FEDERAL COURT OF AUSTRALIA

AMP Financial Planning Pty Ltd v CGU Insurance Limited [2004] FCA 1330

INSURANCE – policies of indemnity insurance – applicant licensed securities dealer – negligent investments made by “securities representatives” under the Corporations Law – settlements made by applicant with investors while liability to indemnify still reserved by respondent insurer and before any breach of policies – whether respondent liable under policies – whether applicant required to prove its legal liability to investors by admissible evidence – whether doctrines of estoppel or waiver available to applicant – whether respondent engaged in unconscionable conduct or misleading and deceptive conduct or breached obligation of utmost good faith – whether applicant liable to investors under s 819(2) of the Law – whether insured would have had a defence to claims by investors under s 819(4) of the Law – settlements made under pressure from Australian Securities and Investments Commission – whether settlements reasonable – whether claims within terms of policies – whether liability under policies for applicant’s investigation and legal costs

WORDS AND PHRASES – “civil liability claims” – “insured professional business practice” – “prudent uninsured”

Australian Securities and Investments Commission Act 2001 (Cth) ss 12CA, 12DA 12DB(1)(g)

Corporations Law ss 94, 817, 819, 820

Insurance Contracts Act 1984 (Cth) s 13

Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 374 cited

Brice v J H Wakerbarth (Australasia) Pty Ltd [1974] 2 Lloyd’s Rep 274 at 276 cited

Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 193 CLR 603 applied

Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88 applied

Parker v Lewis (1873) LR 8 Ch App 1035 applied

The Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 applied

General Omnibus Company Ltd v London General Insurance Co Ltd [1936] IR 596 cited

Hurlock v Council of the Shire of Johnstone [2002] QCA 256 not followed

C E Heath Underwriting & Insurance (Australia) Pty Ltd v Campbell Wallis Moule & Co Pty Ltd [1992] 1 VR 386 distinguished

Nigel Watts Fashion Agencies Pty Limited v GIO General Limited (1995) 8 ANZ Insurance Cases 61-235 distinguished

ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374 distinguished

Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428-429 cited

Commonwealth v Verwayen (1990) 170 CLR 394 at 441-442 cited

New Zealand Pelt Export Co Ltd v Trade Indemnity New Zealand Ltd [2004] VSCA 163 at [96] – [99] cited

Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 642 applied

Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 at 326 applied

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153 applied

CIC Insurance Ltd v Barwon Region Water Authority [1939] 1 VR 683 at 699 cited

Newman v Financial Wisdom Ltd [2004] VSC 216 at [208] applied

Lloyd v Grace, Smith & Co [1912] AC 716 cited

Polkinghorne v Holland (1934) 51 CLR 143 cited

Capricorn Financial Planners Pty Ltd v Australian Securities and Investments Commission (1999) 31 ACSR 46 cited

CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2001) 188 ALR 439 at [64] cited

Pacific Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045 at [22] cited

Banco de Portugal v Waterlow [1932] AC 452 at 506 cited

MacGillivray on Insurance Law 10^th ed. 2003 at 28-5

Derrington and Ashton The Law of Liability Insurance 1990 at 280

K Sutherland, ‘An Uneasy Compromise: An Analysis of the Effect of a Settlement Reached by an Insurer with a Third Party Claimant vis-à-vis his or her Insurer’(1998) 9 Insurance Law Journal 257

Meagher, Gummow and Lehane Equity Doctrines & Remedies 4^th ed. 2004 at 17-050

Chitty on Contracts 29^th ed 2004

AMP FINANCIAL PLANNING PTY LTD v CGU INSURANCE LIMITED

V 465 OF 2003

HEEREY J

18 OCTOBER 2004

MELBOURNE

THE COURT ORDERS THAT:

The proceeding stand over for further submissions.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

Contents

Introduction

1                     The applicant AMP Financial Planning Pty Ltd (AMPFP) was in 1999 and 2000 a licensed securities dealer under s 784 of the Corporations Law (the Law). In those years it was insured under professional indemnity policies (the Policies) issued by the respondent CGU Insurance Limited (CGU).

