Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003

[2019] HCATrans 18

[2019] HCATrans 018

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S226 of 2018

B e t w e e n -

JASON ONLEY

Applicant

and

CATLIN SYNDICATE LTD AS THE UNDERWRITING MEMBER OF LLOYD’S SYNDICATE 2003

Respondent

Application for special leave to appeal

NETTLE J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 15 FEBRUARY 2019, AT 2.38 PM

Copyright in the High Court of Australia

MS R.L. SEIDEN, SC:   May it please the Court, I appear with my learned friends, MR P. MANN and MR W.R. JOHNSON, for the applicant.  (instructed by Pure Legal)

MR S.R. DONALDSON, SC:   If your Honours please, I appear with my learned friend, MR M.F. NEWTON, for the respondent.  (instructed by Norton Rose Fulbright Australia)

NETTLE J:   Ms Seiden.

MS SEIDEN:   Thank you, your Honours.  At heart, this case concerns the content and scope of an insurer’s duty of utmost good faith.  In particular, it concerns the circumstances under which an insurer may avoid a contract of insurance for alleged precontractual non‑disclosure when, first, there is a third party claim alleging criminal conduct; second, there is a clause in the contract promising to advance defence costs until admission, judgment or adjudication subject to a clawback, and there has been no such admission, judgment or adjudication; and, finally, the allegations of non‑disclosure are exactly the same as the allegations in the third party claim for which cover was promised.

The real question here is who, consistently with the duty of utmost good faith, is to bear the burden of a wait and see approach.  Is it the insured by having to wait until the criminal proceedings have concluded before challenging the avoidance, but then having lost forever the benefit of the advancement extension, or is it the insurer who risks not being able to recoup the advanced funds in the event ultimately it is established that wrongful conduct occurred and that there was a matter for disclosure.

EDELMAN J:   Alternatively, one could put the question as asking whether the advancement clause was intended to waive the insurer’s rights under section 28(2).

MS SEIDEN:   With respect, your Honour, we do not see it as extending to a waiver.  The question is whether or not the circumstances for avoidance have been proved or demonstrated and the question is what is the proof mechanism.  So, whilst it is contended that the Part IV rights remain intact, the evidence or the proof mechanism by which those rights might be enlivened is what the parties have agreed.

EDELMAN J:   Is that right?  Is the question of avoidance by an insurer a question of a power to be exercised by the insurer, or is it a power to be exercised by a court upon proof of all of the elements of the requirements for avoidance?

MS SEIDEN:   We would say the latter, your Honour, but the first step in that is that the insurer purports to avoid.

EDELMAN J:   Was the case run at any stage on the basis that section 28(2) was anything other than a type of common law power of rescission which was a power that could be unilaterally exercised by an insurer?

MS SEIDEN:   It was put on the basis that once the insurer has avoided or purported to avoid, an insured has an opportunity to challenge that and that challenge takes place in the court, but for the reasons of self‑incrimination privilege and various other reasons, that challenge was muted and that effectively the unilateral action takes some priority or precedence.

EDELMAN J:   So it was accepted it operates like termination.  A party will exercise the power to terminate or a party will exercise the power to avoid.  It can always be challenged in court, but it is the power of the party to do it.

MS SEIDEN:   It is the power to take the first step.  That is really how it was advanced, your Honour, and it was submitted that in this case it is open to the insured to come back years later once perhaps vindicated in the criminal courts and challenge that avoidance, but by then the benefit of the advancement extension is forever lost.

So, from a practical perspective, the insured really cannot do anything right now because the criminal conduct alleged and the basis for the avoidance are one and the same, and so the legitimate interests that it is submitted that arise here include the privilege against self‑incrimination because the insured, to challenge the avoidance, either has to waive the right to self‑incrimination or wait until the criminal proceedings have taken their course.  By then the advancement extension has been nullified because, even if ultimately he can get his defence costs, the advancement extension has gone. 

If I could take your Honours to the actual clauses, at application book 14 your Honours will see at line 40 the advancement of defence costs.  At line 45:

We will advance Defence Costs . . . However, if and to the extent that You are not entitled to cover –

and just pausing there, that includes a reference to tripping up into one of the exclusions and an example of the exclusions is on the next page.  At line 35:

We will not be liable for:

. . . 

Dishonest or Criminal Intent –

Then at line 47:

only if established by any admission by the Insured, judgment, or other adjudication.

So that is the clause that is the – the defence costs.  There might be an exclusion for that but we were really focusing the court’s attention below on the advancement which is the clause at application book 14.  So:

We will advance Defence Costs –

subject to:

You are not entitled to cover –

Then at lines 47 and 48:

If a Claim alleges a Wrongful Act . . . as described in the . . . Exclusion –

which I have just taken your Honours to:

then We will advance Defence Costs . . . until it is found by way of an admission by You, judgment or adjudication that such Insured did in fact commit such Wrongful Act –

Then there is a clawback.  So there is a wait and see mechanism and a proof mechanism for how it is established that wrongful conduct will be proved and it is submitted in the context of the Insurance Contracts Act which holds utmost good faith to be an implied term of the contract, it permeates through the conduct of the parties as between each other and there is no bright line between precontractual conduct and post‑contractual conduct.  So this proof mechanism, it is submitted, operates on the insurer even with respect to allegations that might satisfy – might otherwise prompt him to avoid.  So it was really submitted that he ought not take that first step now because the time has not yet come to know whether there has been a non‑disclosure or not.

NETTLE J:   What is wrong with the reasoning of the Full Court at paragraph 46 in answer to that proposition – page 24 of the application book?

