Arch Underwriting Agency (Australia) Pty Ltd v Lexon Insurance Pte Ltd

[2020] NSWSC 580

Supreme Court

New South Wales

Medium Neutral Citation:	Arch Underwriting Agency (Australia) Pty Ltd v Lexon Insurance Pte Ltd [2020] NSWSC 580
Hearing dates:	On the papers
Decision date:	25 May 2020
Jurisdiction:	Equity - Commercial List
Before:	Ball J
Decision:	The defendant’s notice of motion dated 21 February 2020 be dismissed with costs
Catchwords:	PRACTICE AND PROCEDURE – Separate question – Principles applicable to whether question for determination should be tried separately – Whether order should be made.
Cases Cited:	CBS Productions Pty Ltd v O’Neill (1985) 1 NSWLR 601 Crawley v Vero Insurance Ltd (2012) 17 ANZ Ins Cas 61-946 GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83 Idoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 1215 Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 Tepko Pty Ltd v Water Board (2001) 206 CLR 1 Todd Hadley Pty Ltd v Lake Maintenance (NSW) Pty Ltd [2019] NSWCA 262
Category:	Procedural and other rulings
Parties:	Arch Underwriting Agency (Australia) Pty Ltd (First Plaintiff) QBE Underwriting Limited as Managing Agent for Lloyds Casualty Syndicate 386 (Second Plaintiff) Lexon Insurance Pte Ltd (Defendant)
Representation:	Counsel: IR Pike SC with DA Lloyd (Plaintiffs) B Walker SC with V Brigden (Defendant)   Solicitors: Norton Rose Fulbright (Plaintiffs) BN Law (Defendant)
File Number(s):	2019/217049

Judgment

Introduction

1. The plaintiffs (the First Excess Insurers) provided first excess layer professional indemnity insurance to Minter Ellison Gold Coast (MEGC) in respect of the 2013-2014 financial year. It was a term of the relevant policy (the First Excess Policy) that the First Excess Insurers would provide drop down difference in conditions cover in line with a Legal Practitioners’ Liability Committee contract annexed to the First Excess Policy (the LPLC Contract).

2. The LPLC Contract provided drop down cover in the following terms (the Drop Down Clause):

Each MELG Firm (other than Minter Ellison) and each person or entity insured under the Primary Insurance Contract for each such firm (and each person or entity who would have been insured if the Primary Insurance Contract for such firm was the LPLC Contract), on a ‘difference in conditions’ basis with the LPLC Contract, such that, if they are not entitled to indemnity under their Primary Insurance Contract for any reason other than the non payment of premium, but would have been entitled to indemnity had the wording been that of the LPLC Contract, drop down cover under this contract is provided.

3. MEGC’s primary layer insurance was provided by the defendant, Lexon Insurance Pte Ltd, under a policy made up of a Master Policy No. QLS2013 Queensland Law Society Incorporated Law Practice Professional Indemnity Insurance Master Policy 2013-2016 and a certificate of insurance issued to MEGC under the Master Policy (the Primary Policy). It had a limit of $2,000,000 per claim with a costs inclusive excess of $30,000. The Primary Policy contained (in cl 6.9) an exclusion (subject to a number of provisos not presently relevant) in respect of any Claim (as defined in the policy) or liability “[a]rising from or brought about by, or in any way contributed to by, or which would not have arisen but for, the dishonest or fraudulent act, omission or conduct of any Insured”. The LPLC Contract contained no such exclusion.

4. The First Excess Insurers allege that, following the refusal of Lexon to indemnify MEGC in respect of a claim brought against MEGC by a former client, Trilogy Funds Management Limited (the Trilogy Claim). on the basis of the dishonesty exclusion contained in the Primary Policy, they, pursuant to the Drop Down Clause, extended indemnity to MEGC and settled the claim for $13,500,000, $13,000,000 of which was paid by the First Excess Insurers and $500,000 of which was paid by MEGC as its excess under the First Excess Policy.

5. In these proceedings, the First Excess Insurers seek to recover from Lexon the amount of $2,000,000 as recoupment of the amount they paid to Lexon’s benefit or, in the alternative, as equitable contribution.

6. By a notice of motion dated 21 February 2020, Lexon seeks to have determined as a separate question the following question:

On the proper construction of the [Drop Down Clause], was MEGC “not entitled to indemnity” (within the meaning of those words as contained in that clause) under the Lexon Policy by reason only of Lexon’s declinature of indemnity to MEGC on 20 May 2015?

7. The question before the Court is whether that separate question should be ordered.

Applicable legal principles

8. In the ordinary course, all issues for determination should be determined together: Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141. The applicant for an order that one or more questions be determined separately bears the onus of satisfying the Court of the appropriateness of that course of action: Crawley v Vero Insurance Ltd (2012) 17 ANZ Ins Cas 61-946 at [17]. Separate determination of an issue may be appropriate where the issue “is a central issue in contention between the parties, the resolution of which will either obviate the necessity of litigation altogether or substantially narrow the field of controversy”: CBS Productions Pty Ltd vO’Neill (1985) 1 NSWLR 601 at 606 per Kirby P. Separate determination of an issue is not appropriate where factual matters relevant to the issue to be determined separately are relevant to other issues in the case or where the same witnesses are likely to give evidence in relation to the factual issues that are relevant to the questions sought to be determined separately and to other issues in the case: Tepko Pty Ltd v Water Board (2001) 206 CLR 1 at [168] per Kirby and Callinan JJ; Idoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 1215 at [7(5)(b)] per Einstein J. An important factor in ordering a separate question is whether it can be expected that determination of the separate question will or will be likely to bring about a substantial saving in time and costs compared to a hearing of all issues: Todd Hadley Pty Ltd v Lake Maintenance (NSW) Pty Ltd [2019] NSWCA 262 per Bell P at [15].