2                     AMPFP had two “securities representatives” for the purposes of Ch 7 of the Law, Mr Ashok (Andy) Pal and Mr Anthony Howarth, who conducted a financial advisory business through the medium of their company Macquarie Advisory Group Pty Ltd (MAG). As a result of advice from Pal and Howarth, many people (the Investors) made investments which subsequently failed. On becoming aware of these losses AMPFP notified CGU and sought indemnity under the Policies

3                     The Australian Securities and Investment Commission (ASIC) urged AMPFP to meet the losses of the Investors. ASIC made it clear that an inadequate response to the Investors’ claims would put AMPFP’s securities dealer licence at risk.

4                     Ultimately CGU denied indemnity. But in the meantime AMPFP reached settlements (the Settlements) with 47 of the Investors and paid to them sums totalling $3,242,668.40. It has deferred a decision on further claims by some of the 47 and another 16 Investors. These deferred claims total $3,067,550.

5                     In the course of protracted discussions between AMPFP and CGU via their respective solicitors, AMPFP prepared a procedure (referred to as the Protocol) for the handling of claims by Investors against it. Under the Protocol, an Investor’s claim received by AMPFP would be notified to CGU. AMPFP would prepare a liability report setting out its views on liability and recommendations for settlement. It would obtain from CGU instructions for settling or defending within 14 days of provision of the liability report. CGU agreed “in principle” to the Protocol but repeatedly stated to AMPFP that the question of indemnity was reserved and that AMPFP should act as a “prudent uninsured”. The 47 claims were paid by AMPFP after it provided liability reports to CGU but without CGU admitting or denying liability to indemnify.

6                     AMPFP now seeks damages from CGU consisting of the amounts it has paid under the Settlements, less the excess of $6,500 per claim, together with interest and costs of investigation and an order that CGU indemnify it in respect of any unpaid Investors’ claims.

7                     I should note an important evidentiary question. AMPFP claims that the Settlements it reached with the investors were, objectively considered, “reasonable”. CGU says the true question is whether AMPFP became legally liable to the investors and that AMPFP cannot make out its case merely by showing that it reached settlements, whether reasonable or otherwise. Alternatively, CGU says that anyway the Settlements were not reasonable. But AMPFP has not called evidence from any of the Investors, or Pal or Howarth. There is evidence of investigations conducted by AMPFP, its solicitors and ASIC, which includes reports of interviews with Investors. But there is no direct evidence from Investors and, in particular, no direct evidence of their dealings with Pal and Howarth.

8                     CGU also says some terms and conditions of the Policies have the effect that the Policies do not respond to the Investors’ claims.

The issues

9                     On the pleadings and the respective cases conducted by the parties at trial the issues for decision are as follows:

1.                  Must AMPFP establish by admissible evidence, and not merely by proof of the Settlements, that it was legally liable to Investors?

2.                  Is CGU liable in damages for AMPFP’s payouts on the Settlements (assuming them to be reasonable) when the Settlements were made before any breach of the Policies by CGU?

3.                  If yes to 1 and no to 2, can AMPFP avoid that result by reason of its having, with CGU’s knowledge, paid Investors under the Settlements pursuant to the Protocol and on the basis of:

3.1              Estoppel;

3.2              Waiver;

3.3              Unconscionable conduct;

3.4              Misleading and deceptive conduct; and/or

3.5              Breach of the obligation of utmost good faith.

4.                  Did AMPFP have any liability to Investors under ss 817, 818 or 819 of the Law in respect of any alleged wrongful conduct of Pal or Howarth?

5.                  If yes to 4, in any proceedings by Investors could AMPFP have relied on s 819(4) of the Law to avoid liability under s 819(2)?

6.                  Were the Settlements reasonable?

7.                  Were the Civil Liability Claims of the Investors within the terms of cl 3.2 of the Policies?

8.                  Did the Civil Liability Claims of the Investors arise in the course of the “Insured Professional Business Practice” of AMPFP?

9.                  Were the Civil Liability Claims of the Investors excluded from indemnity by cl 6.3(e) of the Policies?

10.              Would any liability under the Policies include AMPFP’s investigation costs and legal costs?

11.              Should there be a declaration that CGU is obliged to indemnify it under the Policies in respect of unpaid and future claims?

