CGU Insurance Limited v AMP Financial Planning Pty Limited  HCA 36
This case is about the management of the relationship between an insured and its insurer in the face of a threatened claim.
Messrs Pal and Horwath practised as financial advisers. As a result of particular advice which they gave without authority, a number of clients invested in Hibiscus Spas Pty Ltd and subsequently lost the full value of their investments.
As it appeared that Messrs Pal and Horwath gave their advice at the time they held authorities with AMP, AMP notified its professional indemnity insurer, CGU, in 1999 and 2000 that a claim might be made against it.
Those clients who had lost money, placed ASIC under pressure to see that they were reimbursed as quickly as possible. ASIC therefore placed AMP on notice that if these matters were not resolved fully and expeditiously, it would consider its options including options relating to AMP’s financial license.
Against the background, AMP proposed to CGU a protocol for the management of the claims that might be made against it. In the ensuing correspondence, CGU’s solicitors resisted confirming indemnity (specifically raising a number of issues with AMP’s solicitors about indemnity) and insisted that AMP act as a prudent uninsured. Correspondence of this nature ensured until late 2003 when CGU’s solicitors notified that indemnity was denied as AMP had no liability to its investors. By this time, AMP had settled the investors potential claims before any proceedings had been commenced.
AMP brought proceedings against CGU in the Federal Court of Australia.
The Court upheld CGU’s position at first instance. AMP’s appeal to the Full Federal Court was upheld. In the High Court, a majority upheld CGU’s appeal and restored the original decision.
Gleeson CJ and Crennan J saw the matter in terms of whether AMP had established its entitlement to indemnity under the relevant policy. The reasons for reaching their view that it had not, included the following:
- Payment of settlement amounts did not fall within the terms of the relevant policies because there had been no originating process in terms of legal proceedings or arbitration.
- AMP did not wish CGU to take control of the defence of the actions threatened against it notwithstanding the provisions of the relevant policies.
- The settlement amounts were paid at a time when AMP knew that CGU had not granted AMP indemnity.
Gleeson CJ and Crennan J accepted that CGU’s agreements with AMP estopped it from relying upon certain provisions of the relevant policies but that estoppel did not go so far as to relieve AMP from establishing that the settlements which it reached with the investors, were reasonable.
Callinan and Heydon JJ were tempted to find that CGU’s delay in addressing AMP’s entitlement to indemnity, demonstrated a breach of good faith towards AMP. Yet they felt that AMP’s overall conduct disentitled it from relying upon any such breach of good faith by CGU. In particular they pointed to AMP’s failure to trigger the ‘SC’ claim in the policy and its determination to resolve these potential claims for its own purposes.
Protocols established by insurer and insureds to manage the settlement of claims should not only address the settlement process and its impact upon the policy’s terms and conditions, but also how the reasonableness of the settlement amount is to be agreed between the insurer and insured.
The difficulty in this matter is that the protocol (and therefore the estoppel arguments) only went as far as the policy’s terms and conditions, It did not extend to the reasonableness of the settlements.
What does the duty of utmost good faith involve? It is more than dishonesty. It can involve capriciousness and unreasonableness. It can even involve a failure to take into account the interests of the other parties.
Importantly, it operates both ways and requires a party who wishes to assert that there has been a breach, to demonstrate that their conduct is beyond reproach.
The further question is even if there is a breach of the duty of utmost good faith, what is the remedy and what are the principles which determine the remedy. That remains to be explored.
Finally, there are the terms and conditions of the policy itself. An interesting point which emerged late in this matter is the role of the ‘Senior Counsel’ clause and the parties’ failure to trigger it. The suggestion was that had it been triggered, AMP and CGU may have been in a position to resolve this dispute in the face of ASIC’s pressure rather than after that pressure had passed.
Alistair Little, Partner
Sarah Wheller, Senior Associate