Francis v Powercor Australia Ltd and Lenehan v Powercor Australia Ltd (No 2)

[2020] VSC 877

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

MAJOR TORTS LIST

S CI 2018 01113

ANDREW JOHN FRANCIS	Plaintiff
v
POWERCOR AUSTRALIA LIMITED (ACN 064 651 109)	Defendants
and
ELECTRIX PTY LIMITED (ACN 067 232 393)

S CI 2018 01290

ANTHONY LENEHAN	Plaintiff
v
POWERCOR AUSTRALIA LIMITED (ACN 064 651 109)	Defendant

JUDGE:	Nichols J
WHERE HELD:	Melbourne
DATE OF HEARING:	17 December 2020
DATE OF RULING:	22 December 2020
CASE MAY BE CITED AS:	Francis v Powercor Australia Ltd and Lenehan v Powercor Australia Ltd (No 2)
MEDIUM NEUTRAL CITATION:	[2020] VSC 877

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COSTS – representative proceedings – Application for costs from certain registered insurers who objected to a proposed settlement distribution scheme – Objection led to determination of rights as between opposing sides who were engaged and represented – Supreme Court Act 1986 (Vic), Part 4A – Costs incurred for the purpose of independent counsel assessing the respective entitlements of insurer and insured group member to a proportion of group member’s share of the compensation pool is not an amount paid by the insured for administrative and legal costs incurred in connection with the recovery – Insurance Contracts Act, s 67 – Costs of independent counsel to be distributed on a pro-rata basis.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr T P Tobin SC with Mr A Fraatz	Maddens Lawyers
For the Defendants	No appearance
For the Insurer Objectors	Mr D Carolan	Hall & Wilcox Lawyers

HER HONOUR:

1. Each of these proceedings is a group proceeding under Part 4A of the Supreme Court Act 1986 (Vic) (Supreme Court Act) in which damages for loss of property, economic loss and personal injury arising from bushfires that occurred in March 2017 were sought.  Each proceeding settled and in each case the defendant agreed to pay the plaintiff and group members a lump sum of money, to be distributed between group members.  Some group members in each proceeding had, before the bushfires, entered into contracts of general insurance under which, after the fires, they were indemnified for certain losses arising out of the fires (insured group members).

1. On 11 December 2020 I delivered judgment in each proceeding (11 December Ruling)[1] in relation to a dispute between the group members and certain of their insurers,  Insurance Australia Group, Allianz Australia Limited and QBE Insurance (Australia) Ltd (the Insurer Objectors or Insurers) who between them had insured most, but not all insured group members and had made payments in respect of losses sustained in the bushfires.  This ruling concerns the costs arising from that judgment.

   [1]Francis v Powercor Australia Ltd and Lenehan v Powercor Australia Ltd [2020] VSC 836.

1. As I explained in the 11 December Ruling, the issue between the insured group members and their insurers arose in this way:

(a)        Shortly after these proceedings were issued the Insurer Objectors and the plaintiffs’ solicitors (Maddens) representing certain insured group members, commenced what ultimately became a lengthy dispute in relation to their respective entitlements to receive a distribution of the proceeds of any future settlement.  The dispute was not crystallised in any application to the Court, until the plaintiffs applied for court approval of the settlements in each case.

(b) The plaintiffs sought approval of the proposed settlements and for a proposed a scheme for the distribution of moneys between group members, pursuant to s 33V of the Supreme Court Act.  The proposed settlement distribution schemes[2] provided for the distribution of moneys between group members, and also between insured group members and their insurers.

[2]The proposed schemes (and the approved schemes) were materially the same in respect of the Lenehan and Francis proceedings.

(c)        The Insurer Objectors objected to that part of the scheme by which the plaintiffs proposed that moneys be distributed between insured group members and their insurers.  They sought that moneys be distributed to them via the scheme, but disagreed with the manner in which the plaintiffs proposed that that occur.

(d)       Both sets of parties, from well before the matter settled, intended that those insurers who registered their interests in the proceeding in accordance with ‘class closure’ orders,  would recover directly from any settlement. What was in issue was the priority in which proceeds recovered in the settlements should be distributed between insured group members and their insurers.

(e)        The plaintiffs (for the insured group members in each case) sought approval of provisions in the proposed settlement scheme to the effect that  where a group member’s assessed loss includes insured loss, the registered insurer would be entitled to recover such component of the group member’s share of the compensation pool[3] as the Administrator determined, by construing the relevant insurance policy, any submissions of the insurer and the ‘instructions’ of the group member.  The Administrator’s assessment was to be subject to a limited, binding, right of review.  The Insurer Objectors proposed in each case the insured group member’s share of the compensation pool be divided between group members and their registered insurers on a pro-rata basis according to the value which the above insurance losses bore to the insurance paid, save where the contract of insurance expressly provided otherwise.