The role of Pal and Howarth

10                  At all material times AMPFP, a member of the AMP Group, provided financial planning advice to retail clients through a network of individuals who were authorised, through the granting of “proper authorities” under the Law, to represent AMPFP. A proper authority allowed the representative to give securities advice and recommendations on AMPFP’s behalf. Under AMPFP’s standard form Representatives Agreement the representative was authorised to provide financial planning advice only about financial products on AMPFP’s Approved Products List published from time to time and only about financial products on that Approved Products List in respect of which the representative had been accredited to advise. The Approved Products List includes not only AMP products but those of other organisations such as BT, Colonial, MLC, Perpetual and Rothchilds.

11                  Pal and Howarth respectively held proper authorities issued by AMPFP for the periods 1 August 1996 to 2 December 1997 and 10 November 1994 to 19 June 1995.

12                  Pal also held proper authorities from Hillross Pty Ltd, another member of the AMP Group, from 30 November 1997 to 27 May 1999 and from Kamisha Corporation Pty Ltd from 1 August 1996 to 12 November 1999. Howarth also held proper authorities from Colonial Financial Services Pty Ltd from 22 June 1995 to 27 December 1996, from Financial Wisdom Pty Ltd from 30 December 1996 to 29 January 1998, from Hillross from 3 December 1997 to 27 May 1999, from Personal Investment Planners Pty Ltd from 4 August 1999 to 17 November 1999 and from Segue Portfolio Planners Pty Ltd from 23 December 1999 to 12 July 2000.

Discovery of misconduct by Pal and Howarth

13                  In May 1999 Hillross discovered that Pal and Howarth had traded outside their proper authorities and in a manner contrary to their Hillross Representatives Agreements. Of particular concern was an investment in Hibiscus Spas Pty Ltd (Hibiscus). Pal was a director of Hibiscus, which was under administration. Pal and Howarth offered their resignations as agents and representatives and returned their proper authorities, which were then suspended. Following a two week review Hillross formed the opinion that under the terms of its securities dealers licence it was obliged to notify ASIC of possible breaches of the Law. That review revealed that approximately $3.4 million of client funds had been invested and lost in Hibiscus. Hillross terminated Pal and Howarth’s proper authorities and notified clients that the relationship between Hillross and AMPFP and Pal and Howarth had ended.

ASIC investigation

14                  After receiving notification from Hillross, ASIC conducted examinations of Pal, Howarth and associated persons and obtained an order for the winding up of MAG. It banned Pal and Howarth from the securities industries and from management of companies.

Notification of claims to CGU

15                  As investigation progressed it became apparent that some investments had been recommended and placed during the period Pal and Howarth held proper authorities from AMPFP. On 16 December 1999 AMPFP notified CGU that it had become aware of matters which might give rise to a claim under the 1999 policy. On 5 December 2000 further notification was given to CGU under the 2000 policy.

AMPFP and Hillross meeting with ASIC – 14 February 2001

16                  In the latter part of 2000 meetings were held between Hillross and AMPFP’s solicitors Minter Ellison and CGU’s then solicitors Ebsworth and Ebsworth in relation to the handling of claims by Investors.

17                  In early February 2001 ASIC requested a meeting with AMPFP and Hillross. The meeting took place on 14 February 2001. Present were representatives of AMPFP, Hillross, Minter Ellison and ASIC. CGU was not represented. Mr Darren Williams from ASIC said that it was concerned about the delay in compensating clients, given that the problems had been discovered in May 1999. He said that ASIC considered that the responsibility of AMPFP and Hillross was to handle all claims made by clients in an “efficient, fair and timely manner” (see s 826(1)(j) of the Law) and that the obligation to clients should override any insurer concerns. He said that if AMPFP or Hillross’ view was that compensation was properly payable there should be no discounting of valid claims and clients should not be required to follow a procedure which required court proceedings if they were unnecessary. Ms Annette Donselaar on behalf of ASIC said that the process of dealing with client complaints needed to be improved so that clients could be informed of the time period within which matters would be resolved, the evidence required to review the claim and the person who would deal with them. There needed to be, she said, clear milestones during the review process, accurate tracking and reporting of complaints and accountability. Mr Tim Mullaly from ASIC said that some clients had expressed concern to ASIC regarding delays and were frustrated by the amount of information that Hillross and AMPFP required from them. Mr Williams said that ASIC would look very carefully at how Hillross and AMPFP handled the claims before it decided what further action it would take. He raised the possibility that ASIC might require AMPFP and Hillross to give enforceable undertakings to ASIC under the Law.

