The Federal Court Insurance List

Our January 2016 newsletter discussed the introduction of the Federal Court of Australia’s (Federal Court) new ‘Insurance List for short matters’ (List). Chief Justice Allsop has recently toured the country delivering a briefing on the List for legal practitioners and industry stakeholders. This newsletter provides further details surrounding the List’s operation and its potential advantages for both insurers and insureds.

The jurisdiction of the Federal Court is broad and is triggered whenever a party seeks to rely upon and plead a Commonwealth statute. In the case of insurance related disputes, it may be most commonly triggered when an action is pleaded pursuant to the Corporations Act 2001 (Cth), the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) or the Insurance Contracts Act 1984 (Cth).

The Federal Court is moving away from a system of state based registries with individual docket systems and is in the process of implementing a number of national-based case management reforms known collectively as the ‘National Court Framework’ (NCF). The NCF is designed to facilitate flexible, efficient and cost-effective resolution of commercial disputes.

The reforms have established eight specialist National Practice Areas (NPA). This allows for a degree of specialisation where required and each NPA is co-ordinated nationally with a state-based co-ordinating Judge. This is supported by the Federal Court’s electronic filing system and a now centralised docket system.

The List fits within the ‘Commercial Contracts, Banking, Finance and Insurance’ sub-area of the ‘Commercial and Corporations’ NPA. The List is designed to hear disputes regarding policy construction or statutory interpretation which are fundamental to a proceeding and which may otherwise prevent parties from resolving a claim on its facts. The List exists to enable disputes regarding policy construction or statutory interpretation to be dealt with as separate issues freeing the parties to subsequently attempt to resolve any factual disputes without the need for a full trial.

Alternative dispute resolution

The List’s focus on the efficient resolution of disputes, necessitates (and encourages) innovative use of alternative dispute resolution (ADR) in ways other than simply mediating.

The Federal Court has authority to send all or part of a matter to an arbitrator, mediator or other suitable form of ADR.1 The court may send parties to mediation at its accord however it must obtain the parties consent to send the proceeding to an arbitrator.2 Accordingly, the List is best suited to matters involving parties that are amenable to ADR (other than mediation).

It is proposed that, where proceedings involve both factual and legal (indemnity or statutory interpretation) issues, to the extent those issues are to be extracted and determined separately, the Federal Court will triage and judicially determine any legal issues, then propose a form of ADR to resolve factual issues. This is designed to be a more cost effective and efficient approach to litigation.

The Federal Court proposes, in appropriate circumstances, to refer factual disputes to a ‘special referee’ if mediation fails to resolve the factual disputes. A ‘special referee’ is generally a specialist in a particular practice area or field, and is often better placed to determine specific factual issues with greater efficiency than the Federal Court (which may require the assistance of experts, causing further delay and expense).

The Federal Court may refer a part of, or an entire, proceeding to a ‘special referee’ for inquiry and report.3 If the ‘special referee’s’ report is acceptable to the court, that report or decision on the factual issues may be adopted in whole or part,4 allowing the court to consider the report before it becomes binding, but potentially saving the court the time required to hear factually intensive disputes.

This division of labour may allow the List to efficiently and cost-effectively dispose of litigated matters without the need for a full trial.

Case example

An illustration of how the List may work in practice is as follows:

An insured piece of machinery has been damaged while being used in its ordinary fashion. The cost to repair the machine is $5 million. The insured makes a claim under its policy. The insurer alleges that the damage to the machinery has been caused by a manufacturing defect and the ‘faulty manufacturing’ exclusion contained in the policy excludes cover.

The matter can essentially be distilled into two key issues:

  1. Whether the exclusion applies (question of law); and
  2. Whether the cause of the failure was due to defective manufacture (question of fact).

If this matter was on the List, the Federal Court could sensibly proceed as follows:

  1. The insured has four weeks to deliver short submissions as to why the claim falls within the policy;
  2. The insurer commissions a report from an appropriately qualified expert on the cause of the failure;
  3. The insurer has six weeks to submit the report, along with short submissions as to why the policy does not respond;
  4. The court determines the policy construction issue;
  5. Assuming the exclusion has the potential to apply, the matter is then sent to mediation for the parties to attempt to resolve the remaining factual issue;
  6. If the mediation fails, the matter is referred to a special referee who prepares a report for the court; and
  7. The court decides whether it will accept the report of the referee as its judgment or whether a full court hearing is necessary.

The above process presents obvious cost and time savings for litigants and their insurers. At the very least, the Federal Court limits the issues by determining the policy construction issue with limited material required by each party. The parties are therefore saved the preparation and hearing time that would be required if the matter did proceed to trial.

Further, the early mediation presents an opportunity for the parties to resolve the dispute having the advantage of the expert report and the court’s decision on the policy’s legal effect. In the event the matter is not capable of resolution at mediation, a special referee is called upon and can be provided with all the material necessary to make an informed decision on the remaining issues. The court may then adopt the report as its judgment, rather than holding a costly court hearing.

Appropriate matters to refer to the List

The List has been developed for the benefit of both insurers and insureds. Insureds wishing to understand their entitlement under a policy should consider applying to have their matters placed on the List. Likewise, insurers may also wish to utilise the List to uphold the wording of their policies in appropriate circumstances.

The List aims to hear all matters within two hours, however this time limit is not inflexible and allowance may be made for a longer hearing (no longer than a day) in certain situations.

The time limit does not prevent the List dealing with complicated questions regarding policy construction and questions of law relating to non-disclosure, good faith, and prejudice, which often do not involve significant factual analysis.

The flexibility afforded to the way in which matters on the List are conducted, combined with the Federal Court’s power to delegate factual disputes to qualified third parties, may provide an effective and cost efficient alternative to resolve litigated disputes.

While insurance matters have not traditionally been issued out of the Federal Court, this new initiative may see more insurance disputes being dealt with in that jurisdiction. Alternatively, parties may seek to adopt the same ADR ideas in the State Supreme and District Courts, in circumstances where the various civil procedure rules already provide for the use of special referees (although they have been perhaps underutilised to date.)