National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2)
[2019] FCA 1543
•20 September 2019
FEDERAL COURT OF AUSTRALIA
National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543
File number: VID 527 of 2019 Judge: ALLSOP CJ Date of judgment: 20 September 2019 Catchwords: COURTS AND JUDGES – jurisdiction – where applicant initiated proceeding in Insurance List seeking declaratory relief in relation to the proper construction of policies of insurance and reinsurance – where respondents filed interlocutory applications seeking orders that the originating application be set aside pursuant to r 13.01 of the Federal Court Rules 2011 (Cth), or that the proceeding be dismissed pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth), or an order for summary judgment pursuant to r 26.01 of the Federal Court Rules 2011 (Cth) – whether the Court has jurisdiction to hear the underlying construction proceeding – whether there exists a matter arising under a law of the Parliament – whether the underlying construction proceeding is in respect of a matter arising under a law of the Parliament – whether declaratory relief inappropriate due to hypotheticality and/or inutility – interlocutory applications dismissed with costs Legislation: Australian Constitution, ss 75, 76
Federal Court of Australia Act 1976 (Cth), ss 19, 21, 22, 23, 31A
Insurance Contracts Act 1984 (Cth), ss 54, 57
Judiciary Act 1903 (Cth), s 39B(1A)
Supreme Court Act 1970 (NSW), ss 63, 75
Federal Court Rules 2011 (Cth), rr 9.21, 13.01, 16.21, 26.01
Cases cited: Ainsworth v Criminal Justice Commission [1992] HCA 10; 175 CLR 564
Australian Securities and Investments Commission v Edensor Nominees Pty Ltd [2001] HCA 1; 204 CLR 559
Bass v Permanent Trustee Co Ltd [1999] HCA 9; 198 CLR 334
Bateman’s Bay Local Aboriginal Land Council v The Aboriginal Community Benefit Fund Pty Ltd [1998] HCA 49; 194 CLR 247
Cacciola v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691
Champerslife Pty Ltd v Manojlovski [2010] NSWCA 33; 75 NSWLR 245
Coles v Wood [1981] 1 NSWLR 723
Commonwealth v BIS Cleanaway Ltd [2007] NSWSC 1075; 214 FLR 271
Commonwealth v BIS Cleanaway Ltd [2008] NSWCA 170
Croome v Tasmania [1997] HCA 5; 191 CLR 119
Crouch v Commissioner for Railways (Qld) [1985] HCA 69; 159 CLR 22
Danthanarayana v Commonwealth [2016] FCAFC 114
Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd [2019] FCA 639
Dey v Victorian Railways Commissioners [1949] HCA 1; 78 CLR 62
Edwards v Santos Ltd [2011] HCA 8; 242 CLR 421
Federated Engine-Drivers and Firemen’s Association of Australasia v The Broken Hill Proprietary Company Ltd [1911] HCA 31; 12 CLR 398
Felton v Mulligan [1971] HCA 39; 124 CLR 367
Fencott v Muller [1983] HCA 12; 152 CLR 570
Forster v Jododex Australia Pty Ltd [1972] HCA 61; 127 CLR 421
FQM Australia Nickel Pty Ltd v Bullen [2011] FCAFC 30; 191 FCR 261
General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; 112 CLR 125
Henderson v Henderson (1843) 3 Hare 100; 67 ER 313
Hooper v Kirella Pty Ltd [1999] FCA 1584; 96 FCR 1
In re Judiciary and Navigation Acts [1921] HCA 20; 29 CLR 257
In re Pacific Railway Commission 32 F 241 (1887)
Integrated Lighting & Ceilings Pty Ltd v Phillips Electrical Pty Ltd (1969) 90 WN (Pt 1) (NSW) 693
Jager v Tolme & Runge and the London Produce Clearing House, Ltd [1916] 1 KB 939
Lewis v Green [1905] 2 Ch 340
Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 97014
Moorgate Tobacco Co Ltd v Philip Morris Ltd [1980] HCA 32; 145 CLR 457
Neeta (Epping) Pty Ltd v Phillips [1974] HCA 18; 131 CLR 286
NRMA Insurance Ltd v Tatt (1989) 94 FLR 339
Palmer v Ayres [2017] HCA 5; 259 CLR 478
Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd [1981] HCA 7; 148 CLR 457
Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; 147 CLR 589
QBE Insurance Ltd v Nguyen [2008] SASC 138; 100 SASR 560
Quest Rose Hill Pty Ltd v White [2010] NSWSC 939
R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett [1945] HCA 50; 70 CLR 141
Rajbenback v Mamon [1955] 1 QB 283
Rana v Google Inc [2017] FCAFC 156; 254 FCR 1
Re Bowman [1994] 1 Qd R 251
Re McBain; Ex parte Australian Catholic Bishops Conference [2002] HCA 16; 209 CLR 372
Re Multiplex Constructions [1999] 1 Qd R 287
Re Security Projects Ltd; Re K Mart (Aust) Ltd & Roggette [1993] QSC 18
Re Wakim; Ex parte McNally [1999] HCA 27; 198 CLR 511
Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438
Schering Ltd v Stockholms Enskilda Bank Aktiebolag [1946] AC 219
Sop & Sop Pty Ltd v Commissioner of Taxation [2019] FCA 102
South Australia v Victoria [1911] HCA 17; 12 CLR 667
Spencer v Commonwealth [2010] HCA 28; 241 CLR 118
Trans Realties Pty Ltd v Grbac [1975] 1 NSWLR 170
Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd [2000] HCA 11; 200 CLR 591
Union of India v Compania Naviera Aeolus SA [1962] 1 QB 1
United Broadcasting International Pty Ltd v Turkplus Pty Ltd (No 2) [2010] FCA 1413
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; 192 CLR 603
Wighams Enterprises Pty Ltd v Smith [1975] 1 NSWLR 76
Winchcombe Carson Trustee Co Ltd v Ball-Rand Pty Ltd [1974] 1 NSWLR 477
Date of hearing: 21 August 2019 Date of last submissions: 23 August 2019 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance – Insurance List Category: Catchwords Number of paragraphs: 175 Counsel for the Applicant: Ms W A Harris QC with Ms S Gory Solicitor for the Applicant: Herbert Smith Freehills Counsel for the First Respondent: Ms V Whittaker SC with Mr R Pietriche Solicitor for the First Respondent: King & Wood Mallesons Counsel for the Second Respondent: Mr M Darke SC with Ms C van Proctor Solicitor for the Second Respondent: Kennedys Counsel for the Third and Fourth Respondents: Mr G Rich SC with Mr G Ng and Mr R Jedrzejczyk Solicitor for the Third and Fourth Respondents: YPOL Lawyers
Table of Corrections 23 September 2019 [171]: in the fourth line, “intent” is changed to “interest”. ORDERS
VID 527 of 2019 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)
Applicant
AND: NAUTILUS INSURANCE PTE LTD
First Respondent
CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBER B0509QA009912
Second Respondent
CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBER B0509QA008613
Third Respondent
CERTAIN UNDERWRITERS AT LLOYD'S LONDON SUBSCRIBING TO POLICY NUMBER B0509QA009914
Fourth Respondent
JUDGE:
ALLSOP CJ
DATE OF ORDER:
20 SEPTEMBER 2019
THE COURT ORDERS THAT:
1.The interlocutory applications of the second, and third and fourth, respondents be dismissed with costs.
