We have started to see the Federal Court use its discretionary powers in respect of class actions to order defendants to disclose their insurance policies to plaintiffs. The disclosure is not framed as traditional discovery focused on the disputed facts in the case, rather it is discovery aimed at assisting the settlement process. The emergence of these disclosure orders is an example of the flexible and pragmatic approach increasingly being adopted by the Federal Court in class actions.
The conventional position
Until recently class action proceedings have been subject to the general principle that insurance policies need not be produced unless relevant to the pleaded issues in the case. That long-standing position is founded upon the principle that the existence and amount of insurance cover is not relevant to determining the extent of a party’s liability.
Limited statutory exceptions have over the years been introduced. They include for example, an application by a member of a company to inspect that company’s books and records under section 247A of the Corporations Act 2001 (Cth)(Corporations Act). In the context of an application for leave to proceed against a company in liquidation, administration or bankruptcy, under sections 440D and 471B of the Corporations Act, and s58(3)(b) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) respectively.
Past attempts by plaintiffs to compel production in a class action context have been unsuccessful. Most notably, in Richard v Centro Properties Limited (ACN 078 590 682) the class action Plaintiffs sought an order that Centro Properties Limited and CPT Manager Limited (Centro Parties) produce their insurance policies. The order was sought in the context of an upcoming mediation and the Plaintiffs’ legal representatives argued, among other things, that where there was uncertainty as to the Centro Parties’ ability to meet the damages sought by the Applicant and class members. It was impossible to properly advise them as to whether particular settlement offers were fair and reasonable and in the interests of class members (which in the class action context the counsel for the class members have to do as part of the process of having a settlement approved by the Court).
Ryan J rejected those arguments and dismissed the application. His Honour did not accept that a lack of knowledge about the extent of the Centro Parties’ insurance cover precluded them from advising their clients as to settlement or forming a view about the reasonableness of any settlement reached between the parties for the purposes of an application to have any settlement approved by the court. Further, his Honour was concerned that disclosure of the policy would unfairly prejudice the defendants in any settlement negotiations.
However, since the Centro case there has arguably been a shift toward more pragmatic case management principles and a greater judicial acceptance of the need to produce insurance policies in certain circumstances. In that context, and while not yet the subject of a judgment, the Federal Court of Australia has in a number of instances ordered defendants to produce insurance policies to class action plaintiffs using its broad case management powers (s33Z and 37P of the FCAA). This has been done, for example, in the class actions commenced against Slater & Gordon Limited and Quintis Limited (Subject to a Deed of Company Arrangement).
Section 33ZF of the FCAA provides, inter alia, that (emphasis added):
- In any proceeding (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding.
It can only be relied upon in representative proceedings commenced under Part IVA, and confers on the Court a particularly wide power to do whatever it thinks appropriate or necessary to ensure that justice is done in the proceeding. It has been put to an array of uses by the Court including in the making of common fund orders. Recent comments from the bench have suggested at least some judges see the disclosure of insurance policies as critical to the conduct of efficient settlement negotiations, and thus, discovery of them is able to be ordered under s 33ZF.
Section 37P of the FCAA entitles a Court or a Judge to give directions about the practice and procedure to be followed in relation to the proceeding, or any part of the proceeding. It applies to any civil proceeding before the Court, and is not limited to Part IVA proceedings. It will be interesting to see whether the trend of ordering disclosure of insurance policies for settlement purposes in the class action space translates to any extent into the non-class action space.
Arguments in support of an order compelling production of insurance policies in class actions are most obviously based on:
- the need for the plaintiff’s legal team to form a view as to the reasonableness of any settlement, including for the purposes of having the settlement approved by the Court. Available insurance cover is often a key factor in the assessment of settlement options, as it often provides the parameters for what is actually recoverable in the case; and
- the requirement for the plaintiff’s solicitors to conduct the case, and incur legal costs, in a manner which is proportional to the expected benefit of the litigation. Where this benefit depends largely on access to insurance funds, there may be arguments that it is difficult for the legal team to manage legal expenses appropriately without access to the relevant policies.
This is a new and evolving area of jurisprudence and we await - with interest - a judgment on the issue. In the meantime, some obvious issues arise for both plaintiffs and defendants.
In cases where recoverability is at issue, a relatively early application for access to relevant insurance policies appears prudent to ensure your settlement strategy and expectations are appropriately formed. At least in the Federal Court, we expect applications for access to insurance policies to become the “norm” in class actions against companies in administration (at least until any judgement which may define the circumstances in which the disclosure might be ordered).
It may even be that plaintiffs who do not seek such disclosure are later criticised if their case management or settlement approach prove inappropriate in respect of the actual insurance funds available.
The development of these disclosure orders in the context of Australia’s increasingly competitive class action market, warrants particular attention. For example:
Particular care should be taken in communications with insurers, as such communications are typically captured by this new class of disclosure order. In short, nothing should be put into a letter to your insurers which you would not want the plaintiffs to see. Companies should ensure all insureds (including often ex-directors and officers) are aware of this.
Careful and wide confidentiality provisions should be sought with the disclosure of any polices. This should include:
(i) protection against policy limits being disclosed in open court or evidence, or disclosed outside of the individual solicitors acting for the plaintiffs (and not the entire firm).
(ii) policy limit information, if disclosed in the class action market, might be used to support the viability of other class actions against the company - possibly even for unrelated conduct or in different periods; and
(iii) thought should also be given to mechanisms for keeping the insurer’s name confidential, as the standard terms are familiar to some players in the market and again could be a factor supporting another claim.