18                  The comments of ASIC officers were primarily in the context of investments in Hibiscus. Hibiscus was a manufacturer of spas. Pal was a director and investor in the company. Clients had placed money in “shares” which were never issued, and “debentures” which were never registered, at a time when Hibiscus was in deep financial trouble. It appears to have been accepted by those at the meeting that Hibiscus was not suitable for even the most speculative investor.

19                  After the meeting with ASIC, AMPFP and Hillross prepared a project plan for the investigation of claims in the light of ASIC’s comments. Interviews with Investors commenced in March.

AMPFP/CGU discussions about the handling of claims

20                  Minter Ellison on 1 March 2001 sent to Ebsworth and Ebsworth a folder of material with a covering letter. The letter advised of the meeting with ASIC on 14 February. It stated that the relationship between AMPFP and ASIC was “critical to AMPFP’s business”. It noted that ASIC at the meeting had reminded AMPFP of its obligations as a licensed securities dealer to ensure Investors were made aware of their rights if they wished to make a claim and to compensate them fully if their claims were legitimate. In particular, ASIC had considered that full compensation for the loss sustained by Investors with legitimate claims meant the return of their claim plus a reasonable interest component and reimbursement of any costs. Where an Investor had satisfied AMPFP that he or she had a “legitimate claim” ASIC considered there should be no discounting of that claim by reason of the fact that the Investor will not have to issue or continue with legal proceedings. Also ASIC required Investors with “legitimate claims” to be made aware of the internal and external complaints handling proceedings available. AMPFP’s internal mechanisms required claims to be resolved internally within 45 to 90 days and, if that was not possible, externally through Financial Industry Complaints Services Ltd, which could make decisions binding on AMPFP. ASIC considered that investors should be compensated promptly and inconvenienced as little as possible in the information gathering process, they should not be required to engage a lawyer or have their claim discounted because of a “technical defence”. They should not be taken advantage of because of age or lack of sophistication in commercial matters. The letter stated that “in order to protect its licence and business reputation, AMPFP would give effect to ASIC’s views when dealing with Investor claims”.

The Protocol

21                  On 26 May 2001 Minter Ellison sent to Ebsworth and Ebsworth the proposed Protocol. In a covering letter Minter Ellison stated:

“We wish to emphasise that AMPFP’s internal and external complaints resolution procedures required claims to be resolved in 45 days otherwise the complainant must be referred to FICS.”

On the same day Minter Ellison sent to Ebsworth and Ebsworth the liability report in respect of the Bajada Retirement Fund claim, one of the first claims to have involved AMPFP. The covering letter requested CGU’s authority to make a settlement offer in the sum of $22,664.35 within 14 days of date of this letter. The letter then stated:

“If we have not heard within that period AMPFP shall, acting as a prudent uninsured (as you have previously advised it to do) make the settlement offer to the Bajada Retirement Fund.”

22                  On 6 April Ebsworth and Ebsworth wrote to Minter Ellison a letter which included the following:

“We understand the requirements of AMPFP’s internal and external complains resolution procedures and have sought instructions from our client in respect of indemnity. Pending the indemnity your client should continue to act as a prudent uninsured.”

On 11 May Ebsworth and Ebsworth wrote again advising that they were instructed by CGU “to agree in principal [sic] to the protocol for the handling of claims”. The letter went on to say:

“In accordance with the protocol our client will consider your client’s claim for indemnity on an investor by investor basis consequent upon receipt of your summary document. Upon receipt of your summary document we shall arrange to attend your office and inspect the relevant primary documents which it is submitted evidence the claim and comprise the basis of liability. Thereafter we shall advise our clients instructions in respect of the particular investor.”

Submission of liability reports and subsequent Settlements

23                  AMPFP thereafter submitted liability reports for the claims that it proposed to settle. By way of example (the first alphabetically, although not in point of time), a liability report in respect of a claim by the Affat Retirement Fund dealt with claims in respect of Blackhill (a vineyard) and Albert Street (an unlisted property joint venture in Ballarat) against AMPFP and Hillross and also against Hillross in respect of Hunter Road (a retirement home in Camberwell).