2.Within 7 days, the solicitors for the third and fourth respondents identify in a letter to the solicitors for the applicant any matter of substance that would prevent an order under r 9.21(2) being made.
3.The originating application be fixed for hearing on 12 November 2019 before the Honourable Justice Lee.
4.The parties have liberty to apply to Justice Lee for the making of any orders for further case management.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
ALLSOP CJ:
Introduction
The applicant in the proceedings, the National Australia Bank Limited (NAB) has made a claim on its insurer Nautilus Insurance Pte Ltd (Nautilus or the insurer) and on three groups of Nautilus’ reinsurers under policies of insurance and reinsurance that include civil liability insurance for three relevant policy years, 31 March 2012 to 31 March 2013, 31 March 2013 to 31 March 2014 and 31 March 2014 to 31 March 2015.
The claim is large – over £357 million. The nature and content of the claim has been carefully and fully expressed and discussed between and among the solicitors for NAB, the insurer and the respective reinsurers since 2016, if not earlier. There are numerous issues in respect of which the parties are in dispute. One group of issues concerns the proper construction of critical provisions of the policies of insurance concerning the definitions of the phrase “Civil Liability” in General Definition 11(b), of the word “Loss” in General Definition 40(B)(a) and of the phrase “Defence Costs” in General Condition 7(a).
As appears in the reasons that follow, there is one whole controversy between and among NAB, Nautilus and its reinsurers concerning the claim for indemnity by NAB over the three policy periods. To use the words of Griffith CJ in South Australia v Victoria [1911] HCA 17; 12 CLR 667, in his distinction between a controversy and the proceedings in which it might be resolved, there is a controversy “which might come before a Court of Justice”.
For the reasons below, the whole controversy between and among the various parties is one that arises under a law of the Parliament for the purposes of s 39B(1A)(c) of the Judiciary Act 1903 (Cth) (Judiciary Act) and s 76(ii) of the Constitution. That conclusion is a matter of contest, the reinsurers contending that there is no “matter” before the Court, and no exercise of federal jurisdiction that has been engaged by NAB.
Part of that argument about the jurisdiction of the Court arises from the fact that in the proceeding brought in the Court (in the Insurance List in the Commercial, Contracts, Banking, Finance and Insurance sub-area of the Commercial and Corporations National Practice Area) NAB has only sought declaratory relief against the insurer and reinsurers as to the proper construction of certain clauses of the policies. The limited scope of the relief sought in these proceedings (as, in effect, a construction summons) has also led to the arguments of the reinsurers that, even if the Court has jurisdiction, the proceedings should be summarily dismissed as bound to fail, not because of the asserted lack of merit in any argument concerning the meaning of the clauses in question, but because the declaratory proceedings are said to lack utility, are said to be hypothetical and are said to be otherwise not appropriate to be the subject of disposition by the Court in the exercise of judicial power.
Given the assertion that the Court lacks jurisdiction because of the absence of a “matter”, there was a matter arising under, or involving the interpretation of, the Constitution that engaged ss 78A and 78B of the Judiciary Act. Notices were given to all Attorneys-General of the Commonwealth, the States and the Territories. None has sought to intervene.
The questions of jurisdiction, judicial power and the power and discretion to entertain a suit for declaratory relief can be seen to be intertwined: Forster v Jododex Australia Pty Ltd [1972] HCA 61; 127 CLR 421; Neeta (Epping) Pty Ltd v Phillips [1974] HCA 18; 131 CLR 286; Ainsworth v Criminal Justice Commission [1992] HCA 10; 175 CLR 564; Bass v Permanent Trustee Co Ltd [1999] HCA 9; 198 CLR 334; Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd [2000] HCA 11; 200 CLR 591; Bateman’s Bay Local Aboriginal Land Council v The Aboriginal Community Benefit Fund Pty Ltd [1998] HCA 49; 194 CLR 247; Russian Commercial and Industrial Bank v British Bank for Foreign TradeLtd [1921] 2 AC 438. Nevertheless, it is necessary to deal first with the question of jurisdiction (that is the lawful authority of the Court to adjudicate and decide upon what is placed before it) in whatever way that is put, since it is the Court’s first duty to decide whether it has that authority: Federated Engine-Drivers and Firemen’s Association of Australasia v The Broken Hill Proprietary Company Ltd [1911] HCA 31; 12 CLR 398 at 415; and see the cases referred to and discussed in Leeming M, Authority to Decide: The Law of Jurisdiction in Australia (Federation Press, 2012) at pp 35–7. The question of jurisdiction involves an examination of the nature of the existing controversy between and among the parties, and the legitimacy of the choice made by NAB for resolution by this Court of part of the controversy, being questions of construction of the policies of insurance, before judicial power is engaged (if that becomes necessary) to determine questions of the final determination of liability (or not, as the case may be).
Factual background
The factual background is taken from the various claims, submissions and responses that form the expression of the controversy between and among the parties, and from the submissions before the Court.
In or about 2012, the United Kingdom Financial Services Authority (which later became the Financial Conduct Authority), to which I will refer as the UK Regulator, identified failings in the way some banks, including Clydesdale Bank Plc (Clydesdale), a subsidiary of NAB (until 2013), had sold certain products to customers. These included Interest Rate Hedging Products (IRHPs), being so-called stand-alone derivative products (SADs) and tailored business loan products (TBLs), sold from 2001. A review and redress investigation scheme was instituted by Clydesdale and NAB with the aim of identifying and settling reasonably apprehended liabilities in respect of these products.
The review revealed to Clydesdale and NAB that there were grounds for redress for many customers. Many customers were paid redress in accordance with agreements entered into with Clydesdale and NAB.
It is unnecessary for present purposes to explain in any detail the nature of the IRHPs and the misselling that occurred. SADs enable customers to hedge against the risk of interest rate changes or variable rate loans by a separate derivative agreement. TBLs were loans which had some features of SADs. They were developed for small to medium customers in order to give them a hedging capacity without a separate derivative agreement. There were different types of SADs and TBLs. Some were regulated by the UK Regulator, some were not.
Clydesdale and NAB also conducted a complaints redress and review process in relation to fixed rate loans. There had been complaints from customers about the circumstances in which these were sold. There were agreements reached with a large number of customers along the same lines as the agreements to resolve the IRHP review and redress program.
