The recent decision from the NSW Supreme Court in the Endeavour Energy class action ([2015] NSWSC 1117) has raised an important issue for insurers and their policyholders for the opt-in/opt-out process in class actions. Following this judgment, insurers will need to consider whether retail (and maybe other) policy wordings require amendment to provide greater control of their policyholder's participation in class actions. Policyholders will need to consider the extent to which they may wish to hand over the opt-in/opt-out decision to insurers.

Issue

The key issue for determination concerned subrogation clauses in insurance policies (particularly domestic retail policies) and the extent to which insurers can control subrogated recovery claims against third parties. This is particularly important in the context of class actions and the ability for an insurer through the policyholder to “opt out” of the class. Because of the wording of a significant number of policies in the Endeavour Energy class action, the insurer was unable to force its policy holders to opt out of the class which could have significant ramifications for the amount the insurer is able to recover.

Background

The Endeavour Energy class action concerns the Springwood (Blue Mountains) bush fire in 2013. A number of the class members held insurance with a domestic insurance group. The policies responded to various claims for loss and damage but underinsurance was often an issue such that the full loss was not covered. The insurer paid out the claims which gave it the entitlement to bring subrogated recovery actions.

A class action had been commenced and the definition of the class captured a large number of the insurer's policyholders. The damage claimed included the damage to which the insurer's policies responded to.

As is the case with class actions started with an open class, an opt-out framework was implemented requiring opt-out notices to be served within a specified timeframe. The insurer, through its solicitors, served opt out notices for its policyholders and subsequently commenced its own action against Endeavour Energy to recover both insured and uninsured losses. The class action applicant subsequently challenged the validity of the insurer's opt out notices.

Outcome – see [2015] NSWSC 1117

The outcome turned on the particular policy wording and whether the policy gave the insurer an express right to unilaterally take the opt out decision. In a small number of cases, the policy provided that right and the opt out notices were successful. However, in the great majority of cases the opt out notices were found not to be of any effect as the policy either did not provide the insurer with the right to unilaterally opt out for the policyholder or, where it did, the insurer had not complied with the relevant policy pre-conditions.

Impact for insurers

For the insurer, the immediate impact was its loss of the ability to run and manage the recovery claim against Endeavour for a large number of its policyholders for whom the opt out notices were invalid (approximately 530 out of 565). That will likely mean that any recovery received by the insurer by virtue of these policyholders pursuing their claim through the original class action is less than it would have been under the insurer's separately commenced action. This is because the insurer was likely to run the action more efficiently given its information advantage (and the lawyers acting for the class may be entitled under their fee agreement to claim an uplift in fees). This issue would be more pronounced if there was a funder in the background entitled to take a (significant) cut of any damages recovery.

More broadly, it seems to us that the impact for general insurers operating in the Australian market is around the extent to which they are prepared to allow control of any subrogated recovery claims to essentially vest in a class action. If such claims vest in the class action, then the recovery for the insurer may be less (possibly significantly less) than if the insurer had pursued its own subrogated recovery claim. This is because of the impact that uplifts on solicitor's fees or the payment litigation funders take from any damages recovered may have. In large scale disasters impacting on households and small businesses (such as bushfires or floods), an insurer may have sufficient numbers of recovery claims (7 or more claimants) to allow it to pursue its own class action to recover both insured and uninsured losses on behalf of its policyholders. In such cases, the recovery is likely to be larger than through a regular class action because of the impact of uplifts on legal fees and payments to funders.

Impact for policyholders

Retail or small business policyholders often have little ability to negotiate the wording of their policies. That said, if policyholders wish to (potentially) have a say in the opt-in/opt-out decision then they should look carefully at the policy wording.

Larger businesses with more bespoke policy wordings are likely to have more ability to negotiate policy wordings in this space to give themselves (should they wish for it) a say in the opt-in/opt-out decision.

An important issue for all policyholders to be aware off is the manner in which any recoveries from a subrogated claim by an insurer are distributed between the insurer (for insured loss) and the policyholder (for uninsured loss).

Considerations

Whether or not an insurer wishes to opt in or opt out its insureds from a class action will obviously turn on the particular circumstances. That said, we expect insurers would at least like to give themselves the opportunity to opt out should they wish to and control the opt out decision making. Alternatively, having control over the opt out decision may give insurers the ability to negotiate better terms with the lawyers/funders of any class action. Insurers ought therefore carefully look at their policy wordings to make sure they have the required degree of control.