24                  The report said the prospects of successful claim against AMPFP in respect of the Blackhill investments were “high”. There was “clear liability” in respect of this investment under s 819 and possibly also under s 817. There was insufficient information about Albert Street and Hunter Road. It was not known whether those investments would make a loss. It was noted that the Investors’ profile was “very conservative”, that they were 43 and 42 years old, worked in the IT industry and had one dependant child. Superannuation was an issue and therefore financial goals were “to create wealth, reduce taxable income and pay off their mortgage”. The report detailed documentary evidence of the investments.

25                  Under the heading “Liability” it said that Pal was liable under s 849 for failing to disclose his interest in Blackhill. It said that under s 851 that “there was no reasonable basis for the advice having regard to what we know about the viability of the project”. A report by Australian Agribusiness Group raised serious doubts concerning the availability of water of sufficient quality to sustain a viable crop.

26                  In respect of Blackhill there was probably a liability of AMPFP under s 819 and possibly under s 817. The basis of liability was that the initial investment was made during the period of the AMPFP proper authority to Pal. As to s 817 it was said that “we have seen no evidence to prove conclusively that Pal was not acting in connection with AMPFP security business (given that a wide definition of AMPFP securities business is likely to be applied by the court)”. The Affats believed Pal was acting for MAG. However they did not know of Pal’s relationship with AMPFP so it was difficult to see how he could be engaging in conduct as agent for and/or on behalf of AMPFP, i.e. no issue of apparent agency arose. This might mean there was no liability under s 817. Under s 819 it was said that as the Affats believed Pal acted on behalf of some principal’s security business, that would be sufficient to make AMPFP liable under s 819 unless there was evidence to prove that the belief was unreasonable or that reliance on that belief was unreasonable. No evidence had been seen to prove that unreasonableness. The view was that AMPFP would be liable under s 819 but not under agency principles.

27                  The report contained a “client interview record” which was in the form of a printed questionnaire. Copies of supporting documents were provided and also a proposed deed of settlement.

28                  The recommendation in respect of the Affat claims was virtually the full amount claimed, together with interest, in respect of Blackhill but “presently nil” in respect of Albert Street and Hunter Road.

29                  In relation to each Investor claim AMPFP either directly or by its solicitors requested CGU to provide it with instructions in relation to settling the claim. Further requests to the same effect were made orally and in writing at various stages throughout 2001 and 2002. An example of the letters written is one on 9 July 2001 from Minter Ellison to Ebsworth and Ebsworth containing a number of liability reports. The letter continued:

“If we do not proceed with the above confirmation within 14 days of the date of this letter as requested, AMPFP will be advised (by virtue of, amongst other things, ASIC’s expectations) immediately to settle this claim. Our client will, however, expect CGU to reimburse it for the full amount of the settlement sum.”

On 12 July 2001 Ebsworth and Ebsworth sent a letter to Minter Ellison, which stated, amongst other things:

“…whilst our client has no difficulties with the claim protocol as noted in our letter of 11 May it has not yet determined to confer indemnity upon your client. Frankly it is interested to understand why it is that the directors (or their insurers) are not being required to meet the claims and why it appears that AMPFP has not persued [sic] GIO’s insurance decision on their liability.”

CGU’s attitude to Protocol

30                  Up until November 2001 the officer responsible for the day-to-day management of the claims in CGU’s office was Ms Allison Grice. She is a solicitor. Ms Grice said in evidence that on receipt of the Protocol she did not pay significant attention to the proposed procedure. She understood that it reflected a method for handling the Investor claims which had been agreed between AMPFP and ASIC. As far as she was concerned, if AMPFP wished to settle claims with Investors in order to convince ASIC that it was responding appropriately and promptly to the claims, CGU would not inhibit such an approach. In her mind there was a clear distinction between any procedure voluntarily adopted by AMPFP (albeit under pressure from ASIC) for dealing with Investors’ claims and the separate question of any entitlement of AMPFP to indemnity from CGU in respect of liability of third parties. For these reasons, and on the express basis that each claim for indemnity would be considered on a claim by claim basis, she instructed Ebsworth and Ebsworth to proceed in accordance with the proposed procedure, which she understood to have been agreed between AMPFP and ASIC.