After some communication in the previous year and in early 2016, NAB submitted, on 14 November 2016, a formal claim submission for the IRHP review and redress program to Nautilus and the reinsurers for the 2012/2013 policy. On 11 August 2017, NAB submitted a formal claim submission for the fixed rate complaints redress program to Nautilus and the reinsurers for the 2013/2014 and 2014/2015 policy years.
Thereafter, detailed correspondence followed these two formal claim submissions. In respect of the claim on the 2012/2013 policy and reinsurances, on 31 October 2017 the reinsurers for the 2012/2013 policy year (through their solicitors) denied indemnity for the IRHP review and redress claim. By letter dated 1 December 2017, NAB (through its solicitors) responded to that denial of indemnity. The reinsurers (again through their solicitors) responded in substance to NAB’s solicitors by letter dated 23 April 2018.
In respect of the claim on the 2013/2014 and 2014/2015 policies, by letter dated 13 June 2018 from their solicitors the reinsurers for those years denied indemnity. In this letter, the 2013/2014 and 2014/2015 reinsurers adopted the position articulated by the 2012/2013 reinsurers in relation to the IRHP redress claims.
A number of things should be noted about this correspondence. First, reinsurers took the running in the debate about the claim because of the terms of the following clauses in the reinsurances, the size of the claims and the engagement of the reinsurances. Secondly, as will be discussed later, the legal representatives engaged, if I may respectfully say, in a clear, full, and sophisticated way with the various issues that attended the claims for indemnity. Thirdly, from these communications, supplemented by later correspondence and the submissions before the Court, one can obtain not only an outline, but also the detail, of a significant existing and substantial commercial dispute as to a present (claimed and denied) entitlement of over £350 million. There is nothing hypothetical about the controversy reflected by the correspondence.
Before returning to the character, limits and contours of that controversy, it is necessary to turn to the policies of insurance and reinsurance.
The policies of insurance and reinsurance
Because of the substantial identical terms of the policies, discussion of the policies can be focused on the underlying 2012/2013 policy and reinsurance.
The 2012/2013 primary insurance and reinsurance
The policyholder was NAB (Schedule item 2).
Items 7 and 8 of the Schedule set out the limits of indemnity and retentions, the latter (retentions) being amended by endorsement on 23 October 2012.
Item 9 of the Schedule and General Condition 3 provided for the jurisdiction and proper law of the insurance. The policy was expressed to be subject to the provisions of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act). The policy also provided that any dispute between NAB and Nautilus would be subject to Australian law and further that, in relation to any dispute, Nautilus would submit to the exclusive jurisdiction of any competent court in Victoria.
In the reinsurance policy for the same period between Nautilus and the reinsurers, there was a following clause which stated:
Follow Form:
This Reinsurance shall be subject to the same terms, conditions, exclusions, definitions and other provisions as are contained in or shall be added to the Original Policies except as otherwise specified herein. This Reinsurance shall follow the meaning and interpretation of the Original Policy in all respects except as otherwise specified herein. It is warranted that the original wording is as attached and any amendments are to be agreed by Reinsurers hereon.
(Emphasis added.)
By cl 4 of the reinsurance policy there was a specific clause dealing with the Insurance Contracts Act, as follows:
Insurance Contracts Act:
Save in the cases arising in relation to Subrogation, it is agreed by Reinsurers hereon that in spite of this contract being structured as a reinsurance, the provisions of the Insurance Contracts Act 1984 (Cth) will apply to this Reinsurance, as if this Reinsurance was a direct insurance. Without limiting the generality of the foregoing, Reinsurers hereon acknowledge that their rights under and in relation to this Reinsurance, and the remedies available to them in the case of any of the following, shall be limited to those which would be available to them if the Reinsurance were in fact a direct insurance:
(a)any non-disclosure or misrepresentation by or on behalf of the Reassured;
(b)any breach of condition, breach of warranty, or failure to comply with any condition precedent; and
(c)the existence of any other insurance or reinsurance covering the risks reinsured hereunder.
(Emphasis added.)
Further, by cl 10 of the reinsurance policy dealing with proper law and jurisdiction, the reinsurers agreed to an identical clause as between them and Nautilus, as was agreed between Nautilus and NAB in General Condition 3 referred to at [21] above.
Clause 3 of the reinsurance policy was the claims control clause. Nautilus was required to notify any loss or claim to the broker identified in the underlying insurance. That company was related to the reinsurance placing broker (both being companies in the Marsh group). Such person was stated by cl 3 to act on behalf of the reinsurers. Subclause (ii) of cl 3 also made clear that the reinsurers controlled the handling of the underlying claim:
… the Reinsurers shall have the right to appoint adjusters, assessors and/or surveyors and to control all negotiations, adjustments and settlements in connection with any Single Loss arising therefrom.
The substantial identity of the terms of the insurance and reinsurance, including the application of the Insurance Contracts Act, and the effective control of all primary claims by the reinsurers perhaps explains why there is no complaint by the reinsurers to being joined in these proceedings with Nautilus.
Referring to the primary policy between NAB and Nautilus, sections I and II concern crime – conventional and electronic. Section III is entitled “Professional Indemnity”. It is the section in respect of which the claim and dispute as to indemnity arises.
The insuring clause is set out at the beginning of the section and relevantly states:
(A)Civil Liability arising out of:
(a)The provision by or on behalf of the Assured (or failure to provide) Financial or Professional Services to third parties;
…
(B)the incurring of Defence Costs in relation to any actual or alleged Civil Liability as described in (A) above…
Immediately after the indemnity clause is a part of the policy entitled “Special Exclusions”. Two provisions are said to be relevant to the present debate, Special Exclusions 1 and 15 and the chapeau thereto:
This Section III of the Policy shall not indemnify the Assured in respect of;
1.Any Loss arising out of a contract but only to the extent that the legal liability giving rise to the Loss arises from a breach of a duty, warranty, guarantee or other term that exists solely under contract and which would not have attached to the Assured in the absence of such contract.
…
15.For the reimbursement, restitution or disgorgement of fees, profits, commissions, costs or other charges paid or payable to the Assured, or based on, arising out of, relating to or involving, directly or indirectly, the actual or alleged charging of excessive, undisclosed or otherwise improper fees, profits, commissions, costs or other charges by the Assured.
