CGU Insurance Limited v Blakeley [2016] HCA 2

Background

The High Court recently heard an appeal brought by CGU Insurance from a decision in the Supreme Court of Victoria, challenging a declaration that CGU was liable to indemnify Akron Roads Pty Ltd (in liquidation) (“Akron”) in interrelated proceedings.

Akron commenced proceedings in the Supreme Court of Victoria against Crewe Sharp Pty Ltd as well as three former directors of that company, one of whom was Mr Trevor Crewe. Crewe Sharp was a consultancy company that provided services to Akron. Akron argued that Crewe Sharp was also a director pursuant to the extended definition in section 9 of the Corporations Act 2001 (Cth) (“the Act”) and that it and Mr Crewe had therefore breached section 588G of the Act for insolvent trading.

Crewe Sharp made a claim under its professional indemnity policy with CGU in relation to that claim noting that Mr Crewe was also a named insured under that policy. CGU subsequently denied indemnity for that claim relying on trading debts and directors and officers liability exclusions.

Shortly thereafter, Crewe Sharp entered into liquidation and its liquidators informed Akron that it was unlikely that Crewe Sharp would continue to defend the proceedings against it. Mr Crewe’s assets were estimated at approximately $1,000,000.00 and the undisputed evidence was that they were insufficient to cover the claim brought against him by Akron, being for debts incurred by Akron totaling over $14,000,000.00. Mr Crewe, however, was not declared bankrupt.

Unsurprisingly, Akron sought to go after CGU directly

Akron filed an interlocutory application to join CGU as a defendant to the proceedings as well as leave to file and serve proceedings seeking a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the terms of the CGU policy in respect to any judgement and costs obtained by Akron against Crewe Sharp and Mr Crewe.

Mr Crewe’s solicitors informed Akron that he consented to the joinder of CGU and disagreed with their decision to deny indemnity. Crewe Sharp’s liquidators informed Akron that the company was unfunded and therefore not in a position to investigate CGU’s denial and would take no position in relation to CGU’s joinder application.

In the Victorian Supreme Court decision, Akron said that it had a sufficient interest in the determination of CGU’s liability to support their claim for declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the terms of the CGU policy and relied upon section 562 of the Act in that regard as a sufficient basis for the joinder of CGU. That section essentially provided that if a company enters into a policy of insurance before it enters into liquidation, then that policy, providing that the company or the liquidator pays the excess, is valid against the company whilst in liquidation.

CGU argued that the Court did not have jurisdiction to determine the meaning and effect of a contract between two parties as Akron was a stranger to the contract of insurance. CGU also argued that section 562 of the Act did not confer on the liquidator a right of action against an insured’s insurance policy and that Akron’s interests in the third party proceedings were therefore hypothetical and contingent upon Crewe Sharp successfully enforcing a right.

The Law

The High Court concluded that the declaratory relief sought by Akron fell within the subject matter of the Federal jurisdiction. Regarding the second precondition of whether the declaration sought reflected a justiciable controversy between Akron and CGU, the Court answered in the affirmative and said there was sufficient interest demonstrated by Akron pursuant to section 562 of the Act and CGU’s declinature.

The Court placed much emphasis on the fact that Crewe Sharp, its liquidators, and Mr Crewe did not accept the denial of indemnity by CGU. Indeed, the Court said that Mr Crewe disagreed with the decision and consented to the joinder of CGU though the liquidators of Crewe Sharp were not in a position to investigate the denial and took no position on the joinder.

Likewise, the Court also placed emphasis on the fact that by Akron relying on section 562 of the Act (and its comparative equal in the Bankruptcy Act 1966 (Cth)), its claim was not as a party to the insurance contract or as a person otherwise entitled to the benefit of the contract. Instead, the Court said that the proceeds of the policy, so far as they related to Crewe Sharp, would, as a legal consequence, bring into existence the rights of proceeds of the insurance policy payable to Crewe Sharp in respect of its liability to Akron.

Essentially, the Court said that the interest upon which Akron claimed for the declaratory relief was sufficient to constitute a judiciable controversy on the basis that Akron stood to benefit from the making of the declaration albeit not directly as a party to the contract. The court did note, however, that if the liquidators of Crewe Sharp and Mr Crewe had elected not to contest the indemnity (or alternatively consent to Akron’s contest) that could be enough to have defeated Akron’s interest in the declaratory relief.

The Court was also mindful to dismiss CGU’s appeal on the basis that granting the declaratory relief would prevent CGU from re-litigating in subsequent proceedings issues that should have been and would be determined in proceedings brought by Akron involving the insured (i.e. the circumstances upon which the declaratory relief and Akron’s claim against Crewe Sharp and Mr Crewe were the same).

Ramifications

The decision clears up a string of inconsistent appellate level decisions where similar declaratory relief has been sought. It provides an avenue for third parties that stand to benefit from an insurer indemnifying an insured to contest an insurer’s declinature in circumstances where the insured does not agree with the insurer’s decision to decline indemnity, but, for whatever reasons, is unable or materially unwilling to contest same.

Likewise, for claims involving individuals, the decision suggests the same outcome will apply to bankrupts by way of section 117 of the Bankruptcy Act 1966 (Cth), being the analogous provision to section 562 of the Corporations Act 2001 (Cth).

For insurers, the decision poses the risk of increased litigation and therefore costs on two levels- opposing the application by a non-party seeking declaratory relief against the insurer direct and secondly, defending the declinature by the insurer at trial where the issue will be determined by the court.