Lexon’s contentions

9. Lexon contends that, in order to succeed in their claim, the First Excess Insurers must prove that the payment they made to MEGC in respect of the Trilogy Claim related to a liability falling on both them and Lexon (in the case of a claim for recoupment) or that both they and Lexon were under a co-ordinate liability to indemnify MEGC up to their respective limits of liability in respect of the claim (in the case of a claim for contribution).

10. Lexon denies the First Excess Insurers’ claim on the basis that it had no liability to MEGC because of the application of the dishonesty exclusion in the Primary Policy. Alternatively, it contends that the First Excess Insurers are not entitled to recoupment or contribution because they did not have a liability to MEGC. It is a premise of Lexon’s argument in favour of a separate question that the First Excess Insurers can only advance a case that both they and Lexon were “liable” in the required sense if the reference in the Drop Down Clause to MEGC not being entitled to an indemnity is read as a reference to Lexon’s decision to decline liability rather than as a reference to whether MEGC was in fact liable. If it is read in the latter way, then only Lexon or the First Excess Insurers (but not both) could be liable because the First Excess Insurers’ liability depends on Lexon not being liable. Lexon contends that the separate question should be answered in the negative, with the result that the drop down cover was only available if in fact the dishonesty exclusion applied, in which case it was not liable. If the separate question is answered in that way, that would be an end to the claim. If it were answered in the affirmative, it would still be necessary for the Court to consider whether the dishonesty exclusion applied.

11. It appears to be common ground between the parties that the hearing of the separate question will take approximately one day whereas the hearing of the whole case (raising as it does the application of the dishonesty exclusion) will take approximately five days. It also appears to be accepted that the separate question involves a question of construction that could be determined on the basis of an agreed statement of facts without the need to call evidence. There is very little if any overlap in the limited factual issues to which it gives rise and the other factual issues in the case. It follows, according to Lexon, that there is much to be said for the separate question. It will only take a day to hear. It does not turn on any evidence relevant to the application of the dishonesty exclusion. If it is answered favourably to it, the need for a five day hearing will be avoided.

Consideration

12. I do not accept Lexon’s submissions.

13. The difficulty with them is the premise that the only way the First Excess Insurers can establish that both they and Lexon are liable for the purpose of a claim for recoupment or a claim for contribution is that both had an actual liability to indemnify MEGC. But that is not necessarily so. It is at least arguable in relation to a claim for contribution that the liability of an insurer claiming contribution is established if the payment it made was made in respect of its obligation to indemnify the insured and it would be unjust not to permit that insurer to recover contribution. For example, in GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83, both QBE and GRE provided cover to an insured in respect of a fire. GRE denied liability. QBE paid the whole claim, although its policy contained a clause limiting QBE’s liability to a rateable proportion of the loss. It then sought to recover contribution from GRE. GRE denied liability on the basis that, to the extent that QBE paid more than a rateable proportion of the loss, its payment was voluntary, with the result that it was not entitled to claim contribution. A majority of the Victorian Full Court (Murray and McGarvie JJ) rejected GRE’s argument. Murray J based his decision largely on the inequitable result of GRE’s contention. As he said “[I]f [GRE] now can succeed upon the basis that [QBE] is not entitled to contribution simply because it paid out the whole loss it will indeed be profiting by its own wrong, as it turned out, in wrongly denying primary liability” (at 96). He thought that that result “would be inequitable in the extreme” (at 96). McGarvie J took a somewhat different approach. He said (at 102) “A right to recover from another in respect of payment of a liability usually includes the right to recover for an amount not proved to have been due, but reasonably and honestly paid where doubt existed as or the liability and its extent”. Applying that principle, QBE was liable in the requisite sense.

14. The decision in GRE Insurance was concerned with a special case in which it was plain that QBE had a liability but not for the amount that was the subject of the claim for contribution. However, it is at least arguable that the principles adopted in that case should be extended to the present one.

15. Moreover, in its Reply to the Commercial List Response, the First Excess Insurers plead:

As to paragraphs C21, C23(d), C24, C25, C27, C28 and C29 of the CLR [Commercial List Response]

a.   In the event that the Court determines that Lexon’s decision not to indemnify MEGC was wrongful (Wrongful Declinature), then:

i.   It would be unconscionable for Lexon to rely on the Wrongful Declinature to assert any defence to Underwriters claim for equitable relief, as set out in their Commercial List Statement and Summons, in circumstances where Lexon would be placed in a position of advantage as a direct result of its Wrongful Declinature; and

ii.   Lexon should be estopped from asserting or relying upon any Defence to the equitable relief claimed by Underwriters in reliance on the Wrongful Declinature, including but not limited to those matters pleaded in the CLR at paragraphs C23(d)(iii)(B)(a) and C23(d)(iii)(B)(b).

16. It is not entirely clear whether the Reply is intended to raise the issues raised in GRE Insurance. But whatever the precise position, it seems to me that there is an argument available to the First Excess Insurers that they do not have to establish their own liability in order to be entitled to make a claim for contribution. If that is correct, it is difficult to see how the separate question will save any time or costs. However it is answered, it would still be necessary for the Court to consider whether proof of actual liability on the part of the First Excess Insurers was necessary; and consequently, it would still be necessary for the Court to consider the question whether Lexon was entitled to rely on the dishonesty exclusion. Far from saving time and costs, the separate question is likely to add to them.

Orders

17. It follows that Lexon’s notice of motion dated 21 February 2020 must be dismissed with costs.

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Decision last updated: 25 May 2020