Who has the dominant right to recover a loss - insured, insurer or both?
Insurance update - 24 August 2015
When does an insurer have the authority and entitlement to discontinue an insured's participation in recovery litigation for insured and uninsured losses arising from the same event?
Justice Garling of the Supreme Court of NSW recently considered this novel question in the context of two class actions arising from the Springwood/Winmalee bushfire in the Blue Mountains in October 2013. Judgment was handed down on this issue on 19 August 2015.
Justice Garling found that, in respect of the majority of the affected group members, the insurers did not have authority to execute and file the opt out notices that purported to remove the group members from the original class action. As such the opt out notices were invalid and had no effect.
In this eBulletin we will discuss:
- the circumstances in which an insurer can remove an insured from a recovery claim seeking damages for insured and uninsured losses arising from the same event;
- examples of policies wordings that do and do not assign an insured's right to pursue recovery of uninsured losses to an insurer; and
- relevant rights of insurers under the general law of subrogation.
- Insured and uninsured losses
- Relief sought
- Judicial view
- Further information
In May 2014, Maddens Lawyers commenced a class action on behalf of all persons who suffered loss of or damage to property, personal injury and/or economic loss as a result the bushfire on 17 October 2013. The lead plaintiff is Mr Johnston (Johnston action).
Mr Johnston alleges that the bushfire was caused when a hazardous tree on a property in Linksview Road, Springwood (Tree), fell onto and remained on conductor lines, causing arcing between the conductors, the discharge of sparks and the ignition of vegetation.
Mr Johnston also alleges that an energy distributor and network operator, as well as one of its contractors, were responsible for the bushfire because they failed to remove or require the removal of Tree.
On 10 October 2014, William Roberts Lawyers (WRL) representing NRMA, Coles, CGU and Wesfarmers (together, Insurers) filed six notices (Opt Out Notices) purporting to opt out many individuals and entities (Group Members) from the Johnston action. On 24 October 2014, WRL commenced a separate class action on behalf of the Group Members. The lead plaintiffs are Mr and Mrs More (More action). The allegations in the More action mostly mirror those in the Johnston action.
The key question for Justice Garling to determine was whether the Insurers were entitled to remove the Group Members from the Johnston action. The two main facets to this question were:
- what were the Insurers' contractual rights under the relevant policies of insurance1; and
- what were the Insurers rights under the general law of subrogation.
With the exception of those insured under the 'Group 3 Policies', Mr Johnston alleged that Insurers were not entitled to remove the Group Members from the Johnston action.2 Mr Johnston submitted that:
- with respect to the 'Group 1 Policies', no authority was given which would be sufficient to authorise WRL to execute and file the Opt Out Notices; and
- with respect to the 'Group 2 Policies', while these may provide some limited authority, it was insufficient to authorise what was done, because the authority did not extend to uninsured losses.
The Mores argued that the Insurers were entitled to act as they did because the relevant policy provisions conveyed a discretion upon the Insurers to determine the appropriate course of recovery and/or there was a contractual requirement for the insured to cooperate with the Insurers.
It was agreed that there was no Australian authority on the question of whether an insurer's right to pursue a subrogated recovery for sums paid under a policy extends to any uninsured loss arising from the same event.
Mr Johnston submitted that, absent "quite explicit language", any right of subrogation could only ever relate to insured losses and that, unless an insured has been completely indemnified for all losses arising from an event, the insured remained dominus litis3 for its uninsured losses.
The Mores submitted that, pursuant to general principles of subrogation, once an insurer fulfils its obligation to indemnify an insured under the contract, it enjoys full rights to commence and control a recovery action in the insured's name for insured and uninsured losses.
Mr Johnston sought declarations regarding the above authority issues under section 183 of the Civil Procedure Act 2005 (NSW)4 (CP Act) or, alternatively, section 75 of the Supreme Court Act 1970 (NSW). Further and in the alternative, he sought orders that:
- the Opt Out Notices filed for the insureds under the Group 1 Policies be set aside; and
- the Opt Out Notices filed for the insureds under the Group 2 Policies be set aside to the extent they opted out the Group Members for uninsured losses.
Justice Garling made reference to Section 183 of the CP Act as:
"…the legislative wellspring of the Court's discretionary power to make orders where thought appropriate or necessary in, and thereby control, representative proceedings so as to ensure that justice is done, and to also ensure that large numbers of claims are dealt with consistently and fairly".5
Justice Garling found that the power granted to the Court under this section was broad enough to ground the making of the orders sought by Mr Johnston.