CGU’s change of solicitors

31                  In August 2001 it emerged that Ebsworth and Ebsworth had a conflict of interest. CGU instructed Ms Elizabeth Solomon of Solomon and Associates to take over the matter. Ms Solomon had in the past been a principal consultant with Minter Ellison and was on good terms with Mr Ross Freeman who was handling the matter in that office.

32                  At this stage the matter had been proceeding for over two years. Ms Solomon had the advantage of a fresh mind. My impression is that she took an incisive and hardheaded approach in the interests of her client. In an initial conversation with Mr Freeman she expressed her view that she doubted that AMPFP would have any liability to any of the investors by reason of s 819. Mr Freeman said that Minter Ellison had a different view, as set out in the liability reports. Ms Solomon referred to the standard form letters that Minter Ellison had been sending with the liability reports seeking “confirmation within 14 days” that CGU would agree to provide indemnity. Ms Solomon told Mr Freeman that, as far as she was concerned, he should not bother writing any letters in what she called a “self executing tone”. From early October in letters acknowledging receipt of the liability reports she responded that “the time frame for resolution of this matter as stipulated by you is unrealistic”.

33                  On 5 October 2001 a meeting was held at the officers of Minter Ellison at the suggestion of Mr Freeman. The meeting was said by Mr Freeman to be an “educational session” for the benefit of CGU and Ms Solomon. She attended with an employee solicitor and Mr Mark Settle of counsel for CGU, Mr David Abbey and Ms Grice of behalf of CGU, Mr Freeman and Ms Avis of Minter Ellison and Mr McCrae and Mr Tudjman of AMPFP. Mr Freeman gave a Powerpoint presentation outlining the background facts giving rise to the claims against AMPFP and the processes adopted by AMPFP and Hillross in dealing with those claims. Mr Freeman discussed the obligations of AMPFP to ASIC and stated that the securities dealers licence held by AMPFP was under review. He asserted that AMPFP was subject to a liability to investors pursuant to s 819 and that it was required to settle investor’s claims for capital invested, plus reasonable interest and costs in order to satisfy ASIC.

34                  Ms Solomon raised the following points at the meeting:

·        She repeated her view, previously expressed to Mr Freeman, that she did not share Minter Ellison’s interpretation of s 819 and was not satisfied that AMPFP had any liability to investors;

·        She was concerned that non-lawyers had carried out the interviews with investors and that they may have been asked in a leading way whether they believed Pal and Howarth were acting on behalf, or had some connection, with AMPFP or some other, and if so which, entities;

·        Little attention seemed to have been given to potential defences available to AMPFP in its liability under s 819. Specifically she referred to the requirement of “reasonable belief” under s 819 and the possibility of collusion between investors;

·        She queried the basis upon which settlement was being made, and in particular the full return of capital invested without any consideration of any factors such as tax benefits already received;

·        She said that CGU did not have documentation for many of the claims being considered by AMPFP and noted she did not have copies of any records conducted with Investors. There were no transcripts of these interviews and not even notes of what had been asked of investors.

35                  Ms Solomon also said that CGU was not going to be forced by AMPFP into making decisions on indemnity within 14 days of receiving liability reports. When one of the AMPFP representatives responded by saying that ASIC was pushing AMPFP to settle claims promptly she made a comment to the effect “Well fine, you have commercial issues, but this is a policy of insurance”. She said that she proposed to take an opinion on s 819 from Mr Alan Archibald QC.

36                  After the meeting on 5 October 2001 Ms Solomon continued to receive correspondence from Minter Ellison enclosing liability reports and draft settlement deeds in respect of further investors. In March 2002 she ceased active legal practice. CGU transferred conduct of the matter to Ms Nicole Wearne of Middletons. At some later stage Ms Wearne moved to Deacons, the present solicitors for CGU.

AMPFP seeks counsel’s advice

37                  In December 2001 Minter Ellison delivered a brief to Mr Norman O’Bryan SC seeking advice as to the liability of AMPFP to clients and enclosing the firm’s advice on the operations of ss 817 and 819. On 21 December 2001 Mr O’Bryan gave written advice agreeing with Minter Ellison’s reasoning and conclusions, concluding that AMPFP was “likely to be found liable to compensate investors under s 819”.