[3]That is, that group member’s share of the settlement amount, from which common benefit legal costs and other costs including costs of administering the settlement scheme, were deducted, calculated in accordance with the provisions of the settlement distribution scheme.

Costs of the Objection

1. There are two parts to the costs dispute.  The first concerns the costs of the objection.

1. The plaintiffs sought that the Insurer Objectors pay the plaintiffs’ costs of the objection, and ‘any additional costs in administering the settlement scheme’,[4] to be taxed in default of agreement.

   [4]That is, the settlement schemes approved by orders made on 6 April 2020.

1. The plaintiffs submitted that the Insurers’ objection had failed and that costs should follow the event. It was implicit in that submission that the plaintiff had in each case borne the costs of the conduct of the response to the objection, on behalf of insured group members. As a secondary submission it was submitted that the costs of responding to the objection should be characterised as an ‘amount paid by the insured for administrative and legal costs incurred in connection with the recovery’ within the meaning of s 67(3) of the Insurance Contracts Act 1984 (Cth) (the ICA) and that in accordance with the 11 December Ruling the plaintiffs should be entitled to priority in respect of those costs, in the distribution of the settlement pool.  Finally, it was submitted that whatever order was made in relation to costs, wholly uninsured group members should be not bear any burden flowing from that order, because the dispute did not concern them.

1. The Insurer Objectors sought that there be no order as to costs regarding the objection.  They submitted in substance that:

(a)        The Court has power to order costs in favour of an objecting class member in a group proceeding, reflecting a policy that the Court should not discourage legitimate objections to proposed settlements, noting that whether such an order is warranted will depend on where the interests of justice lie.[5]

[5]See, e.g. Kelly v Willmott Forests (in Liq) (No 6) [2019] FCA 745 (Murphy J).

(b)       In this case the Insurers where not wholly unsuccessful in their objection in that the Court had accepted their submission that independent counsel should be involved in aspects of the distribution of funds between insurer and insured.

(c)        It was reasonable for the Insurers to approach the Court with an objection because the approach proposed by the plaintiffs was novel in the sense that all previous class action settlements involving a distribution between insured group members and their insurers had adopted the Insurers’ ‘pro-rata’ rule and had been approved, by consent, on that basis, and there was no existing authority on the question of priorities in this context and scant authority on the relevant provision (s 67) of the ICA.

(d)       The Insurer Objectors occupied the role of contradictor and assisted the Court in circumstances where there was no appearance for the defendants.

(e)        The Insurer Objectors’ arguments were also to the benefit of other insurers who were affected by the approval of the settlement distribution schemes.  In doing so, the Insurers ‘sought to protect a class of members affected by the proposed SDS [settlement distribution scheme]’.

1. As observed in the 11 December Ruling, no existing authority governed the question of priorities between insurer and insured in the present context.  In the circumstances, the Insurers’ pressing a pro-rata distribution of recovered moneys could not be characterised as unreasonable.  I accept their submission in that respect.

1. The Insurers also correctly said that their submissions assisted the Court in resolving the issue for determination.  The submissions of both parties, particularly their written submissions provided in response to my directions, were of real assistance.

1. I consider, however, that although the issue in dispute arose in the context of an application for approval of a settlement of each of the proceedings, it was in substance an inter partes dispute in which two groups of opposing parties – namely the Insurer Objectors on the one hand, and insured group members on the other, squarely joined issue on opposite sides of a clearly formulated question that affected their interests directly.

1. As I said in the December ruling,

[29]The question of the respective rights of the insurers and insureds was not litigated in these proceedings – the question of priorities did not form part of the common claims that gave rise to common issues, in relation to which the plaintiffs and group members are privies in interest.

[30]Whilst so much is uncontentious, the plaintiffs’ real position was that they in fact wished the Court to deal with question of priorities as between insured group members and insurers, notwithstanding that that question was brought before the Court in the context of an application under s 33V and not, for example, in a separate proceeding constituted by insured group members or some of them, and their insurers. That was a position that they shared with the Insurer Objectors.

…

[33][The parties’] submissions (and the Insurer Objectors’ submissions) were made in circumstances in which the insured group members and insurers had contemplated from the outset that insurers would “recover” in any settlement, which would necessitate the question of priorities being the subject of court approval (and determination if not agreed) and in which both parties were represented and the issues argued fully.

[34]In other words, there was a real controversy between the interested parties that raised the question whether, on the facts, the Insurer Objectors or the insured group members (or some of them) could and should be considered as the “recovering” party for the purposes of s 67 or otherwise be given priority in the allocation of recovered proceeds.

