In late 2013 the Federal Court of Australia was called upon in Morgan, Re Brighton Hall to consider whether, for the purpose of a professional indemnity policy, representative proceedings (class actions) comprised a single claim or multiple claims having regard to an aggregation of claims clause. This matter is significant because it determines the number of deductibles that will apply to a claim or claims and thus the exposure of the insurer under the policy, the deductible an insured may have to bear or, where only insurance monies are available because of an impecunious insured, the amount net of any deductible a claimant will be able to recover.
Between 2001 and 2005, Brighton Hall Securities Pty Limited (Brighton), a financial services provider, advised many clients to invest in schemes developed and marketed by the Westpoint Group of companies. Following the collapse of the Westpoint group in late 2005, a number of clients suffered investment losses and made claims against Brighton for negligent and/or misleading advice.
In September 2008, under the weight of the claims made and a consequent inability to secure ongoing insurance, Brighton was placed into liquidation and Mr Morgan was appointed as liquidator.
As the matter developed, by 2008/2009 two representative proceedings had been brought against Brighton:
- the Lawrence class action, which involved approximately 170 individual claims seeking in excess of $14.7 million in total; and
- the Casey class action, involving 60 individual claims seeking in the order of $5.3 million in total.
Brighton held a professional indemnity insurance policy and sought indemnification in respect of the Lawrence and Casey class actions. In August 2010 the insurer paid $2 million to Brighton’s liquidators, being the full amount payable under the policy. The proceedings came about because the liquidator sought guidance from the Court in relation to a number of issues, including whether the class actions were to be regarded as single or multiple claims and, importantly for the claimants, whether each of their claims was subject to a $25,000 deductible.
The relevant provisions regarding aggregation
The policy relevantly included the following provisions:
- a claim was defined as including a civil proceeding brought by a third party for the recovery of compensation or damages;
- insurers were only liable to provide indemnity against that part of civil liability in respect of each claim that exceeds the deductible;
- all claims that arise from one act, error or omission, or series of related acts, errors or omissions are deemed to constitute one claim;
- as to the limit of indemnity, the policy provided that the insurer was only liable to indemnify Brighton against civil liability arising from any one claim, and in the aggregate in respect of all claims arising from any one act, error or omission or series of related acts, errors or omissions, up to the limit of indemnity.
The insurer did not appear at the hearing but provided a letter indicating that its view was that each of the Lawrence and Casey class actions constituted multiple claims, that is, 230 separate claims in total and accordingly 230 applicable deductibles. On the other hand, the class action claimants contended that the 170 individual claims comprising the Lawrence class action were to be aggregated and treated as a single claim, and that each of the 60 individual claims constituting the Casey class action also comprised a separate single claim.
Considering at a threshold level whether a class action could be regarded as a single claim, the Court found that a class action necessarily involves multiple claims:
“… the whole essence of a representative claim is that there are multiple claims before the court. The character of each claim is not changed by the proceeding which embraces it. The representative proceeding is simply designed to facilitate an efficient and cost-effective way to resolve multiple individual claims. Those claims, being made in a proceeding in court, constitute proceedings.”
Under the Federal Court rules, the common features required for a class action include that the individual claims comprising it are in respect to or arise out of the same, similar or related circumstances and to substantial common issues of law or fact. It does not matter whether the individual claims are concerned with separate contracts or transactions or involve separate acts or omissions.
Critically, the Court found that the common features required by the rules for a class action fell short of the threshold required for individual claims to be aggregated under the policy. In order to invoke the aggregation provisions, it was necessary to identify a sufficient unifying factor: be it an act, error or omission or a series of them.
Insofar as the class actions were concerned, it was held that the multiple claims comprising each did not arise out of any one act, error or omission or series of them. Although it could be said that a common feature of the claims was that the relevant Westpoint investments were all included on Brighton’s authorised product list:
“…. there were different products, different clients, different times of investment, different circumstances of taking advice, different levels of investment and perhaps most importantly, different circumstances and times and amounts of sustaining loss. Without the loss, there can be no cause of action in each instance.”
The Court found this to be the case not only in respect of the Lawrence class action where there were multiple Westpoint investment products, but also in respect of the Casey class action where all of the individual claims only concerned the issue of a single investment product, Westpoint Market Street Mezzanine Notes.
The consequence of the Morgan, Brighton Hall decision was to significantly diminish the insurance moneys effectively available for the individual class action claimants for their claims.
Had the Lawrence and Casey class actions been found by aggregation to each be a single aggregated claim, there would have been two claims and thus the applicable deductibles would have totaled $50,000. Instead, there being 230 claims, the applicable deductibles each of $25,000 totaled $5.75 million.
Where a defendant insured company is in liquidation and has no other assets, as was the case here, it is the claimants who will find themselves in effect out of pocket for the deductible amount relative to their claim. If an individual claim is for less than the deductible amount, there is effectively no recovery for that claimant.
Where the defendant insured company is not in liquidation, then the burden of the deductible/s falls to the company.
With these matters in mind, potential class action claimants, their legal representatives and, where applicable, litigation funders, are given cause for serious thought before commencing proceedings. As a corollary, insurers may well find insureds increasingly seeking tailored aggregation clauses specifically providing that class actions be regarded as single claims for the purposes of the deductible provisions.