After the Special Exclusions, there is a part of the policy entitled “General Definitions”. There are a number of provisions relevant to the present debate:
(a)The phrase “Civil Liability” is defined in cl 11 as follows:
“Civil Liability” shall mean:
(a)a legally enforceable obligation to a third party for compensation, damages, legal costs or a Restitutionary Order in accordance with an award of a court or tribunal by whose jurisdiction the Assured is bound;
(b)a legally enforceable obligation to a third party for compensation, damages, legal costs or a Restitutionary Order acknowledged (subject always to the provisions of General Condition 2, Notification of Losses or Third Party Claims and General Condition 7, Defence and Defence Costs, clause (c) 2)) by an agreement made between the Assured and a third party in settlement of a Claim;
(c)any liability pursuant to any award, directive, order or similar act of a Authority or self regulating organisation, the result of which is binding upon the Assured;
(d)any liability pursuant to arbitration or other alternative dispute resolution process the result of which is binding upon the Assured;
(e)liability under Section 95 (1) of the Cheques and Payments Orders Act in Australia or similar legislation elsewhere for conversion;
(f)any liability to retail clients due to breaches of obligations under Chapter 7 of the Corporations Act 2001 (Cth) but only as required to be covered under ASIC Regulatory Guide 126;
(g)any liability to consumers due to breaches of obligations under the National Consumer Protection Act 2009 (Cth) but only as required to be covered under ASIC Regulatory Guide 210…
(b)The word “Claim” is defined in cl 12 as follows:
“Claim” means any:
(a)demand, suit or proceeding, including any civil proceeding, third party proceeding, counterclaim, arbitration or alternative dispute resolution process, regulatory or administrative proceeding (and any appeal therefrom) brought by any party against the Assured either for or which could reasonably result in the payment of compensation, damages, or a Restitutionary Order; or
(b)hearing, examination, investigation or inquiry into the affairs of the Assured.
(c)The phrase “Defence Costs” is defined in cl 20 as follows:
“Defence Costs” means reasonable and necessary legal fees, legal costs and other expenses and costs of investigation, defence and settlement paid or incurred by or on behalf of the Assured in connection with any Claim, other than the normal salary of any Employees.
(d)The phrase “First Made” is defined in cl 32 as follows:
“First Made” means the date at which the Responsible Department:
(a)becomes aware that the Assured has received a Claim; or
(b)becomes aware of the intention of any person to make a Claim against any Assured.
(e)The word “Loss” is defined for the purposes of Section III of the policy in cl 40 as follows:
“Loss” means:
…
(B)In respect of Section III only:
(a)The total amounts which the Assured becomes or may become legally liable to pay, including but not limited to:
(i)damages, judgments and settlements, including legal costs;
(ii)payments to third parties (including civil penalties) in restitution which are of a compensatory nature, in compliance with the directions of any body or Authority empowered to govern the conduct of the business of the Assured between the Assured and such third parties (not to include for the avoidance of doubt any such payment to or for the benefit of such body or Authority);
(iii)any award of costs made against the Assured;
(iv)the cost (including the acquisition cost of securities) of restoring a person to a register or record where the Assured is legally liable for the wrongful removal or non-appearance of that person from or on the register or record;
(v)all other costs and expenses, incurred with the written consent of Underwriters;
(b) Defence Costs.
There is a qualification to this definition of Loss immediately following, as follows:
“Loss” under (B) (a) and (C) (a) above only does not, include:
…
(d) fees, commissions, or other charges paid or due to the Assured…
(f)The phrase “Responsible Department” is defined in cl 54 as follows:
“Responsible Department” means that part of the Assured’s organisation specified in the Schedule.
Item 13 of the Schedule specified Group Insurance & Operational Risk Financing, Melbourne as the Responsible Department.
(g)The phrase “Single Loss” is defined in cl 60 as follows:
“Single Loss” means all Loss arising from or attributable to one originating cause.
After the General Definitions there follows a part of the policy entitled “General Conditions”.
Clause 2 of the General Conditions deals with notification of losses, or third party claims, investigation of losses and dispute resolution. It included the following:
(i) The Responsible Department shall give written notice of:
(I)any actual or potential Loss where Discovery occurs during the Policy Period (or Extended Reporting Period in accordance with General Condition 12), and/or
(II)any Claim First Made against the Assured during the Policy Period (or Extended Reporting Period in accordance with General Condition 12)
in accordance with the following procedures agreed between the Assured and Underwriters:
…
(c)any Loss or Claim of more than the applicable ‘Business Unit Retention’ shall be notified to the Underwriters as soon as is reasonably practicable after Discovery or such Claim is First Made;
…
(e)with respect to any Loss or Claim of more than AUD 1,000,000, the Responsible Department shall consult with the Underwriters as to how the matter shall be dealt with and the Underwriters shall have the right, at their discretion, to control the appointment of adjusters and/or legal advisors and the investigation, negotiation and settlement thereof;
The Extended Reporting Period concerns the position when renewal is declined. The Assured was entitled to an extended period upon payment of a further premium.
Clause 7 of the General Conditions provided for Defence and Defence Costs, relevantly as follows:
Defence and Defence Costs
(a)The Underwriters shall indemnify the Assured against reasonable Defence Costs paid or incurred by or on behalf of the Assured, with the approval of Underwriters (which approval shall not be unreasonably withheld, denied or delayed), in the defence of any suit, demand, claim, legal proceedings or action in respect of which the Assured establishes that the circumstances were such that they would, if established against the Assured, give rise to a claim by the Assured under this Policy.
Such Defence Costs and other costs paid by Underwriters in defending any suit, legal proceedings or action shall be applied, firstly, to the retention amount and then, subject to General Condition 9, Limits of Indemnity, to the reduction of the Aggregate Limit of Indemnity of the relevant Section of this Policy and any Sub-limit applicable to the relevant Insuring Clause.
(b)Underwriters shall not indemnify the Assured for Defence Costs incurred in the defence of any causes of action which, if established against the Assured, would not give rise to a claim under this Policy, unless the Underwriters have consented to do so in writing.
(c)The Assured or their legal representatives shall not:
(1)take any action which is prejudicial to Underwriters’ interests; or
(2)without the prior consent of the Underwriters (such consent not to be unreasonably withheld, denied or delayed), admit liability for or settle any third party Claim in excess of the Retention specified the Schedule.
[There followed a Queen’s Counsel Clause.]
In cl 9 of the General Conditions concerning the limits of indemnity subclauses (e) and (f) are in the following terms:
Limits of Indemnity
…
(e)Non Cumulative Liability: Regardless of the number of years this Insurance has been in force or may continue to be in force and of the premiums paid or payable in respect thereof the liability of the Underwriters with respect to any Single Loss shall not be cumulative in amount from year to year or from period to period and in no case shall exceed the Limit of Indemnity stated in the Schedule.
(f)Retention: The Underwriters shall be liable hereunder only in excess of the applicable retention stated in the Schedule, provided always that:
(i)only one retention (being the highest of any of the applicable retentions) shall apply to any Single Loss, even if such Single Loss is covered under more than one Section or Insuring Clause of the Policy or if such Single Loss is covered by either or any Policy issued by Nautilus Insurance Pte Limited; and
(ii)if the Assured is indemnified by any other insurance policy in respect of any Loss, any recoveries therefrom shall to the extent of such recoveries be deemed to contribute towards the satisfaction of the retention.
The 2013/2014 and 2014/2015 policies are in substantially the same form.
The nature and terms of the controversy in the claims correspondence
The 2012/2013 policy period
It is necessary to examine the claims correspondence in order to understand the width and detail of the dispute. This is necessary so that what is sought to be agitated by the current proceedings can be placed in context.
