Practice Breach" and that Southern Classic was exposed to potential liability at Gordan's suit. I see no reason to disagree with that conclusion. In those circumstances, Southern Classic is entitled to indemnity for that part of Gordan's claim that represents loss to which the policy responds.
6. The bases for Gordan's claim are known and are set out in Mr Ivey's report.
7. What is not known is how those bases were addressed in the mediation and how, or whether, the settlement figure $375,000 was apportioned to each of these matters.
8. As I have mentioned, Mr Ivey's calculations are based on his opinion as to Gordan's "Entitlements to March 2012" (to which the policy does not respond: see [30] above) and as to "Ongoing Entitlements" calculated by reference to Gordan's base salary and entitlement to commissions (to which the policy does respond) and superannuation and bonuses (to which the policy does not respond).
9. Taking the mean of the two possible calculations of Gordan's "Entitlements to March 2012" to be $293,500 (see [29] above), and adopting Mr Ivey's calculations of Gordan's entitlements assuming 12 months' notice, the following results: Item Dollar figure Included or excluded Entitlements to March 2012 $293,500 Excluded Base salary $85,000 Included Superannuation $29,823 Excluded Volkswagen commissions $88,356 Included Other commissions $158,016 Included Bonus $66,622 Excluded

1. On this hypothesis the policy responded to $331,372 (the three "included" amounts) of Gordan's total claim $721,317: some 46 per cent.
2. On this basis, and adopting an admittedly broad brush approach, my conclusion is that approximately 46 per cent of the claim that Gordan made against Southern Classic should be treated as loss to which the policy responds.
3. On that basis, my conclusion is that the same proportion of the settlement sum (that is 46 per cent of $375,000) should be adopted as representing that part of the settlement to which the policy responds.

Is Southern Classic entitled to recover all the costs it agreed to pay Gordan?

1. Southern Classic settled with Gordan on a "plus costs" basis. Costs have now been assessed at some $306,000 (see [23] above), subject to review.
2. The "loss" under the policy is defined to include "claimant costs". The issue is what proportion of Southern Classic's costs of $306,000 should be allocated as "loss" under the policy.
3. In that regard Mr Donaldson drew my attention to the decision of the Court of Appeal in Vero Insurance Ltd v Baycorp Advantage Ltd [2004] NSWCA 390.
4. In that case, the question was whether the costs incurred by an insured were wholly recoverable notwithstanding the fact that they were incurred in defending a claim against both insured and uninsured persons. The Court of Appeal (Tobias JA with whom Giles and McColl JJA agreed) upheld Einstein J's decision that all costs were recoverable (at [78] and [79]).
5. Mr Donaldson submitted that by parity of reasoning I should conclude that Southern Classic is entitled to recover all of the costs it has agreed to pay, notwithstanding that much of Gordan's claim (I have found it to be some 46 per cent) was for loss to which the policy does not respond.
6. I do not see that the Court of Appeal's reasoning in Baycorp provides any guidance to the task at hand here.
7. The Court of Appeal's decision turned in large part on the words in the policy in question, particularly on the insurer's obligation to pay "all" reasonable legal costs incurred by the insured in defending a claim.
8. Here, the indemnity is for "claimant costs" which Southern Classic becomes legally obliged to pay "on account of a claim".
9. The "claim" made against Southern Classic by Gordan was one to which the policy only responded in part. I have held it to be 46 per cent.
10. A proportion of the costs that Gordan incurred, and which Southern Classic agreed to pay, must relate to aspects of his claim to which the policy does not respond.
11. In my opinion it follows from Mr Donaldson's acceptance that Southern Classic is only entitled to indemnity for that part of Gordan's claim to which the policy responds, that its entitlement to indemnity for the costs it agreed to pay Gordan must be similarly confined.
12. For those reasons my conclusion is that Southern Classic is entitled to indemnity under the policy for 46 per cent of the costs that it agreed to pay Gordan. As things stand, and subject to the pending review by the appeal panel, that is an amount of some $140,760.

Conclusion

1. Southern Classic is entitled to indemnity under the policy for an amount to be calculated in accordance with these reasons.
2. I invite the parties to confer and agree on the orders that should be made.

Amendments 31 August 2018 - [103] - last item in table corrected to "Excluded" [104] - figures and percentage corrected [105], [106], [111], [115] percentages corrected [118] - percentage and figure corrected DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 August 2018