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Insurers come Last in Class Action Settlement: Lessons to be Learned

  • Legal Development 22 February 2021 22 February 2021
  • Asia Pacific

  • Insurance & Reinsurance

Insurance and Class Action Settlements

A recent dispute1 between group members and their property insurers in two Victorian bushfire class actions has left insurers revisiting how they engage with plaintiff law firms and sets up an interesting dynamic for the interplay of litigation funders and subrogating insurers. The decision highlights the importance of careful drafting of policy terms in addressing the insurer's rights of subrogation and the complexity for insurers in determining whether to play a passive supportive role or controlling active role in class actions. The decision has significant implications in sharing the spoils of a class action settlement between insured and uninsured losses with policyholders receiving priority for their uninsured loss, despite not actually paying out one dollar in funding litigation costs. 

The case provides guidance on insurers' rights of subrogation in the class action context and how s67 of the Insurance Contracts Act (ICA) applies to class action settlements.

As a result of this decision, Insurers should carefully examine subrogation and allocation clauses in their policies, particularly first party indemnity insurances, and develop strategies for adopting proactive roles in class action recoveries.

Background

In March 2017, two bushfires separately ignited in Terang and The Sisters in regional Victoria. In March 2018, Andrew Francis issued group proceedings as lead plaintiff in respect of The Sisters fire. In April 2018, Anthony issued proceedings to recover losses arising out of the Terang fire (the proceedings respectively). The defendant is an electricity distributor that owned and managed assets at each location of the respective fire's ignition. The plaintiffs contended that the defendant breached its duties by failing to design and maintain its electrical assets properly.

Some group members were insured for certain losses arising out of the fires. Insurers registered an interest on behalf of 45 of 91 group members in the Lenehan proceedings. In the Francis proceeding, one of the insurers registered their interest on behalf of ten group members.

In 2020, the plaintiffs settled both proceedings, subject to Court approval. As part of the settlement process, the plaintiffs' drew up a distribution scheme, which would provide for distribution between group members and between insured group members and their insurers.

Insurance Australia Group (IAG), Allianz Australia Limited and QBE Insurance (Australia) Ltd (the insurer) objected to that part of the scheme that distributed money between insured group members and their insurers. They disagreed with how the plaintiffs proposal to allocate the settlement between them and their insureds.

The issue was the culmination of a long-running dispute between the plaintiffs' lawyers and the insurers regarding their customers' participation in the class actions. Ultimately the Insurers instructed lawyers to pursue their own recovery class action of both the insured and uninsured losses of their insureds. The insurers agreed to fund their recovery action and (with some limited exceptions) would assume liability for any adverse costs. Letters were sent to the respective insureds asking them to opt-out of the plaintiffs' class actions. However, some insureds chose not to opt-out. The Insurers informed the plaintiffs that they would not force those insureds to opt out of the proceeding, despite their belief that they could. However, the insurers confirmed that they still intended to recover insured losses suffered by the insureds that chose to remain in the plaintiffs' class action proceedings.

In February 2019, the Court made a class closure order in the proceedings. The orders did not provide for discrete registration of insured losses that the insurers sought to recover. The decision not to include discrete registration was in contrast to other bushfire class actions like the Black Saturday claims. A Notice annexed to the class closure orders stated "[y]our insurance company is required to register its own claim if it wishes to recover from the defendant the amount of any insurance paid to you."

On 18 March, the lawyers for the group members wrote to the Insurers' lawyers and said that they considered the insurers' payments to be registered and confirmed that the insurers would be entitled to claim subrogated losses, subject to the terms of the policies and the provisions of the ICA.

On 29 March, the plaintiffs filed the list of the registered group members with the Court. The list did not include any insurers who had purportedly registered their wish to recover via the proceedings.

The proceedings settled in October 2019, subject to court approval. Both the group members and the Insurers proposed mechanisms for the allocation between the insured and uninsured losses.

The Group members proposed that after legal costs, administration costs and a reimbursement payment to both Mr Francis and Mr Lenehan, the remainder insured losses should be divided as follows:

  1. An Administrator would be appointed to determine whether the Insurers were entitled to recover their losses.
  2. The Administrator would make their determination having regard to:
    1. the terms of each Group Member’s policy of insurance;
    2. the terms of the Insurance Contracts Act 1984;
    3. any notice of submission from the Group Member’s insurer;
    4. the instructions received from Group Members about the distribution of their Assessed Entitlement; and
    5. any other applicable legislation or case law.
  3. If the Administrator determined that the Insurers were entitled to recover their losses, then Administrator would pay the appropriate amount to the relevant insurer. 

The Insurers objected to the almost unfettered power of the Administrator to allocate recovered funds. They also objected to the requirement that the Administrator could regard the group members' instructions concerning the distribution of the entitlement. Finally, they objected to the proposed Administrator, the lead solicitor for the plaintiffs, as he had in effect prosecuted the case against the insurers on the very issue of allocation.