It is convenient to commence with the response of Kennedys (London solicitors for the reinsurers) dated 31 October 2017 in respect of the IRHP redress claim on the 2012/2013 policy. Nautilus did not express a view about the claim and so (in the light of the following clause) the reinsurers’ position can be taken as not only their position but also that of Nautilus. The letter dealt with issues “critical” to cover; expressed as “fundamental bars to coverage”. Rights were reserved on all other issues. Eight critical issues or fundamental bars to coverage were identified in paras 2.2 and 2.3 of the letter, as follows:
2.2As fully set out below, Reinsurers consider that the vast proportion of the claim is not covered. The fundamental bars to coverage are as follows:
2.2.1The redress payments (except those relating to consequential loss) are carved-out of the definition of Loss at Definition 40 of the Policy.
2.2.2The redress payments (except those relating to consequential loss) are similarly excluded by Special Exclusion 15 of the Policy.
2.2.3For the purpose of the definition of Loss, the Insured has not shown it was under any legal liability to make redress payments in respect of sales of TBLs or, in some cases, SADs.
2.2.4The Insured has not shown that the requirement of Civil Liability (as per definition 11 of the Policy) is satisfied in respect of sales of TBLs or, in some cases, SADs.
2.2.5Further to paragraphs 2.2.3 and 2.2.4, the Insured apparently made payments to customers whose claims were time barred under UK law and to whom it therefore had no legal liability for the purpose of the Definitions of Loss and Civil Liability.
2.2.6NAB has not demonstrated that the claimed losses constitute a Single Loss per the Policy definition 60.
2.2.7The costs of the SAD and TBL reviews are not covered as Defence Costs (as per Definition 20 and General Condition 7 of the Policy).
2.3It may also be that any losses do not result from a “Claim First Made” within the Policy Period.
Paragraphs 2.2.3, 2.2.4 and 2.2.5 all contain a feature said to be within the definition of “Loss” and of “Civil Liability” that there is required to be a legal liability antecedent to the review and redress agreement. As will be seen the same issue underlies the position reflected by para 2.2.7. The questions of construction of the policy sought to be resolved by NAB in the declarations sought are directed to this feature.
In section 3 of the letter Kennedys identified (at para 3.2) the necessity for there to be (a) “a Loss”, (b) resulting from “Civil Liability”, (c) arising out of the provision of “Financial or Professional Services”, (d) resulting in a “Claim”, and (e) being a claim “First Made” against the Insured during the policy period. Elements (a), (b) and (d) were denied; rights were reserved as to (c) and (e).
In section 4 of the letter Kennedys dealt with (a): the question of Loss in Definition 40(B) and (C) (see [30(e)] above). Kennedys identified two “important elements” by way of fundamental bars to coverage. The first, which was dealt with over two pages in paras 4.3 to 4.9 was the operation of the carve out clauses (see paras 2.2.1 and 2.2.2 of the letter set out above and the definition of Loss and Special Exclusion 15, at [30(e)] and [29] above). The validity of these contentions are later taken up by Herbert Smith Freehills (HSF, the solicitors for NAB). These contentions and disputes will ultimately involve questions of construction of the stated provisions, as well as their application to the complex and detailed facts of the underlying claim.
The second “important element” is briefly expressed at para 4.2 as “the Insured has to be legally liable to pay any loss”. This is elaborated on at para 4.10, as follows:
…It is not enough simply to show that a particular claim has been settled by the Insured. Evidence is instead required to show that the Insured was liable to the third party and that the amount of the settlement represented a genuine assessment of the third party’s loss. This assessment is similar to that required when assessing whether there is a “Civil Liability” (see below).
In para 4.11 Kennedys referred to this as an “insuperable problem” for NAB in respect of TBL customers because they were not regulated. In para 4.14, Kennedys stated:
These matters are crucial to coverage because Australian case law, like English case law, holds that “legally liable”, as used in liability policies, refers to a liability that is attributable to the operation of law, and one that is imposed by law.
They refer to QBE Insurance Ltd v Nguyen [2008] SASC 138; 100 SASR 560 and Cacciola v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691.
In para 4.15, Kennedys stated:
It follows that, absent express policy wording to the contrary, the Insured’s legal liability to make redress payments to customers is not established simply because the Insured assumed liability to make the payments by its Undertaking to the FCA (which in any case did not include payments to TBL customers) or in its dealings with the customers themselves. Instead the Insured was only liable to make those payments to customers to whom it had a pre-existing liability. This may be the case for SAD customers whose claims were correctly assessed and which are not time barred, but it cannot be the case for TBL customers whose claims were assessed by reference to rules that did not apply to those products.
(Emphasis added.)
In Section 5 of the letter Kennedys dealt with (b) in [39] above: the question of whether there was “Civil Liability” for the insuring clause. This issue was said to raise the same question of “the requirement of legal liability for the purpose of the definition of Loss”: see para 5.1. The point was elaborated upon at para 5.5:
Reinsurers agree that this limb may include liability to SAD customers pursuant to the SAD review, subject to time bar. However the “legally enforceable obligation” must be acknowledged by the settlement agreement and so exist independently of the settlement agreement, rather than being created by it. This limb would not, therefore, include “Civil Liability” to TBL customers to whom there was no independent liability, for the reasons discussed above.
In sections 6 and 7 of the letter the related questions of whether there are Claims and when they were made were discussed.
In section 8 of the letter Kennedys dealt with Defence Costs. An important aspect of the rejection of Defence Costs for a large proportion of the claim was said (in para 8.7) to be the same requirement of a pre-existing legal liability.
In section 8 of the letter Kennedys also dealt with the “carve out” in Special Exclusion 15.
Finally, in section 9 of the letter the question of the single loss and aggregation was addressed.
HSF responded by letter of 1 December 2017. The letter was divided into 6 sections. Section 1 concerned overarching questions of contractual interpretation and policy purpose. Section 2 contained NAB’s answers to the assertion by Kennedys of the need for a pre-existing legal liability. HSF set out what it saw as six misconceptions that underlay Kennedys’ position:
•First, the extent of the Bank’s obligation to establish the existence of a legal liability is governed by the terms of the definition of Civil Liability in GD 11 and not the definition of Loss in GD 40(B).
•Secondly, the Policy – more particularly, the definition of Civil Liability – does not require the establishment of a pre-existing legal liability to each IRHP customer.
•Thirdly, to the extent that it is relevant, the Bank did have a reasonably anticipated pre-existing liability to all SAD customers to whom it paid redress.
•Fourthly, to the extent that it is relevant, the Bank did have a reasonably anticipated pre-existing liability to TBL customers to whom it paid redress.
•Fifthly, in any case, the Bank entered into the IRHP Review process pursuant to a binding regulatory action or ADR process. Because it did so, there is no requirement to inquire into the existence of its pre-existing liability to IRHP customers.
•Sixthly, the application of limitations periods does not affect the Bank’s entitlement to indemnity.