CGU seeks counsel’s advice

38                  On 20 March 2002 Mr Archibald QC and Mr Mark Settle of counsel gave written advice to CGU. In essence their advice was that s 819 did not apply because within the meaning of s 819(b)(ii) the transactions engaged by Pal and/or Howarth and/or MAG were not engaged on behalf of AMPFP but MAG, that is to say they were not in connection with a securities business or investment advice business carried on by AMPFP.

Denial of indemnity

39                  Finally, CGU denied indemnity in a letter dated 14 November 2002 which for some reason was not received by AMPFP until about 7 January 2003. That letter was confirmed by a refusal in a letter dated 28 March 2003.

Commencement of proceeding

40                  The present proceeding was commenced on 13 June 2003.

Issue 1: Must AMPFP establish by admissible evidence, and not merely by proof of the Settlements, that it was legally liable to Investors?

41                  The Policies for the 1999 and 2000 years are identical for present purposes. The insuring clause is cl 3.1 under which CGU agrees to “provide cover … for Claims for Civil Liability (including contractual liability) arising from the conduct of the Insured Professional Business Practice”. “Civil Liability” is defined in cl 12.1 as

“Liability for the damages, costs and expenses which a civil court orders the Insured to pay on a Claim (as opposed to criminal liability or penalties). It includes the legal costs of the person making the Claim, for which the Insured become liable.”

“Claim” is defined in cl 12.2 as:

“Any originating process (in a legal proceeding or arbitration), cross claim or counter claim or third party or similar notice claiming compensation against or served on an Insured.”

42                  A settlement between AMPFP and an Investor does not answer the description of Claims for Civil Liability within the meaning of the Policies. CGU insured AMPFP against claims, not settlements.

43                  If AMPFP has to prove its liability to Investors, clearly it has not done so by admissible evidence. All that has been proved is that AMPFP believed it was, or might be, liable to the Investors. In an action on an insurance policy the occurrence of the insured event must be proved by admissible evidence, as must every element in any other cause of action.

44                  Senior counsel for AMPFP complained that requiring such proof meant that it would have to conduct 63 separate trials within the present trial. I do not agree with this gloomy scenario. It would have been open to AMPFP to sue for a declaration as to its right of indemnity: Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 374, Brice v J H Wakerbarth (Australasia) Pty Ltd [1974] 2 Lloyd’s Rep 274 at 276, MacGillivray on Insurance Law 10^th ed. 2003 at 28-5. AMPFP could call, say, three or four Investors chosen as typical examples. CGU might well have agreed on a selection of test cases. Even if it did not, if AMPFP proved its liability to three or four Investors, and overcame the various defences of CGU based on terms of the Policies, then it is hard to believe the remaining claims would not be resolved by negotiation or mediation. AMPFP would be in the position of being able to wheel up batches of Investors in case after case, a daunting prospect for the most obdurate of insurers. Running a case with a few Investors in the way suggested need not have been markedly more difficult and expensive than the present case, which involved a six day trial and a court book of 24 lever arch folders.

Issue 2: Is CGU liable in damages for AMPFP’s payouts on the Settlements (assuming them to be reasonable) when the Settlements were made before any breach of the Policies by CGU?

45                  If there was a breach by CGU of the contracts of insurance constituted by the Policies, AMPFP could recover as damages the amount of a reasonable settlement it had entered into as a consequence of such breach. As McHugh J said in Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 193 CLR 603 at [33]:

“As a general rule, a contract breaker must be taken to have reasonably contemplated that its breach may force the innocent party into litigation with third parties and that the innocent party may conclude that it is in its best interest to compromise the third party’s claim.”

In Unity an insured who had sued a broker and an insurer and settled with the latter was entitled to recover from the broker the difference between (i) the amount payable under a policy which, but for the broker’s negligence, the insured would have obtained and (ii) the amount of the settlement. The insured only had to show that the settlement was reasonable: see per Hayne J at [128]-[135]. Although arising in an insurance context, Unity did not, insofar as the High Court was concerned, involve an action for damages for breach of a contract of insurance. Rather the Court was concerned with the more general question of the rights of the innocent party to a contract who as a result of the breach, and in furtherance of the duty to mitigate, compromises litigation with a third party. But the general principles propounded apply to all contracts, including contracts of insurance.