With regard to the insureds under the Group 1 Policies, his Honour found that the Insurers were not entitled to remove those insureds from the Johnston action and, therefore:
- the Insurers did not have authority to execute and file the Opt Out Notices in respect of those insureds; and
- the Opt Out Notices were invalid and had no effect to opt out those insureds from the Johnston action.
Justice Garling found that, for the Insurers to have the authority and entitlement to discontinue an insured's participation in recovery litigation for amounts including, but not limited to insured amounts, they must have an explicit contractual basis to do so. For the insureds under the Group 1 Policies, they did not have that contractual basis given that:
- there was no clause in any of the Group 1 Policies by which the insured assigned its rights to the Insurer to take proceedings against a third party for damages resulting from the event giving rise to the claim under the policy6; and
- in two of the policies only, there was a clause dealing with the recovery by the Insurer of uninsured loss, but the preconditions to the exercise of that right and the evidence did not suggest that Insurers met any of these preconditions regarding the 62 insureds under these policies.7
Further, Justice Garling found that the Insurers' rights under the general law of subrogation did not include:
- the right to require an insured to cease litigation which has been lawfully commenced (Arthur Barnett v National Insurance Co of New Zealand Ltd  NZLR 874 (Arthur Barnett);
- the right to commence proceedings in the insured's name, unless there has been an assignment of an insured's right to an insurer, or an appropriate term exists;8 or
- the right to any sum in excess of the amounts they have paid out under the claim.9
Based on the above, Justice Garling concluded that:
"…the Insurers did not have any entitlement to include in the Insurers proceedings any claim over and above the monies paid to the insureds under the Group 1 policies. As the claims are expressed without limitation, they are made without full and complete instructions".10
With regard to the insureds under the Group 2 Policies, excluding one sole insured, Justice Garling concluded that:
- each of the insureds under the Group 2 Policies had given their Insurer their "…rights to claim from anyone else…." for an incident or event covered under the policy;
- the construction of the clause contended by Mr Johnston's Counsel, namely that it did not assign the insureds' rights in respect of their uninsured losses, was incorrect; and
- therefore, Insurers were entitled and authorised to file the Opt Out Notices for the insureds under the Group 2 Policies.11
Justice Garling agreed with the Mores (and Mr Johnston) that, by reason of the terms of the relevant policies, Insurers were properly authorised to file the Opt Out Notices for the insureds under the Group 3 Policies.12
The motion has been stood over to 3 September 2015 for Orders to be made to effect the judgement.
The decision illustrates how class actions, such a source of evolving jurisprudence, have now added to the uncertainties that plague subrogation claims and which derive not only from common law classification and principles but also insufficient contractual clarity.
As insurers are increasingly involved in class action recovery, this case suggests that they need to review their wordings to maximise their capacity to play a meaningful role in future.
- The Group Members were insured under 24 separate policies of insurance. Of the 24 policies, 553 Group Members were insured by NRMA and Coles under 8 separate policies (Group 1 Policies), 19 Group Members were insured by CGU and Wesfarmers under 9 separate policies (Group 2 Policies) and 12 Group Members were insured by NRMA, CGU and Wesfarmers under the remaining 7 policies (Group 3 Policies).
- Mr Johnston accepted that the Group 3 Policies provided the Insurers with the authority to execute and file the Opt Out Notices for the Group Members insured under those Policies.
- That is, the master of the suit or the person to whom the suit belongs.
- Section 183 of the CPA provides that "… in any proceedings (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceedings".
-  NSWSC 1117 at .
-  NSWSC 1117 at .
-  NSWSC 1117 at  to . The relevant extract from the clause reads: "….This means we may decide to recover your uninsured loss, as well as our claim payment, from a third party. You must: have told us about your uninsured loss and asked us to seek recovery of it; provide us with any documents you have that prove your uninsured loss; and have entered into an agreement about the terms on which we, or our recovery agents or lawyers, will recover you insured loss on your behalf. You may need to contribute your share of any legal or recovery agent's costs…."
-  NSWSC 1117 at .
-  NSWSC 1117 at  to . He also noted that, if an insurer's payment to an insured does not cover the whole of the insured's loss, an insured has and retains the right to recover his entire loss as dominus litis, without interference from the insurer, although if an insured does not conduct such a case with proper regard for the insurer's interests, it may be liable in damages to the insurer (Arthur Barnett at 993 per North J) at .
-  NSWSC 1117 at .
-  NSWSC 1117 at  to .
-  NSWSC 1117 at .
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