Each of these points was then dealt with in detail at paras 2.1 to 2.5. At the heart of these submissions was a disagreement with the proposition that a pre-existing liability was called for by the policy. The articulation of NAB’s position can be seen in paras 2.1 and 2.2. In para 2.1, HSF referred to a mischaracterisation of the policy for five reasons:
(a)Section III of the Policy indemnifies the Bank for ‘Loss which results from Civil Liability’. The first criterion that must be met is therefore whether the Bank can prove a Civil Liability.
(b)In GD 11, the Policy sets out a detailed regime for establishing whether the Bank had a Civil Liability within the meaning of the Policy. In so doing, it expressly contemplated that a Civil Liability for the purposes of the Policy might exist even if the existence of actual underling [sic] liability remained undetermined. For example, the parties evinced an intention that any liability pursuant to a settlement agreement or binding ADR process would be covered under the Policy.
(c)The meaning of the phrase ‘legally liable to pay’ in GD 40(B) should be construed to ensure that all of the components of the Policy operate as a congruent whole.
(d)It would make no commercial sense if the general language in the definition of Loss imposed a different test to the precise requirements of Civil Liability, particularly in circumstances where the Loss must flow from the Civil Liability.
(e)In light of the above, the Bank will be ‘legally liable to pay’ an amount for the purposes of the definition of Loss if the Bank has established a Civil Liability under GD 11.
The argument was further developed in para 2.2 as follows:
The definition of Civil Liability does not impose on the Bank a requirement to establish a pre-existing liability to customers as a condition of indemnity. This follows from the Policy provisions cited below, which express a discernible intention that the Bank will be entitled to indemnity in the absence of a pre-existing legal liability.
(a)As noted, the definition of Civil Liability under GD 11(b) allows for a legally enforceable obligation to be created pursuant to a reasonable settlement. The clause deliberately uses the words ‘legally enforceable obligation’ rather than the word ‘liability’, which is used in clauses GD 11(c)-(g). This makes obvious commercial sense as, if the Bank was known to be actually liable to the customer at law, then there would be no point to a compromise.
GD 11(b) must be construed by reference to GC 7, to which it refers. Relevantly, GC 7 permits the Bank to settle a claim pursuant to a counsel opinion, which may have regard to matters other than the Bank’s legal liability, including the Bank’s reputation and operations.
This interpretation of GD 11(b) is consistent with Australian case law which recognises that an insured may, in various contexts be entitled to indemnity for loss arising from a reasonable and bona fide settlement. [Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1, 9, 32; Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, [63]; Hurlock v Council of the Shire of Johnstone [2002] QCA 256, [30]-[31]; Vero Insurance Ltd v Baycorp Advantage Ltd (2005) 13 ANZ Insurance Cases ¶61-630, [48]-[52], [62], [66]-[69]; Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243, [324].] The case law on which Reinsurers rely in support of their construction of the expression ‘legally liable to pay’ in GD 40(B) does not address this issue.
(b)The definitions of Civil Liability under GD 11(c) and (d) allow for a liability to be created ‘pursuant to’ – that is, as a result of – regulator action or an ADR process, respectively, and do not require the establishment of an antecedent legal liability.
(c)The definition of Claim under GD 12(a) refers to, amongst other things, a demand or ADR process which could ‘reasonably result in the payment of’ a loss rather than an actual pre-existing liability.
In para 2.3, HSF addressed the question of civil liability, shorn of the necessity to prove a pre-existing civil liability: that NAB had a reasonably anticipated liability for SADs and TBLs.
In dealing with the asserted limitation defence, HSF in para 2.4(c) also referred to the lack of a need for pre-existing civil liability:
Limitations periods do not affect whether the Bank incurred a Civil Liability under GD 11(d) because such a liability arises ‘pursuant to’ – that is, as a result of – a binding ADR process. Again, it follows that satisfaction of GD 11(c) is not conditional on proving the existence of an underlying liability.
Section 3 of HSF’s letter dealt with the exclusions. Section 4 dealt with Defence Costs. Section 5 dealt with other matters. Section 6 contained a request for payment. The “request” is properly construed as a demand in civil language. It is important because it contained a claim for interest under s 57 of the Insurance Contracts Act:
The Bank maintains the totality of its claim for indemnity in the IRHP Claim Submission. We request Nautilus and Reinsurers quantify the amount of the IRHP Claim which they consider is indemnified under the Policy and immediately pay that amount to the Bank, including statutory interest calculated in accordance with s 57 of the Insurance Contracts Act 1984 (Cth).
We consider an appropriate date for s 57 interest to commence would be 3 months after submission of the IRHP Claim Submission, being 14 February 2017.
Thus, one can see in this correspondence between Kennedys and HSF an important question, and in Kennedys’ words “a fundamental bar to coverage”, and an “insuperable problem”, arising from the proper construction of the policy and the meaning of “Civil Liability”, “Loss” and, relatedly, “Defence Costs”: the necessity for there to be pre-existing legal liability.
Kennedys responded in substance to HSF on 23 April 2018. In section 3 of the letter, Kennedys took up the challenge of the debate about the proper construction of the policy. The reinsurers’ position remained firm: in para 3.4 Kennedys said:
Reinsurers remain firmly of the view that General Condition 11 (b) requires a pre-existing legally enforceable obligation.
The significance of this (in terms of proof of the claim) can be seen in para 3.9 of Kennedys’ letter:
HSF maintains that the Bank entered into reasonable and bona fide settlements with IRHP customers. Given that GD 11(b) requires the Bank to have a pre-existing liability independent of the settlement agreement it makes, then entry into reasonable and bona fide settlements is not sufficient to meet that requirement. The same applies if the Bank failed to obtain Nautilus’ prior consent to the settlements. However, even if those matters are assumed in the Bank’s favour, it is plain that not all of the Bank’s settlements with IRHP customers were “reasonable”.
The balance of the letter discussed the other issues, including the satisfaction of Civil Liability, questions of the operation of General Definition 11(c) (“award, directive, order or similar act”) and 11(d) (liability due to alternative dispute resolution), the time bar, the carve out in the Definition of Loss and Special Exclusion 15, whether there was a claim, when it was first made, and defence costs, aggregation and the request for payment. In the last section of the letter on the question of payment, Kennedys said:
Reinsurers also reject HSF’s assertion that an appropriate date for interest under s57 of the Insurance Contracts Act 1984 to commence (on any part of the claim that may be covered) would be 3 months after the 14 November 2016 formal IRHP Claim Submission. In the first place, Reinsurers do not agree that they have any liability under the Policy. In any event, Reinsurers do not accept that it is unreasonable for them to have withheld payment of interest on any amount owing to the Bank in the current circumstances.
