Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited [2017] FCA 699

Commercial context

Security for costs is often a significant burden for plaintiffs, but growing acceptance of insurance as security may ease this burden. The increase in third party litigation funding, litigation insurance products and the introduction of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (TPCAI Act) has led to an increased number of plaintiffs proffering security for costs in the form of an insurance policy. However, whether or not an insurance policy can be given as security depends on a close examination of the policy's terms and the circumstances of the case.

In Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited,1. Yates J of the Federal Court of Australia ruled that insurance was not an acceptable form of security given the restrictive terms of the policy. The particular policy of insurance exposed the parties seeking security for their costs to excessive risk. However, the decision leaves the proverbial door open for insurance to be validated as a form of security for costs, where the party seeking costs has greater control over the policy, and the insurer is located within the jurisdiction.

Background

This case considered whether "after the event" insurance (ATE insurance) could constitute an acceptable form of security for costs. This decision arises out of an application for security for costs in which the respondents, Bank of Queensland (BOQ) and DDH Graham Ltd (DDH), sought further orders compelling the applicant, Petersen Superannuation Fund Pty Ltd (Petersen), to provide increased security for costs for an amount in excess of $1 million for steps in the class action litigation up to the completion of discovery.

Petersen proposed to provide security in the form of AET insurance. However, BOQ and DDH submitted that security should instead take the form of payment into court or a bank guarantee. BOQ and DDH challenged the proposed provision of an AET Insurance policy on a number of grounds, all essentially related to the fact that the terms of the policy were such that the respondents would not receive adequate costs protection.

The proceeding (an open class action) is backed by a third party litigation funder. The AET Insurance policy was procured by the funder and was underwritten by AmTrust Europe (AmTrust) – a multinational, publicly listed company, with no presence in Australia. Under the policy, AmTrust undertook to indemnify Peterson for defence costs up to $5.5 million. In February 2017, AmTrust's credit rating was downgraded from "stable" to "negative". The AmTrust AET Insurance policy was the sole form of security for costs offered to BOQ and DDH.

Salient features of the AmTrust AET Insurance policy

The AmTrust AET Insurance policy was negotiated by the litigation funder. The parties to the policy were AmTrust Europe (as insurer) and Petersen (as insured). BOQ and DDH were not parties to the policy, and no obligations were owed to them by the insurer under the policy. Clause 2.1.5 of the policy excluded liability for any negligent acts or omissions by Petersen's legal representatives and clause 3.2.1 enabled the insurer to reduce liability or cancel the insurance contract due to non-disclosure.

Reasoning of Yates J

Yates J decided that the AMTrust AET Insurance policy was deficient as a form of security for costs, but did not foreclose the possibility that insurance policies in general could constitute an adequate form of security. Indeed, his Honour stated that "depending on the circumstances of the given case, an appropriately worded ATE policy might be capable of providing sufficient security for an opponent's costs".

Yates J cited, with approval, case authority affirming that the form of security for costs is not limited to payment into court or bank guarantee. His Honour cited with approval the decision of the NSW Court of Appeal in Blue Oil Energy v Tan2. that there is "no limitation on the form of security that might be ordered…a plaintiff is entitled to put forward security in a form that is least disadvantageous to it". The only caveat is that the security, whatever form it takes, must protect the party seeking it. This principle was also affirmed by Hargrave J in FID III Global Co-Investment Fun, L.P & Anor v BBLP LLC & Ors.3.

Yates J then considered a number of recent decisions of the United Kingdom in which the courts had accepted appropriately worded ATE insurance policies as adequate security for costs.

Yates J distinguished the AmTrust AET Insurance policy from those deemed acceptable in the UK cases on the grounds that its terms provided a lesser degree of protection than those considered in the UK cases. For example, in the UK cases, policies could only be avoided for fraudulent non-disclosure, whereas the policy at hand permitted the insurer to cancel the policy even for non-fraudulent non-disclosure (per cl. 3.2.1). The Court considered this was disadvantageous to BOQ and DDH, who could not know what information was or was not disclosed by Petersen to the insurer. Moreover, the insurer could avoid liability if the conduct of Petersen's legal advisors triggered clause 2.1.5 – an occurrence over which BOQ and DDH would have no control. The AET Insurance policy could also be cancelled before costs were ordered against Petersen in the class action litigation. Again, BOQ and DDH would have no control over such an event. These exclusions from liability led Yates J to the conclusion that the terms of the AmTrust AET Insurance policy were "more extensive and onerous" than those examined in the UK cases.

The Court explained that the TPCAI Act theoretically grants the respondents a direct right to sue the insurer for the sum of the insured liability under the AET Insurance policy. However, the TPCAI Act does not confer any contractual rights on BOQ and DDH. Section 4 of the Act confers only a local statutory right, which requires the presence of the insurer in the jurisdiction. As AmTrust did not have a presence in Australia, and leave would need to be obtained to proceed under the TPCAI Act, BOQ and DDH could not "effectively or conveniently" deploy that provision.4. Moreover, Petersen did not enter into any undertakings to sue the insurer to enforce legitimate claims, so BOQ and DDH were unable to compel Petersen to sue the insurer in the event that the insurer refused to provide cover under the AET Insurance policy.

Yates J also took into account that in the event of Petersen's insolvency, the sum payable under the ATE Insurance policy might be rendered inaccessible to BOQ and DDH, who would need to jostle with creditors for a share in the assets of Petersen's bankrupt estate.

Yates J rejected the submission that the insurer did not have the financial capacity to fulfil the terms of the AmTrust AET Insurance policy. In spite of the insurer's "negative" credit rating, the Court was satisfied on the evidence that the insurer had sufficient capital to discharge its liabilities.

Accordingly, for the above reasons, Yates J found that the AmTrust AET Insurance policy was not an acceptable form of security for costs.

Key takeaways

As long as the insurance policy put forward as security for costs adequately protects the party seeking security, Australian courts will consider accepting ATE insurance as an adequate form of security for costs. In this case, the possibility of an insurance policy being accepted as security for costs was not rejected outright – rather, the terms of the specific policy at hand did not give BOQ and DDH sufficient control to ensure payment of their costs.

In order to determine whether the form of the security is adequate, the court will need to undertake a practical assessment of risk to the party seeking the security. Courts will consider the extent to which a policy excludes liability, the applicability of the TPCAI Act (if relevant), and whether a party seeking security can sue the insurer directly. The fact that a litigation funder is involved in the proceedings is immaterial to this inquiry. The TPCAI Act may be of limited utility when an insurer is not present in the jurisdiction. Further, the insurer's credit rating is not a decisive factor in determining whether AET Insurance constitutes an adequate form of security for costs.