[35]Having raised the controversy in that way, and having consented to (and actively sought) its determination without the constitution of a separate proceeding, the plaintiffs (for the insured group members) and the Insurer Objectors, then sought competing orders directed to the manner in which the settlement pool should be distributed, and in effect sought that that distribution be consistent with their respective legal entitlements. That being so, the question of limits of the power conferred by s 33V was not in issue.

1. So while the Insurers’ submissions were undoubtedly of assistance in resolving a question on which there was no relevant authority, properly characterised, their role was not one of contradictor.  The procedural context in which the priorities dispute unfolded was chosen by the interested parties, by reason of their not having sought to agitate the dispute in any other way.  The fact that the Insurers Objectors advanced their position in the context of an objection to an application to approve a settlement distribution scheme, did not affect any real transformation of their role.  At least one other insurer of group members had registered an interest in the proceedings for the purpose of settlement and that insurer’s position was also determined by the outcome of the 11 December Ruling (in circumstances where that insurer made no submissions on the objection).[6] The Insurers invoked that fact when they submitted that they ‘sought to protect a class of members affected by the proposed SDS’.  Even if that characterisation is accurate, it can be contrasted with a situation in which a contradictor or perhaps an objector, represents the interests of group members (or some of them), for example by opposing a course supported by the plaintiff.  That is not to say that such circumstances are the only ones in which objectors might be awarded costs.  It is only to say that in this case, I consider that the Insurer Objectors were advancing their own interests, as they were entitled to do, in a contest  in which opposing sides were engaged and represented.

   [6]See the 11 December Ruling at [10].

1. It is apparent from the 11 December Ruling that the plaintiffs, for the insured group members, succeeded on the principal and substantive issues in dispute, including on both aspects of the substantive ground of the Insurers’ objection.  As to the submission that the Insurers partly succeeded because I accepted the submission that Independent Counsel should be involved in certain aspects of the distribution of the settlement moneys, that issue was of comparatively minor significance, as the submissions of the parties on the principal issues and the 11 December Ruling demonstrate.

1. The ordinary rule is that costs follow the event.  That rule is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant.[7]  The ordinary rule may of course be displaced.  In this case, given the characterisation of the roles of the respective parties interested in the dispute, the interests of justice lie in an award of costs to the successful party, and there are no circumstances that warrant a departure from that approach.

   [7]Oshlack v Richmond River Council (1998) 193 CLR 72, 96–7 [66]–[67].

1. It is unnecessary to consider the plaintiff’s alternative argument regarding s 67 of the ICA.

1. The award of costs should be limited to the costs of the objection.  No basis was identified for an award in respect of ‘any additional costs in administering the settlement scheme’, and nor was the nature of those costs described in any way in submissions.

Costs of Referral to Independent Counsel

1. On 17 December 2020, consequent upon my 11 December Ruling, I ordered that the settlement distribution schemes in each proceeding be varied to facilitate the distribution of remaining settlement moneys between insured group members and registered insurers.  The scheme is to provide that the Settlement Administrator retain a member of counsel practising at the Victorian Bar (agreed with the Insurer Objectors or appointed by the Court if not agreed) for the purposes of performing a role in the settlement distribution, namely where registered insurer and Settlement Administrator cannot agree, to assess, for each insured group member, the respective entitlements of group member and insurer, to a proportion of the group member’s share of the compensation pool.

1. The plaintiffs submitted that the costs of any referral to independent counsel should not form part of the ‘common benefit legal costs’ or ‘administration costs’ and that those costs shall be borne between insured group member and their registered insurer ‘in accordance with the priorities as set out in s 67(3) of the ICA or (if relevant) in accordance with Independent Counsel’s determination’. The reference to independent counsel’s determination was intended to be limited to those circumstances in which independent counsel determined that the applicable policy of insurance had the effect of determining how the costs of the resolution of a dispute between insurer and insured concerning distribution of recovered funds, should be borne as between those parties. The plaintiffs submitted that their proposed order would protect wholly uninsured group members from the costs of the insurance dispute, and that it was consistent with the insured group members’ success in the dispute generally. They submitted in the alternative that the costs of referral to independent counsel fell within s 67(3) of the ICA and in accordance with the 11 December Ruling insured group members (on whose behalf the plaintiffs would incur the costs) should be entitled to priority in the distribution of the settlement pool, to the extent of the costs of the referral.

1. The Insurer Objectors submitted that costs of deciding how recovered moneys should be distributed between insured and insurer were not covered by s 67(3) and that their proposed distribution, namely that ‘the costs of any referral to Independent Counsel be borne as between insured group member and the Registered Insurer pro-rata according to the assessed value of the uninsured and insured losses respectively’, was fair and equitable.