The 2013/2014 and 2014/2015 policy periods
On 22 December 2016, Yeldham Price O’Brien Lusk (YPOL), then the lawyers for the reinsurers under the 2014/2015 policy, wrote to King & Wood Mallesons (KWM), the lawyers for Nautilus, about the Fixed Rate Claims that had been asserted in relation to the 2014/2015 policy. On 3 May 2017, HSF responded to YPOL’s letter of 22 December 2016. HSF summarised what it saw as the reinsurers’ position as follows:
As matters stand, the Reinsurers make four primary arguments in support of their decision to deny indemnity for the Fixed Rate CRP Claim. The Reinsurers say that each of these grounds is dispositive of the entire Fixed Rate CRP Claim under the 2014/15 Policy and that they presently have sufficient information to make that determination.
We summarise the Reinsurers’ primary grounds for denying coverage as follows:
1The Fixed Rate CRP Claim was notified under the 2012/13 Policy by reason of the IRHP Notification;
2The Fixed Rate CRP Claim is deemed to be aggregated with the IRHP Claim under the 2012/13 Policy and therefore is excluded from coverage under the 2014/15 Policy;
3The Fixed Rate CRP Claim was ‘First Made’ during the 2013/14 Policy Period and, implicitly, is therefore properly brought under the 2013/14 Policy;
4Even if the Fixed Rate CRP Claim may properly be brought under the 2014/15 Policy, it will be excluded by the revised definition of ‘Claim’ in the 2014/2015 Policy to the extent that the Fixed Rate CRP was a voluntary process.
The Reinsurers raise further grounds which they say are likely to exclude some, part or all of the Bank’s claim for indemnity. The further grounds set out by the Reinsurers do not operate to preclude the Bank from making a claim under the 2014/15 Policy. Consequently we do not consider it presently necessary for the Bank to address these matters. However, it should not be assumed that, in the absence of any positive response to such matters in this letter, the Bank agrees with Reinsurers, and the Bank expressly reserves its position.
In response to the third point, factual matters were taken up. Then HSF stated:
As a consequence of the matters set out above, the Bank will take the prudent step of notifying under the 2013/14 Policy (in reliance on section 54 of the Insurance Contracts Act 1984 (Cth)). In making that notification, the Bank reserves its rights to pursue a claim under the 2014/15 Policy and the 2012/13 Policy.
We request YPOL to confirm whether they act for the 2013/14 Reinsurers.
The prudence of this step was required by the temporal requirement for notification under General Condition 2(i)(e) set out at [32] above.
The formal claims submission by NAB against Nautilus in respect of fixed rate loans under the 2013/2014 and 2014/2015 policies was made under cover of a letter from HSF dated 11 August 2017. NAB reserved its position under the 2012/2013 policy. This claim involved the reinsurers who are the third and fourth respondents to the present proceeding.
In the making of the Fixed Rate Claim in the submission of 11 August 2017 the following was stated at para 109 (implicitly referring to the issue raised by General Condition 2(i)(e)):
The 2013/14 Complaints were notified under the 2013/14 Policy on 9 May 2017 in reliance on Insurance Contract Act 1984 (Cth) s 54 (the 2013/14 Notification).
(Footnote omitted.)
After a detailed explanation of the claim, the claim document focused on the response of the policy. At para 117 of the claim, NAB stated:
Upon its proper construction, General Definition 11(b) is engaged by the legally enforceable settlements reached with customers in the course of the Fixed Rate CRP.
This assertion (challenged in later correspondence) implicitly asserted the lack of a requirement for there to be a pre-existing legal liability.
Later, in paras 131 and 132, NAB submitted that it satisfied General Definitions 40(B)(a) and 40(B)(b) as to “Loss” and “Defence Costs” by incurring a legal liability to pay redress. Again this raised the same point about the proper construction of those definitions.
On 24 November 2017, YPOL responded to the claim in a letter to KWM. The letter was provided to NAB. The letter sought a variety of information, including in relation to the IRHP Review Claim on the 2012/2013 policy. YPOL put its denial of liability by reference to an earlier letter of 22 December 2016 that had been sent to KWM. In the letter of 22 December 2016, YPOL set out various bases for denial. These included the claim being first made prior to the policy, and the operation of the “carve out” provision.
In December 2017 and January 2018, HSF provided information to YPOL and KWM of the kind requested by YPOL.
On 23 March 2018, YPOL sent a detailed letter restating its position on the denial of indemnity under the two policies. For present purposes I will adopt as a summary of that position the encapsulation of the points made by YPOL in HSF’s response of 10 May 2018, as follows:
YPOL’s position, on behalf of the 2013/14 and 2014/15 Reinsurers (Reinsurers), in relation to the year of attachment for the Fixed Rate TBL Claims appears to be as follows:
1The IRHP Potential Claim Notification dated 31 July 2012 notified the circumstances giving rise to Fixed Rate TBL Claims;
2By reason of this, General Condition (GC) 9(e) or GC 2(vi) of the 2012/13 Policy prevents Fixed Rate TBL Claims from attaching to the 2013/14 or 2014/15 Policy;
3There is a factual issue, requiring further investigation, as to when the Bank’s Responsible Department was first aware of Fixed Rate TBL Claims;
4If, prior to the commencement of the 2013/14 or 2014/15 Policy, the Responsible Department was aware of:
—Fixed Rate TBL Claims;
—aggregated Fixed Rate TBL Claims; or
— the likelihood of Fixed Rate TBL Claims,
then Fixed Rate TBL Claims would not attach to the Insuring Clause of either the 2013/14 or 2014/15 Policy or would be excluded from coverage under either Policy by Special Exclusion (SE) 6.
As yet, the construction implicit within paras 117, 131 and 132 of the claim had not appeared with any clarity in YPOL’s correspondence. By letter dated 13 June 2018, however, YPOL made clear that it adopted precisely the same position for the 2013/2014 and 2014/2015 policies as Kennedys had in relation to the 2012/2013 policy on the question of the requirement (or not) for the pre-existence of a legal liability.
The proceedings
The declarations sought
It is convenient to set out the declarations sought in respect of the 2012/2013 policy year (being substantially identical to the declarations sought in relation to the 2013/2014 and 2014/2015 policy years):
1.A declaration that on the proper construction of the definition of Civil Liability in General Definition 11(b) of the policy of insurance issued to National Australia Bank Ltd (NAB) by Nautilus Insurance Pte Ltd (Nautilus) for the policy period 31 March 2012 to 31 March 2013 and titled “Comprehensive Crime / Electronic Crime and Civil Liability Insurance Policy” (the 2012/13 Policy), there is a Civil Liability when an Assured (as defined in the 2012/13 Policy) enters into an agreement with a third party which contains a legally enforceable obligation to pay a third party damages or compensation in settlement of a Claim (as defined in the 2012/13 Policy).
2.A declaration that on the proper construction of the definition of Loss in General Definition 40(B)(a) of the 2012/13 Policy, there is a Loss when an Assured pays a third party damages or compensation pursuant to a settlement agreement with a third party entered into in settlement of a Claim (as defined in the 2012/13 Policy).
