Introduction

A recent ruling of Derham AsJ in the long running Kilmore bushfire proceeding makes clear that whilst group members are immune from adverse costs orders, their subrogating insurers do not share that protection.  This article examines His Honour’s decision and the implications it has for subrogating insurers and potential impact it may have on one avenue for funding future class actions.

The Kilmore East bushfire proceeding10, is the largest litigation in Victoria’s history.  The plaintiff claims property damages and personal injury compensation on behalf of over 7,000 group members.  The trial is proceeding in the Supreme Court of Victoria before His Honour Justice J Forrest and will shortly reach the first anniversary of the commencement of the trial. 

A number of interlocutory applications have arisen throughout the many days of trial, some of which have been referred to Associate Justice Derham whilst the substantive trial proceeds. In December 2013 His Honour ruled in relation to defendant SPI’s applications for security for costs11.  Alternative orders were sought:

  • Security was sought from the representative plaintiff;
  • Alternatively, security was sought against various insurers who had subrogation claims for property loss and who had entered into funding agreements with Maurice Blackburn “to assist with the prosecution of the proceeding”. 

Whilst His Honour found he had power to order security against the plaintiff, Mrs Matthews, he declined to exercise his discretion providing reasons.  He ultimately determined not to exercise his discretion to order security against the Funding Insurers, though he found that as in the case of the plaintiff the court had the power to do so.  The decision provides yet another glimmer of hope for defendants and their insurers engaged in costly litigation brought by plaintiffs with little or no prospect of meeting an adverse costs order.   The decision is consistent with the Full Court of the Federal Court ruling in Madgwick v Kelly [2013] FCFAC 61 where the judges exercised the court’s discretion and ordered it was appropriate for security for costs to be ordered against the representative applicant. 

Facts and findings

The Kilmore East bushfire proceeding is partly being funded by Maurice Blackburn on a no win no fee basis and partly by insurers with subrogation rights funding certain disbursements.  In April 2013, SPI Electricity Pty Ltd made an application for security for costs orders confined to future trial disbursements estimated at $7.1m.  

In support of its application against the insurers, SPI submitted that the Funding Insurers were analogous to litigation funders.  His Honour rejected this analogy noting that the insurers did not stand to make a profit from the litigation but to simply recover payments made under property indemnity policies.  His Honour thought it clear that whilst the insurers had a commercial interest in the outcome of the litigation they were not involved in the litigation to make a commercial profit, only to recover sums paid out.  His Honour contrasted the circumstance of a commercial litigation funder, who is usually entitled to a proportion of any compensation recovered as the price for funding the plaintiff’s claim.

Before the court on the application were confidential copies of the Funding Agreements between the Funding Insurers and Maurice Blackburn.  SPI emphasised that the agreements gave the insurers significant control over the litigation through the role which the insurers had in the “consultative committee” which managed the litigation.  His Honour whilst noting he was inhibited from disclosing the terms of the agreements by reason of the orders made limiting their disclosure, characterised the Agreements as permitting the insurers to be consulted but did not confer on the insurers contractual power to control the litigation. 

However His Honour considered the nature of the interests of the Insurers in the litigation whether funding or otherwise was relevant to the making of an order for security.  He recognised that the insurers’ interest in the compensation that might be awarded to the subrogated claimants gave them a special interest in the outcome.

In opposing the application for security against them, the Funding Insurers contended that s33ZD(b) of the Supreme Court Act (SCA) prevented the court from making any such order. Section 33ZD provides that in a group proceeding the court can order costs against the plaintiff or defendant but except in particular circumstances may not order costs against a group member.  The Funding Insurers submitted that in exercising their rights of subrogation they stood in the shoes of the group members and accordingly s33ZD(b) precluded the court exercising its power against them.  His Honour rejected this submission, noting that whilst they might stand in the shoes of the group member the Funding Insurers are not group members and they do not have the protection afforded by s33ZD(b).

It was also submitted by the Funding Insurers that by reason of the operation of various provisions in Part 4A of the Supreme Court Act addressing the question of costs, and the persons against whom such orders could be made, the court had no power to order costs against any party other than the plaintiff.  It was further submitted that s24 of the SCA, which provides for orders for costs against a non party, is curtailed by s33ZD.  His Honour rejected this submission noting that section 33ZD was completely silent on the topic. 

Derham AsJ found that the court has the power to make an order for security against the Funding Insurers but determined that, assuming the power was enlivened, in the circumstances of the case it was not appropriate for the court to exercise its discretion.  Importantly His Honour recognised that were an order for costs to be made against the Funding Insurers, there was no suggestion of any risk that they would not be able to pay the costs.  

Commentary

In major tort class actions where group member suffer property losses, subrogating insurers will have an interest in the outcome of the proceedings.  The decision of Derham As J opens the door for a successful defendant to seek to recover adverse costs orders from the subrogating insurers, in place of the plaintiff, especially if their interest is sufficient and they have played a role in funding the prosecution of the litigation against the successful defendant. 

This finding that there is a power to order costs against subrogated insurers is something that insurers will have to bear in mind. In the Kilmore bushfire proceeding the insurers agreed to partially fund the plaintiff’s disbursements in return for a right to be consulted in the conduct of the litigation.  Lawyers for the insurers strongly opposed the court’s power to make a security for costs order against their clients, relying in part on s33ZD(b) of the SCA.  If the insurers were proceeding on the understanding that they were entitled to the same protection under s33ZD(b) as group members, that belief has been quashed.  For plaintiff law firms looking to insurers as one source of litigation funding they may find that in the future insurers will be reluctant to come on board.  After all the insurer may be able to simply sit back and rely on the insured’s contractual obligations to repay to the insurer monies recovered by way of subrogation. 

The recent amendments to s67 of the Insurance Contracts Act 1984 (Cth) have clarified the entitlement to funds where an amount is recovered by either insured or insurer for policies entered into after 28 December 2013. Those amendments are likely to result in insurers simply taking a back seat and putting their insured clients on notice that if they obtain a recovery of funds as a result of a settlement or judgment, then after any uninsured loss is met, the insurer will require reimbursement of the amounts paid under the policy.  For policies entered into before the amendments took effect the position is less clear.  Section 67 as it applies to those policies only addresses the position of moneys recovered under subrogation.  A sound argument can be made that a claim brought by a representative plaintiff is not a subrogation proceeding and certainly the entitlement of individual group members to participate in a settlement or judgment is not as a result of any insurer exercising a right of subrogation.  In those circumstances the general law applies and any uninsured loss will have priority over payments made by insurers.