Instead, the Insurers proposed a "pro-rata" approach. In their scheme, the compensation pool would be divided between group members and their registered insurers on a pro-rata basis, unless the contract provided otherwise.   

The plaintiffs rejected the Insurers' model. They offered an amendment to allow for a binding review of the Administrator's decision.

The Issue

Ultimately the issue between the parties became, who should be considered the "recovering party" for the purpose of s67 of the ICA or otherwise be given priority in allocating recovered proceedings. When the recovering party was determined it would then be clear which of the recovery methodologies in s67 would then apply:

  1. If the insurer had recovered (ss2);
  2. If the insured had recovered (ss3); or
  3. If both the insurer and insured recovered (ss4-7).

Parties Submissions

The Insurers’ submitted that they were the recovering parties and should receive priority under s 67(2). The insured group members remained in the proceedings only because the Insurers permitted them to do so; the Insurers were entitled to require their insureds to opt-out of the proceedings but chose not to do so. Thus, it was said that they took over the insured's recovery.

The plaintiff's submission was that subject to their contracts otherwise providing, all insured group members were the recovering parties and should receive priority of payment under s 67(3). The Insurers did not recover the settlement monies and their involvement in the proceeding was not an exercise of their rights of subrogation.

Judge's Determination

The judge rejected the Insurers' submission they were the recovering party and finding for the group members instead. The settlement pool would be distributed, subject to any contrary contractual term, by reference by 67(3).

The judge rejected the Insurers' submission that they had elected not to exercise their rights to opt-out their insured. The Insurers produced no evidence that they had such power or obtained any agreement with any insured group member regarding the election. In contrast, the plaintiffs took action by instructing lawyers, commencing and then settling the proceeding. The judge considered the Insurer's actions were "a non-exercise of contractual rights" and the statutory language of ss67(2) required the insurer to exercise their right of subrogation. The judge illustrated the contrast as the difference between the existence of a right of subrogation and the exercise of those rights. She confirmed that for ss67(2) to apply the Insurers' conduct must focus on extracting funds from the defendants, rather than from the insureds.

The judge also rejected the Insurers' submission that a settlement at a discount requires a pro-rata distribution of recovered proceedings. Her Honour determined, based on established precedent, that the pro-rata approach was only appropriate in a settlement where the insured had not given bona fide consideration of the insurer's interest. There was no evidence to suggest that the plaintiffs did not provide such consideration.

The only win for the insurers was Nichols J rejection of the plaintiff's proposal regarding who should calculate the distribution. Instead, of the plaintiffs' lawyer acting as Settlement Administrator, the court directed independent counsel should to determine the allocation of the recovered amounts between group members and their insurers. 

Analysis

This case is the first bushfire class action to consider the application of s 67 of the ICA to a settlement distribution scheme and radically changes the previous pragmatic approach adopted by insurers of agreeing on pro-rata distribution between insureds and their insurers. In our view, Her Honour has correctly applied the statute to the circumstances, which saw the insurers permit insureds to remain as group members in a no win no fee class action. Whilst the insurers maintained that they had the right to assume conduct under the terms of their policy, a central consideration is whether policy terms properly address the position of uninsured losses and how they will be treated in any subrogation proceeding. Insurers will need to confront whether their existing contractual rights are sufficient to commence a class action on behalf of their insureds. Critical to this right will be whether the policy of insurance contains a right on the part of insurers to pursue subrogation claims including in respect of uninsured loss of their customers.

In light of the Her Honour's conclusions insurers will need to be proactive in proceedings. If insurers fail to do so, their right to recover loss from a third party, will rank second to any uninsured or underinsured loss of their customer. If a settlement is only sufficient to cover uninsured losses, and the insurance contract is silent on priority, insurers will miss out. 

Insurers should conduct a review of all policy wordings with subrogation conditions and consider whether the policy is of a type which may involve Insurers in class action recovery. If the policy falls within that class, then conditions addressing subrogation rights and allocation of recovered funds need to be carefully addressed. Insurers should also confirm that the policy provides a specific contractual right to allow them to opt-out an insured from a class action if required. With the introduction of the Unfair Contract Term laws, Insurers need to also be careful not to over-reach in the rights reserved to the insurer.

Whilst the case in issue was a bushfire class action, other class actions seeking to recover loss including floods and financial loss arising from the consequences of the current COVID-19 pandemic are also likely to be impacted. Insurers will need to exercise contractual rights and take positive steps to control subsequent class action themselves rather than wait for a plaintiff law firm to do so. It seems to us that inevitably subrogating insurers and litigation funders will end up in battling out who should be the controlling litigant and potentially we will see more competing class actions in major tort claims.


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

End

Additional authors:

Joel Harris

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