3.A declaration that on the proper construction of the 2012/13 Policy, it is unnecessary for the purposes of:
a.satisfying the definition of Civil Liability in General Definition 11(b); or
b.satisfying the definition of Loss in General Definition 40(B)(a); or
c.satisfying the Assured’s entitlement to indemnity in respect of Defence Costs (as defined in the 2012/13 Policy) in General Condition 7(a),
for the Assured to establish that it was legally liable to the third party independently of the legally enforceable obligation to pay arising under the settlement agreement relied on to establish Civil Liability under General Definition 11(b).
The pre-proceeding correspondence
By letters dated 27 February 2019 to Kennedys and KWM, and to YPOL and KWM, HSF proposed the commencement of proceedings to resolve the construction issues concerning General Definitions 11(b) and 40(B)(a) and General Condition 7(a), being the provisions raising the requirement (or not) for a pre-existing legal liability. The letter to Kennedys recited the issues as follows:
As revealed by the Correspondence, two intractable issues in dispute between the Bank and the reinsurers under the 2012/13 Policy (Reinsurers) as to the proper construction of the Policy are:
•whether on the proper construction of the definition of Civil Liability in GD 11(b) of the Policy, there is a Civil Liability when an Assured enters into an agreement with a third party which contains a legally enforceable obligation to pay a third party damages or compensation in settlement of a Claim; and
•whether on the proper construction of the definition of Loss in GD 40(B)(a) of the Policy, there is a Loss when an Assured pays a third party damages or compensation pursuant to an agreement with that third party entered into in settlement of a Claim.
The Bank’s answer to both of these issues is ‘Yes’. The Reinsurers’ answer to both issues is ‘No’. The Reinsurers contend that satisfaction of GD 11(b) and GD 40(B)(a) requires the Bank to prove that it had an underlying liability to each customer that it remediated in the IRHP Review.
By reason of the Reinsurers’ position on the above issues, they further contend that, where indemnity is sought in respect of a Civil Liability under GD 11(b), the Bank must establish the existence of an underlying liability in respect of each customer to whom redress was paid in order to establish an entitlement to indemnity in respect of Defence Costs under GC 7(a). The Bank denies this contention.
The letter proposed the following course for the following reasons:
The Bank has given consideration to the most appropriate course to resolve the Construction Issues in the IRHP Claim and the equivalent issues arising in the Fixed Rate CRP Claim. It has concluded that the most appropriate course is to issue a proceeding confined, and directed, to determination of these issues (Construction Proceeding).
The Bank proposes to issue the Construction Proceeding in the Victorian Registry of the Federal Court of Australia.
The Bank considers that a proceeding by way of the Construction Proceeding has significant benefits for all of the parties (and the Court). The issues raised concern the proper construction of the Policy. Proceeding by way of a Construction Proceeding will therefore allow critical issues between the parties to be resolved quickly and efficiently, with minimal impost on the parties and the Court. Further, the resolution of the Construction Issues may assist the parties to come to a consensual settlement of the Bank’s IRHP Claim and Fixed Rate CRP Claim or otherwise substantially assist in the efficient disposal of any subsequent indemnity proceedings by resolving a key issue of proof.
The proposed declarations were in the form claimed in the proceedings and set out above. (The letter to YPOL was in the same terms, mutatis mutandis.)
The proposed course was objected to by Kennedys and YPOL. Their objections were common and expressed by Kennedys in its letter of 25 March 2019. Two reasons were given: first, that the majority of the issues in dispute would remain undecided; and secondly, the proposed declarations (that had been foreshadowed) did not finally resolve those issues in question.
Kennedys identified the issues that would not be resolved as follows:
a.Whether, and if so to what extent, there was a Claim (as defined at GD 12 of the Policy) by customers for the purpose of the Insuring Clause;
b.Whether the settlements agreed between the Bank and the customers to whom it paid redress were reasonable. This issue gives rise to questions such as whether the UK regulator had power to compel the TBL review and whether and to what extent customers’ claims were time-barred;
c.Whether the Claim was First Made (as defined at GD 32 of the Policy) during the Policy Period. (Of relevance to this issue is the full explanation we have sought concerning the TBL notification made by the Bank to the 2007/8 year of account);
d.Whether the losses which are the subject of the Bank’s claim for indemnity arise from, or are attributable to, a “systemic failure” in the marketing and sale of IRHPs, such as to satisfy the definition of “Single Loss” at GD 60 of the Policy;
e.Further to (d) above, whether the claimed losses fall to be aggregated pursuant to the definition of Single Loss at GD 60.
f.Whether amounts claimed by the Bank in respect of Defence Costs:
owere reasonable and necessary for the purpose of GD 20 of the Policy;
owere incurred “in the defence of…any demand [or] claim” within the meaning of General Condition 7;
oare covered in respect of customers who did not make a Claim (as defined at GD 12 of the Policy) against the Bank.
Rule 9.21(1) appears to be satisfied. The third and fourth respondents have been joined by the form of proceedings as representative parties (as well as in their own right). There was no suggestion that any of the following reinsurers have anything other than an entirely conforming interest. As Mason CJ, Deane and Dawson JJ said in Carnie v Esanda Finance Corporation Ltd [1995] HCA 9; 182 CLR 398 at 405:
Once the existence of numerous parties and the requisite commonality of interest are ascertained, the rule is brought into operation subject only to the exercise of the court’s power to order otherwise.
The suit appears to be properly constituted under r 9.21(1). However, if there is any doubt about that matter an order should be made under r 9.21(2). I see no reason why it should not be made in terms of the schedule to the statement of claim. If there is any issue of substance, the third and fourth respondents should raise it promptly. (Their current submissions do not.) In the light of any matters raised, NAB can take its own course.
There was a submission that the statement of claim, or para 37 of it, should be struck out because of a failure to plead a cause of action. The statement of claim, seeking to explain, as it does with some clarity, the declaratory relief sought, could have been cast, without any complaint, as a concise statement. It should be taken as having that explanatory role. No purpose would be served in striking out any part of it.
At the interlocutory hearing on 21 August 2019, I asked the parties to continue to prepare the matter for hearing of the construction issues in the event that the interlocutory applications were dismissed and provide their mutual availability in October 2019 for such a hearing. There was no objection to this course. After conferring, the parties indicated that the only suitable date was 12 November 2019. In the circumstances, it is appropriate for the matter to be listed for hearing of the construction issues before the Honourable Justice Lee on 12 November 2019.
The orders that I would make are:
1.The interlocutory applications of the second, and third and fourth, respondents be dismissed with costs.
2.Within 7 days, the solicitors for the third and fourth respondents identify in a letter to the solicitors for the applicant any matter of substance that would prevent an order under r 9.21(2) being made.
3.The originating application be fixed for hearing on 12 November 2019 before the Honourable Justice Lee.
4.The parties have liberty to apply to Justice Lee for the making of any orders for further case management.
I certify that the preceding one hundred and seventy-five (175) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop. Associate:
Dated: 20 September 2019
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