These proceedings involved claims against a number of respondents involved in marketing, rating and selling highly sophisticated financial products to NSW local councils. One of the respondents, Local Government Financial Services Pty Ltd (LGFS), was insured under a policy issued by American Home Assurance Company (AHAC). LGFS sought indemnity from AHAC in respect of both a settlement it reached with one claimant and its liability to other claimants. AHAC denied that LGFS was entitled to indemnity.Apart from arguments about the proper construction of the policy and the meaning of references to‘financial planning advice and services’ and ‘financial advice and services’ in the policy’s exclusion clauses, AHAC also argued that the effect of Insurance Contracts Act 1984 (Cth) (ICA) section 48(2) was that LGFS owed AHAC a duty of disclosure under ICA section 21, and had breached that duty. AHAC also argued that the settlement LGFS had reached with one of the parties was not reasonable.

The Full Court rejected all of AHAC’s arguments. The obligations that s 48(2) imposed on LGFS, as a third-party beneficiary, were confined to obligations ‘in relation to the third-party beneficiary’s claim’, and did not extend to pre-contractual obligations such as those in ICA s 21. Even if LGFS had owed a duty of disclosure to AHAC, that duty was not breached by LGFS’ failure to disclose a matter that it did not actually know. AHAC’s argument about the settlement that LGFS had made was rejected. On an objective view, having regard to the material available at the time and the uncertainty of litigation, and balancing the prospect of complete success against the substantial risks of failure, the settlement was a reasonable one.

You can access the reasons for judgment here.