In brief 3 min read
The decision in a recent Supreme Court of New South Wales case, where indemnity was sought for costs incurred defending and settling a class action, highlights a potential gap in coverage under civil liability insurance policies. Partner Louise Jenkins, Senior Associate Julia Clemente and Lawyer Calypso Strauss report.
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How does it affect you?
- The Bank of Queensland sought indemnity for the loss and defence costs it incurred in defending and settling a class action, but failed to convince the court the class action should be considered a single claim under its civil liability insurance policy. Consequently, a $2 million deductible applied to each claim, leaving the bank without cover.
- The decision calls attention to a potential gap in coverage under civil liability insurance policies for class actions.
- Claims for losses and defence costs arising from class actions under similarly worded policies could be considered multiple claims, so that a substantial deductible is attracted for each claim.
- In light of this, we recommend that corporate insureds review their civil liability insurance policy wording, to ensure that it provides adequate coverage for these kinds of claims.
Background
The bank sought indemnity, under a civil liability insurance policy, for costs and losses incurred as a result of defending and then settling a separate class action proceeding.
In 2016, 192 investors, who had lost money in a Ponzi scheme that Sherwin Financial Planners (SFP) ran, brought the class action. The investors alleged the bank had breached its fiduciary duty to them, as well its contract with the investors, by allowing certain transactions to be made in and out of its accounts, at SFP's direction. The claim was settled for $6 million.
The key issue in the case was whether the claim for loss and costs incurred in defending and settling the class action under its civil liability insurance policy amounted to one or several claims. For each claim made, a $2 million deductible applied under the policy.
The terms of the policy are important. There was cover for all losses and defence costs arising from any ‘claim’ during the policy period for any ‘Wrongful Act’. The policy also contained an aggregation/disaggregation clause, which provided that:
… all Claims arising out of… one or a series of related Wrongful Acts shall be considered to be a single Claim; conversely where a Claim involves more than one unrelated Wrongful Act, each unrelated Wrongful Act shall constitute a separate Claim.
‘Wrongful Act’ was defined broadly under the policy, to include breaches of contract for the provision of 'Professional Services', and breach of trust or fiduciary duty.
The decision
Justice Stevenson found that the defence and settlement costs incurred as a result of the representative proceedings amounted to several claims under the policy. Although His Honour accepted the proceedings themselves constituted only one claim, he considered that each of the 192 Class Member Registration Forms constituted a separate claim under the policy.
Justice Stevenson held that even if this were not the case, the same result was reached by virtue of the aggregation/disaggregation clause in the policy. He held that it was not sufficient the wrongful acts occurred as a part of a ‘broader fraudulent scheme’. Although the loss and cause of the loss were related, the words of the policy were clear – it was the wrongful acts themselves that needed to share a unifying factor. His Honour considered that the wrongful acts were effectively unrelated and, therefore, each constituted a separate claim under the policy.
Conclusion
As a result of the decision, each of the claims under the policy attracted a $2 million deductible and the bank was left without effective cover for its claim.
The decision highlights the importance of corporate insureds examining and considering the practical effect of the wording of their civil liability insurance policies. Claims for losses and defence costs incurred for class actions under similarly worded policies could be considered multiple claims, each attracting a significant deductible.