CGU Insurance Limited v AMP Financial Planning Pty Limited [2007] HCA 36

29 August 2007
Gleeson CJ, Kirby, Callinan, Heydon and Crennan JJ

• The High Court has dismissed AMP’s long-running claim against CGU for indemnity for losses caused by two of its representatives.

• The duty of insurers and insureds to deal with each other in utmost good faith requires them not to act dishonestly, capriciously or unreasonably. The duty requires insurers to determine indemnity promptly.

• Although not established in this case, an insurer’s absence of good faith or inducing an insured into a course of action may found a right to indemnity outside of the terms of the policy.

• Parties should be prepared, when in dispute, to rely on a "senior counsel clause", should the policy provide one.

• AMP was insured against professional risks by CGU. The event insured against was legal proceedings commenced with respect to AMP’s vicarious liability for its representatives.

• The policy included a "senior counsel clause", under which the parties agreed to attempt to resolve any disputes informally by obtaining the opinion of senior counsel (mutually agreed on) on the merits of any such dispute. The "senior counsel clause" was not activated in this matter.

• Two of AMP's representatives advised investors to make investments that subsequently failed. The representatives became bankrupt and ASIC banned them from the securities industry.

• When AMP became aware of these circumstances, it advised CGU and sought indemnity. AMP drafted a claims handling protocol, under which AMP would notify CGU of each claim, together with information relevant to each claim. Under the protocol, CGU would then advise AMP within 14 days whether that claim would be settled or defended.

• CGU agreed, in principle, to the protocol, but did not decide whether to indemnify AMP. CGU advised AMP to act as a "prudent uninsured". AMP kept CGU abreast of developments in the claims.

• ASIC pressured AMP to resolve the claims promptly and without obliging the investors to commence proceedings. Additionally, AMP was anxious to protect its commercial reputation, which would likely have been damaged were claimants to have commenced formal legal proceedings against it.

• Following requests to CGU to determine its liability, AMP proceeded to settle 47 of the claims, paying out $3.24 million. It then sought indemnity from CGU.

• CGU denied indemnity:

• relying on the necessity for the commencement of legal proceedings (CGU dropped this objection at trial); and

• on the basis that the settlements were not reasonable, both as to quantum and as there was a live issue as to AMP’s vicarious liability under s 819 of the Corporations Law 2001.

• AMP commenced proceedings in the Federal Court, claiming:

• breach of the policy by denial of indemnity;

• estoppel arising from AMP’s settlement of the claims, allegedly in reliance on CGU’s in principle agreement to the claims protocol; and

• breach of the duty of utmost good faith from CGU’s delay in determining indemnity.

• At trial, Heerey J dismissed AMP's claim. He found that:

• AMP had paid out the investors, not because of any representation on CGU's part that it did not require AMP to prove its liability to the investors, but because AMP considered prompt resolution of the claims to be in its best interests;

• AMP had failed to show that the settlements with the investors were reasonable;

• AMP had not considered whether s 819 of the Corporations Law 2001 applied to impose liability on it for its representatives; and

• breach of the duty of utmost good faith required dishonesty on CGU’s part, of which there was none.

• AMP appealed to the Full Federal Court. It found that CGU’s in principle agreement to the protocol may have induced AMP to settle the claims without commencement of proceedings. AMP had suffered detriment since, without such proceedings, it was not entitled to indemnity.

• The Full Court also found that the duty of utmost good faith is not merely to act honestly. The duty is to act with both honesty and propriety.

• The Full Court allowed AMP's appeal and remitted the matter back to Heerey J to determine whether AMP had been induced by CGU to resolve the claims informally. CGU’s liability both in estoppel and under the duty of utmost good faith depended on a finding of such inducement.

• CGU appealed to the High Court.

• The appeal was successful. Gleeson CJ and Crennan J delivered a joint judgment, as did Callinan and Heydon JJ. Kirby J, delivering a separate judgment, dissented.