1. I agree that the costs of referral to independent counsel should not be borne by uninsured group members.  The Insurer Objectors did not contend otherwise.  Accordingly, I accept the plaintiffs’ submission that those costs should be distinguished from ‘common benefit legal costs’ and ‘administrative costs’ which, under the settlement distribution schemes approved by my earlier orders, are borne by group members in that they are or are to be deducted from the settlement sums (at least notionally) before the remaining moneys (the compensation pool in each case) are distributed between group members.

1. The question is, then, how the costs of referral to independent counsel should be borne between insured group members and registered insurers.

1. Consequent upon the 11 December Ruling and Orders made on 18 December 2020, the respective entitlements of insurer and insured group member to a proportion of the group member’s share of the compensation pool will be calculated in accordance with the priorities set out in s 67(3) of the ICA.

1. Section 67(3) provides in effect that where the insured recovers, the insured shall be first entitled to only so much of the recovered amount as to not exceed the insured’s overall loss and ‘the amount paid by the insured for administrative and legal costs incurred in connection with the recovery’.

1. It is evident from s 67 as whole, that its purpose is to facilitate the distribution of moneys in which both insurer and insured have an interest, by supplying rules for distribution which turn on identifying which of the insurer or insured recovered the moneys. In that inquiry, the focus is on the respective roles of insurer and insured, in the recovery. Read in its immediate statutory context (s 67(1)), it is clear that s 67(3)(a)(ii) is concerned with costs incurred in connection with recovery from a third party. Where the insured has recovered from the third party, s 67(3) gives the insured priority (that is, first access to) the recovered amount to the extent of the insured’s overall loss and costs paid by the insured in connection with that recovery. Section 67(2) operates in the same way, where the insurer recovers. The priority given to the recovering party is, relevantly, in respect of the costs incurred in effecting the recovery.

1. Costs that will be incurred in connection with a referral to independent counsel will be incurred for the purposes of independent counsel being engaged to perform, and performing, a particular task, namely assessing the respective entitlements of insurer and insured group members to a proportion of the group member’s share of the compensation pool.  In each case the task will be performed by reference to the relevant contract of insurance where applicable, adopting the underlying calculations performed by the Settlement Administrator which will identify the recovered insured loss for each group member.  That work will occur only where the Insurer and Settlement Administrator cannot agree the outcome.  Those costs, in my view, do not answer the description of ‘the amount paid by the insured for administrative and legal costs incurred in connection with the recovery’.  It is true that the expression, ‘in connection with’ is an expression of broad ambit.[8] Be that as it may, the relationship with which s 67(3)(a)(ii) is concerned is that between the expenditure of costs and the recovery ‘from another person’ (see s 67(1)). The cost of referral to independent counsel will be incurred for another purpose, namely the distribution between insurer and insured, of moneys already recovered from a third party. The purpose of the referral is to quell a different controversy – the dispute between insurer and insured.

   [8]See, for example, R v Khazaal (2012) 246 CLR 601, 613 [31] (French CJ).

1. As to the plaintiffs’ success in the priorities dispute, a similar analysis may be applied. The plaintiffs succeeded, as against the Insurer Objectors, in contending that recovered moneys should be distributed in accordance with the priorities set out in s 67(3) of the ICA, and not in accordance with s 67(2) or ‘pro-rata’, reflecting the relationship between insured and uninsured losses. That was the ‘event’. The costs now to be incurred are not consequent upon that event in any relevant sense. It was always going to be necessary for the Settlement Administrator (with or without the assistance of independent counsel) to distribute the recovered moneys, regardless which rule or set of priorities was to be applied for the purposes of that distribution. That task must now occur, and the plaintiffs’ success on the question of priorities does not inform the separate question of who should bear the costs of the involvement of independent counsel in distributing the recoveries.

1. There is force in the submission by counsel for the Insurer Objectors that independent counsel is in effect, performing a service that will be of benefit to both parties in determining whether and how the relevant contract of insurance applies, and in calculating the parties’ respective entitlements in the recovered amount, in accordance with the 11 December ruling.  The Insurers’ proposed disposition – that the costs of any referral to Independent Counsel be borne as between insured group member and the Registered Insurer pro rata according to the assessed value of the uninsured and insured losses respectively – will spare wholly uninsured group members from those costs, and is equitable because it distributes costs proportionately according to losses, insured and uninsured.  I will order that costs be borne in that way.

1. No submissions were addressed to what items of work would be covered by the costs of referral.  It is appropriate then, only to say that those costs should be taken to include the costs of the Administrator retaining and communicating with independent counsel, and of counsel performing the work required.