Whilst there has been significant coverage of the recent Federal Court decision in what has become known as the “ratings agency class action” (Bathurst Regional Council v LGFS  FCA 1200), there has been little coverage of the judge’s decision concerning the insurance cover held by LGFS.
The decision of Jagot J includes some useful guidance on the disclosure obligations of non-party insureds entitled to cover under civil liability insurance policies issued by many insurers and held by most medium to large scale businesses (especially those in the financial services sector). In particular:-
- insurers should reconsider the extent to which they require non-party insureds to complete proposal forms; and
- policyholders should consider whether each non-party insured ought give their own disclosure to insurers rather than relying on the disclosure provided by the policyholder.
The case involved the rating, sale and purchase of a structured financial product known as a CPDO. Thirteen councils pursued the class action against the creator of the product (ABN Amro), Standard & Poor’s who rated the product AAA, and the seller of the product to the councils (LGFS). The councils succeeded against all three and LGFS succeeded in a cross-claim against ABN Amro and S&P.
For more detail on the dispute and the outcome, please see our recent alert.
The insurance aspect concerned a civil liability policy issued by AIG’s Australian subsidiary to Future Plus of which LGFS was a subsidiary and insured under the policy. AIG declined indemnity on grounds of non-disclosure and further contended that even if its non-disclosure defence failed, the policy did not respond due to certain exclusions. AIG failed in all respects with Jagot J being particularly dismissive of some of the defences raised by AIG.
Two important non-disclosure issues arise from the decision. They were:-
- Does a non-party insured have disclosure obligations?; and
- Did the insurer waive LGFS’s disclosure obligations?
LGFS maintained that it had no disclosure obligations as it was not the policyholder but rather the named insured. Jagot J dismissed this contention, finding that the provisions of section 48 of the Insurance Contracts Act 1984 (Cth) (ICA) not only operated to confer rights on non-party insureds but also imposed obligations on them. This meant LGFS, as an insured, was subject to the same disclosure obligations as the policyholder.
The second issue concerned section 21(3) of the ICA which deems that an insurer waives compliance with the duty of disclosure where an insured fails to answer a question in a proposal form. LGFS had not completed a proposal form and therefore contended that AIG had waived compliance with the duty of disclosure by LGFS with respect to all questions in the proposal form. Jagot J agreed with LGFS and found section 21(3) was engaged by AIG’s failure to insist on a completed proposal form from LGFS.
These two findings raise important considerations for both insurers and policyholders.
- In the case of insurers, consideration should be given to requiring certification from an insured that enquiries concerning the questions asked by the proposal form have been made of people or organisations covered by the policy. Doing so ought avoid a suggestion of waiver concerning those questions in the proposal form.
- From the perspective of policyholders, the finding that section 48 imposes the same disclosure obligations as the policyholder on a non-party insured may make it insufficient to rely on disclosure given by the policyholder. Consideration should be given to the disclosure to be given by any insured to insurers.
It should be noted that consideration is presently being given to amending section 48 of the ICA in a manner which may clarify the obligations of non-party insureds.
Jagot J also dealt with numerous policy coverage defences raised by AIG. In dismissing all such defences, Jagot J concentrated on providing a “common sense business construction of the policy” rather than what she described as the “artificial” and “contrived” construction argued by AIG.
Most of the findings on the policy construction are fact specific but they nevertheless provide some useful guidance on how the following common provisions in such policies are construed:-
- The definition of “wrongful act” which is one of the indemnity triggers;
- AFSL exclusion – this excludes claims arising from the provision of financial advice and services for which the insured does not hold an AFSL;
- Conflict of interest exclusion; and
- Proprietary trading exclusion.