CLASS ACTION FORGES AHEAD AGAINST INSURERS (IN PLACE OF THE INSURED)
March 8, 2018
In its recent decision in Rushleigh Services Pty Ltd v Forge Group Limited (In Liquidation) (Receivers and Managers Appointed)  FCA 26, the Federal Court granted leave in a shareholders’ class action to join a company’s insurers as respondents under the new Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW).
The applicant (Rushleigh) commenced a class action against the respondent (Forge) on its own behalf and on behalf of shareholders of Forge, alleging misleading and deceptive conduct, the making of false representations in breach of the Corporations Act 2001 (Cth) and failure to disclose certain information to the Australian Securities Exchange.
Rushleigh subsequently joined two directors of Forge as respondents to the proceeding.
It was necessary, because Forge was in liquidation, for Rushleigh to apply for leave to proceed against it. This application was unsuccessful.
Rushleigh then sought leave under s5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) to join Forge’s D&O insurers as respondents.
It was accepted for the purpose of the application that there was an arguable case against Forge, that there was an arguable case that the relevant insurance policies responded to the claim against Forge, and that there was a real possibility that if judgment was obtained then Forge would not be able to meet it.
The issue to be determined was whether the facts of the case as assumed warranted an exercise of the Court’s discretion to grant leave to Rushleigh pursuant to s5 of the Act.
Section 4 of the Act provides:
- If an insured person has an insured liability to a claimant, the claimant may, subject to the Act, recover the amount of the insured liability from the insurer in proceedings before a Court;
- The amount of the insured liability is the amount of indemnity (if any) payable pursuant to the terms of the contract of insurance in respect of the insured person’s liability to the claimant;
- In proceedings brought by the claimant against an insurer under the section, the insurer stands in place of the insured person and has the same rights and liabilities as if the proceedings were brought against the insured person.
Section 5 provides that proceedings may not be brought or continued against an insurer under s4, except with leave of the Court, and that such application is to be made before or after the proceedings have been commenced. Further, s5 provides that leave must be refused if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or under any Act or law.
The insurers submitted that the Court’s discretion should not be exercised because if leave was granted, they would suffer irreparable prejudice due to the costs they would incur to defend the proceedings, and the forensic disadvantage due to insurers being strangers to Forge.
The Court stated that an insurer will always be a third party or stranger to the insured. It said that if the additional cost it might therefore incur is a relevant factor, it could undermine the intent behind the Act. It held that there was some doubt about whether this was a factor in the exercise of the discretion, but if it was, it would not have any significant weight in the balancing exercise.
The Court also held that the insured, as a stranger to a proceeding, will always suffer a degree of forensic disadvantage. It said that the relevant policy required Forge to cooperate with insurers, and that there was no evidence that Forge would not so cooperate.
The insurers also submitted that there was no utility in joining them as parties, because they had agreed to indemnify Forge and its directors. Further, that it was unlikely that Rushleigh could succeed against Forge but not the directors, so relief could be obtained against the directors without exposing insurers to the prejudice they would suffer.
The Court found, in circumstances where Rushleigh could not proceed against Forge, and Forge was not therefore an active participant in the proceeding, it could not be said that there was no utility in a grant of leave. Further, that there was potential for claims to succeed against Forge but not the directors.
It was further submitted by the insurers that the joinder of them to overcome the decision not to allow Rushleigh to proceed against Forge would not constitute a proper basis for joinder. They argued that Rushleigh should proceed by way of a proof of debt unless it could demonstrate that there was some good reason to depart from that procedure.
It was submitted that the availability of a more appropriate avenue for relief against an insolvent insured, which had not been acted upon, weighed against granting leave to proceed against insurers.
The insurers also submitted that because of the refusal of the application for leave to proceed against Forge in the proceeding, there was no ‘loss’ incurred by Forge which would be the subject of a grant of indemnity.
The Court stated that the availability of the proof of debt procedure is a bar to making a claim under the relevant Act. It said that it could, in some circumstances, be a relevant factor in the exercise of discretion to grant leave, including in the present case. However, it held that it was not a factor that would weigh against the exercise of the discretion. It also said that there was no evidence before the Court about the prospect of liquidators calling for proofs of debt.
The Court further held that if the effect of the dismissal of the application to join Forge was that Rushleigh could not pursue the proceeding against Forge, this was a procedural bar, but it did not affect the substantive question of whether Forge was in fact liable to Rushleigh and the group members. It said that the Act provides that the insurer stands in the place of the insured, and therefore the insurers would stand in the place of Forge and Rushleigh’s claim would proceed against them as if they were Forge.
On the basis of the above findings, the Court granted leave to Rushleigh to proceed against the insurers.
This decision suggests that plaintiffs may in the future choose to pursue insurers directly, rather than seeking leave to proceed against a company in liquidation. It also sends a warning to insurers to ensure that their policy provisions contain adequate obligations of cooperation and assistance, including in circumstances where an insured goes into liquidation.
Further information / assistance regarding the issues raised in this article is available from the author, Greg King, Special Counsel or your usual contact at Moray & Agnew.
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