• Gleeson CJ and Crennan J held that:

• However, Gleeson CJ and Crennan J (at [16]) found that a failure to act in good faith, of itself, is not sufficient to make an insurer liable to indemnify its insured. It will not make an insurer liable to indemnify when the contract of insurance would not otherwise have created such indemnity.

• Kirby J found that dishonesty is not a necessary element of the breach of utmost good faith. Rather, he adopted the criteria in Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Insurance Cases 61-197, which stated that the duty of utmost good faith required a party not to engage in "dishonest, capricious or unreasonable conduct." He agreed with the Full Court that a finding of lack of utmost good faith on CGU's part was open on the evidence.

• Kirby J found that the duty of utmost good faith required an insurer promptly to indicate whether it admitted or denied indemnity to an insured.

• Although Callinan and Heydon JJ declined to define the content of the duty of utmost good faith, they agreed that it did not only encompass dishonest conduct. In particular, they considered that CGU's temporising in determining whether it would indemnify AMP might well have breached the duty of utmost good faith. Additionally, CGU's initial requirement that the investors' claims be brought by court proceedings could also have been a breach of the duty. They suggested that utmost good faith, in its mutuality, resembled the equitable doctrine that parties must deal with each other with "clean hands", that is act with propriety.

• However, Callinan and Heydon JJ found that, even if there had been an absence of good faith on CGU's part, this would not entitle AMP to relief. Firstly, AMP did not rely on the Senior Counsel clause. Secondly, AMP had, for its own reasons, expeditiously settled the claims.

• Gleeson CJ and Crennan J found that there was nothing in the conduct of CGU that induced AMP to resolve the claims in the manner it did. Therefore, no estoppel arose on CGU's part.

• Kirby J found that, since AMP was indemnified against claims asserted in legal proceedings, the settlement of the investors' claims without commencement of proceedings did not activate the indemnity under the policy. Therefore, if AMP was to succeed, it would have to show that CGU induced it, by its representations, to enter into the settlement agreements and that those settlements were reasonable.

• Kirby J noted that where one party to contract is in breach, forcing the innocent party into litigation with a third party, the party in breach will be liable for the settlement if, firstly, it is in breach of its obligations and, secondly, the settlement is objectively reasonable. He found this inapplicable in this case as CGU was not in breach of the policy. Given the absence of legal proceedings, no liability to indemnify arose.

• However, Kirby J found that CGU had induced AMP to believe that claims dealt with under the protocol would be indemnified. CGU had reserved its decision on indemnity until after the protocol was in place. AMP could not then insist on the investors proving their claims (and presumably also commencing proceedings).

• Kirby J found that the Court was unable, on the material before it, to determine whether s 819 of the Corporations Law 2001 applied to each of the claims. Additionally, he considered it was possible, on the evidence, for AMP to show that each of these settlements was reasonable. Therefore, he would have allowed the matter to be remitted to the trial judge for further consideration.

• Callinan and Heydon JJ found that CGU was not estopped from denying indemnity to AMP. They found that the trial judge had correctly found that AMP had not suffered any relevant detriment on the basis of CGU's conduct.

• The content of an insurer’s duty of utmost good faith has long been difficult to define, with intermediate appeal courts offering some guidance. The High Court has now provided further guidance on this important and emerging area of insurance law.

• Although CGU did not ultimately at trial rely on the absence of legal proceedings by the investors, this case demonstrates the need for insureds to ensure that the terms of their insurance policies are consistent with their business practices and the requirements of external regulators.

• Interestingly, one reason given by Callinan and Heydon JJ for denying the good faith claim was AMP not having called on the "senior counsel clause". Presumably, this flows from their view that utmost good faith resembles "clean hands". Had AMP invoked the "senior counsel clause" and Callinan and Heydon JJ perhaps found in their favour, AMP would have succeeded in having a trial of the issue of reliance and, possibly, succeeded in its claim.

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