MS SEIDEN:   Your Honour, first we would say there is no demonstration that there has not been disclosure.  This is not a case where it was admitted that there was not disclosure, and so it is submitted that the Full Court actually often proceeded on the basis that this was a case where it had been accepted that there was not disclosure.  But that is not the case, and so it is submitted that that is the first ‑ ‑ ‑

NETTLE J:   But that is always the case, is it not?  The insurer purports to terminate the policy or to avoid cover, and then there is a challenge by the insured at which it is ascertained whether or not the insurer has sufficient basis for having terminated or refused cover.

MS SEIDEN:   We would submit in this case for that course to occur would not be consistent with the insurer’s duty of utmost good faith.

NETTLE J:   But as is pointed out in paragraph 46, you are relying upon an implication - some might say an obscure implication – to, as it were, subvert a fundamental right of the insurer to take the point if he thinks it is appropriate on the evidence before him to avoid cover.

MS SEIDEN:   With respect, your Honour, we would say it is not subverted.  There is a wait and see mechanism that has been applied, and it only applies where the wrongful conduct and the conduct said to underpin the avoidance are exactly the same in circumstances where to take that ordinary course actually puts the insurer and the insured in a position of conflict.  The insurer becomes an accuser along with the third party claimant.

Now, in a normal case you do not have those problems.  But here where there is an exact alignment between the underlying wrongful conduct said to justify the first step in the avoidance process, and the third party claim, that is why the duty of utmost good faith, we say, has a lot of work to do in that exact scenario because otherwise the insurer becomes the accuser and the insured cannot challenge it, as they might be able to do if there was not the alignment between the wrongful conducts.

The Full Court in dealing with the implication of utmost good faith and how one must deal with the implied term of utmost good faith, in the construction arguments the Full Court completely ignored the effect that the implied term of utmost good faith might have on the construction of the contract.  That was a seminal submission of the applicant and there is not a paragraph on it.  The only reference to utmost good faith and the content of the duty is in the second sense that was relied on by the applicant that the overarching duty of utmost good faith had work to do.  That can be found at paragraph 7 which is at application book 11.  Their Honours propounded a new test, it is submitted, at line 39:

Consistent with its obligation of utmost good faith . . . an insurer must have a real or substantial ground for alleging non‑disclosure.  That does not mean the insurer must then have all necessary proof of the insured’s conduct to establish the ground for exclusion.  However, sufficient grounds must then exist which can be relied upon consistently with the obligation of utmost good faith.

Then their Honours propounded a threefold test that demonstrated that the real and substantial ground was satisfied here:

This is not an issue in this case, where there is [first] no suggestion of disclosure –

and we might pause there to say, well, there could not be disclosure if the asserted wrongful conduct did not occur and it had not yet been demonstrated by admission, adjudication or judgment.  Then back to the passage:

and the relevant facts of the charges, if true –

That was the second factor and of course that is an important caveat:

must have been known to the Applicants, and the merits of the charges are sufficient to support the commencement of a prosecution.

That was the third factor and it is submitted that prosecutions either fail or are withdrawn often, so to say that an insurer has sufficient proof to take that first step, when taking that first step will either undermine an applicant’s self‑incrimination privilege or force an applicant to wait until the conclusion of the criminal proceedings by which case their advancement extension is entirely annihilated, to propound that test with no analysis of why that test actually satisfies the test of utmost faith, that is the passage, your Honours.  There is no analysis of why that is sufficient in the circumstances, why this case might be different to another case because of the alignment of the wrongful conduct with the criminal proceedings and the assertions by the insurers.

So, in a sense, the Full Court has effectively dealt with this case with only a cursory look at utmost good faith, and we say that here there were legitimate interests that really ought to have been taken into account and the

reason that the insurer ought not take that first step is because those legitimate interests are affected just by taking that first step where one has this alignment of the wrongful conduct.

In the context of the Insurance Contracts Act, it is submitted that there is no longer a bright line between precontractual and post‑contractual conduct and therefore what is in the contract and the proof mechanism in the contact informs the duty of utmost good faith and the duty of utmost good faith informs the construction of the contract and what is entirely missing from the Full Court’s reasoning is how or why the duty of utmost good faith did or did not inform the construction of the contract.  It is simply not there, your Honours.

We say that this is an important point.  It matters not only to the applicant but also to others, because there are many contracts of this kind and there is a reference - my instructing solicitor – searches at application book 63, line 5 - that there are searches of websites of various insurers which contain provisions including similar provisions.  Then at line 35 there was a conversation from David Minty, Insurance Statistics Australia, which it is accepted probably overstates the position for the reasons said there:

“. . .the annual premium written by Australian insurers for all forms of D&O cover . . . is about $300 million.  The number of policies is somewhere between 50,000 and 150,000 – some risks may be counted multiple times –

which is why there is some overstatement.  But our learned friends do not suggest that there are not this type of policy in tens of thousands – this type of clause in tens of thousands of policies, and we have a decision of the Full Court which refers to the duty of utmost good faith in the terms that I have taken your Honours to at paragraph7, and that is it, and that is the content.  It is a charter, with respect, for all these other policies and how they will be administered.  Your Honours, they are the applicant’s submissions.

NETTLE J:   Thank you, Ms Seiden.  Mr Donaldson, we need not call on you, thank you.

In this matter the Court is not persuaded that the decision of the Full Court of the Federal Court of Australia is attended by sufficient doubt to warrant the grant of special leave to appeal.  The application for special leave is dismissed with costs.

The Court will now adjourn until Tuesday, 11 March in Canberra.

AT 2.56 PM THE MATTER WAS CONCLUDED