9 June, 2015
The High Court of Australia has made cost orders against a non-party professional indemnity insurer to pay the litigation costs of the successful party to appeals conducted by the insurer in the name of its insured. The costs orders made against the insurer in its own right impose an independent liability on the insurer to pay the costs, separate to the insurer's obligations under the contract of insurance.
What This Means
The decision of the High Court in Selig & Wealthsure Pty Ltd  HCA 18 has the following implications, it:
- Extends the litigation risks faced by insurers beyond the limits of the insurance policies they issue. It also demonstrates that the courts are prepared to lift the mask of an insurer influencing the conduct of litigation in the place of its insured, exposing an insurer to adverse cost orders as a non-party.
- Provides much needed clarity on the proportionate liability regime and claims for misleading and deceptive conduct under the Corporations Act 2001 (Corporations Act) and the Australian Securities Investment Commission Act 2001 (ASIC Act).
- Resolves the confusion following the Federal Court of Australia's inconsistent judgments a week apart in mid-2014 regarding the application of the proportionate liability regime. It is probably only a matter of time before plaintiffs start targeting deep pocket defendants through the use of creative causes of action that escape the reach of the proportionate liability regime.
- Exposes insurers to direct costs orders for litigation that they conduct or control for their insureds. Litigators, insureds, insurers and the courts are also likely to focus more carefully on costs orders that should be made against interested non-parties to litigation, such as insurers.
Wealthsure Pty Ltd (Wealthsure), an Australian financial services licensee, had the benefit of a professional indemnity insurance policy issued by its insurer, which provided a maximum cover of AUD 3 million on any one claim inclusive of costs and expenses.
Mr and Mrs Selig pursued an investment based on advice provided by Wealthsure's authorised representative. Relying on that advice they effectively invested in a "Ponzi scheme" which became insolvent and they lost their investment.
The Seligs sued Wealthsure, its authorised representative and other parties. The claims against Wealthsure and its authorised representative were based on contraventions of the Corporations Act and the ASIC Act for misleading or deceptive conduct in relation to financial products or services, negligence and breach of contract. Claims were made against other parties pursuant to the Corporations Act, the ASIC Act and negligence. The loss and damage arising from each of the claims was the same, and a key issue for determination in the proceedings related to allocation of liability under the proportionate liability regime.
The Seligs were successful at trial in the Federal Court of Australia and were awarded damages in the sum of AUD 1,765,512.
The trial judge entered the judgment against each of the defendants on the basis that each of them was liable to the Seligs for the whole of the damage suffered by them after rejecting arguments that the claims were apportionable claims. The trial judge had held that the proportionate liability regime under Division 2A of the Corporations Act applied only when there had been a contravention of section 1041H of the Corporations Act (ie misleading and conceptive conduct) and otherwise had no application when a plaintiff succeeds on other statutory or common law causes of actions in respect of which a defendant is liable for the whole damage.
Wealthsure's insurer had the carriage of its defence. The insurer decided to appeal the primary decision and sought a reduction in the judgment entered against its insured. In the appeal, the insurer (via Wealthsure) argued that the:
- trial judge had erred in his construction of the provisions of Division 2A of the Corporations Act, and its equivalents; and
- other defendants were concurrent wrongdoers whose acts or omissions had caused, independently of each other, the Selig's loss and damage.
It contended that there was a single apportionable claim for the same loss even if the claim was based on more than one cause of action.
The Full Court of the Federal Court upheld the appeal brought in Wealthsure's name and reduced Wealthsure's exposure to the judgment to about 60% of the first instance judgment sum. A majority held that the Selig's claim maintained its character as an apportionable claim in its entirety even though the proceedings involved both an apportionable claim under the Corporations Act and claims that were not apportionable under that Act, provided the same loss and damage has resulted from the different causes of action.
The dissenting position that only causes of action which are themselves apportionable claims under the Corporations Act and ASIC Act fall within the regime. This view gained unanimous support in another Full Federal Court decision a week later in ABN AMRO Bank NV v Bathurst Regional Council  FCAFC 65.
Details Of The High Court Decision
The High Court of Australia delivered its decision in Selig v Wealthsure Pty Ltd  HCA 18 on 13 May 2015.
On the proportionate liability issue, the High Court held that the terms of Division 2A of the Corporations Act make it clear that the definition of an apportionable claim does not extend to claims based upon conduct other than misleading and deceptive conduct. The reasoning applied equally to the equivalent provisions in the ASIC Act.
The High Court's decision means that where multiple causes of action are pleaded against a defendant and only one of those causes of action is apportionable under the Corporations Act or ASIC Act, the proportionate liability regime only applies to the apportionable component of the claim and does not extend to the other claims that are not based on that legislation. This is consistent with the decision of the Full Federal Court in ABN AMRO.
The High Court held that the insurer had decided to appeal against the primary judge's decision in an attempt to better its position by seeking a reduction of the damages its insured was ordered to pay. It held that the insurer took the chance, as a litigant does that if its arguments before the Full Court of the Federal Court succeeded, the liability of its insured would be reduced to 60% of the judgment sum and it would reduce the insurer's exposure to pay the claim under the policy. The High Court considered that the effect of the insurer's decision to appeal was to reduce money that would otherwise be available to pay the judgment sum by diverting the sum payable under the insurance policy to paying legal costs. The insurer had caused the Seligs to incur significant legal costs of the appeals. The insurer was ordered to pay the Selig's costs of the Full Court appeal and their costs of the appellants in the High Court appeal.
For further information, please contact:
Terry Clavey, Clyde & Co
Janette McLennan, Clyde & Co