46                  Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88 was an action on an indemnity insurance policy. The insured settled with a claimant after the insurer had repudiated liability and thus committed an anticipatory breach of the insurance contract. The insured was held entitled to recover as damages the amount of the settlement. Halse Rogers J said (at 98, emphasis added):

“In my opinion, the plaintiff, having been put in the position of having to take all steps in connection with the litigation of the claims against him at his own risk, is entitled to recover, as damages, such sums as he paid to settle those actions, provided that he shows that he acted reasonably in making the settlement. Evidence was tendered to show that the settlement was reasonable, including the advice of the solicitor now acting for the defendant company, and unless evidence were adduced to cut down that evidence I see no reason why he should not recover, in this action, the whole amount he paid in settlement. A lengthy argument was addressed to us, to the effect that, before he could recover on the policy, he must prove, to the satisfaction of the jury, the negligence of the driver, and his own consequent ‘legal liability’, but, in my view, no such burden lies upon him. After the company’s breach, by repudiation of liability in respect of the accident, he was bound to act reasonably, and, if a jury found that his settlement was reasonable, I think he was entitled to recover the sum paid in settlement.”

47                  Thus an insured under an indemnity policy can only recover the amount of a settlement with a third party claimant where the settlement has been made after a breach of the contract of insurance by the insurer, as for example where the insurer wrongfully repudiates liability. In the words of Mellish LJ in Parker v Lewis (1873) LR 8 Ch App 1035 at 1059 (emphasis added):

“ … I think that the law with reference to express contracts of indemnity is, that if a person has agreed to indemnify another against a particular claim or a particular demand, and an action is brought on that demand, he may then give notice to the person who has agreed to indemnify him to come in and defend the action, and if he does not come in, and refuses to come in, he may then compromise at once on the best terms he can, and then bring an action on the contract of indemnity. … ”

48                  And in The Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 9 Menzies J said:

“The insured may make a reasonable settlement where the insurer breaches the contract by denying liability and refusing to defend or settle [authority cited]. But such is not the case here for the insurer has not repudiated its obligations and is not, so far as I can see, in breach of its obligations. By acting as it has it may be that the insurer is forcing the insured to defend claims that it would prefer to settle at the partial expense of the insurer. However it seems to me that the condition [which said the insured was not to make admissions without the insurer’s consent and the insurer had the right to take over defence of claims] is directed to giving the insurer such an advantage for its own protection.”

See also per Stephen J at 25.

49                  That repudiation by the insurer is a critical element as shown by the following passage from Derrington and Ashton The Law of Liability Insurance 1990 at 280 (emphasis added):

“Where the insurer refuses to approve of any compromise or to conduct the defence, but does not repudiate liability, at common law the insured cannot obtain the benefit of a reasonable compromise nor consent to a fair judgment without the insurer’s consent, nor could the insured be safeguarded by a full defence of the action that would bind the insurer which, in such circumstances, could not be joined as a third party as it might where it has repudiated. Even on repudiation, a compromise has its dangers unless it be made subject to the approval of the insurer or a favourable declaratory judgment against the insurer, a condition which is not always attractive to a claimant.”

50                  In an article ‘An Uneasy Compromise: An Analysis of the Effect of a Settlement Reached by an Insurer with a Third Party Claimant vis-à-vis his or her Insurer’ (1998) 9 Insurance Law Journal 257, Kirsty Sutherland provides a comprehensive and valuable review of Australian and overseas authorities. She concludes (at 270, 277-8) that wrongful repudiation by the insurer is an essential element where the insured seeks to recover the amount of a settlement. Under the heading “The Fence Sitting Insurer” Ms Sutherland deals with the insurer who does not deny or admit liability and does not elect to take over the conduct of the insured’s defence – in effect the present case. After discussing the Irish decision General Omnibus Company Ltd v London General Insurance Co Ltd [1936] IR 596 and Distillers she concludes (at 274) that settlement is irrelevant where the insurer has not wrongfully repudiated liability. I agree.

51                  Senior counsel for AMPFP referred to Hurlock v Council of the Shire of Johnstone [2002] QCA 256, a decision of the Queensland Court of Appeal. Landholders sued the Council for negligence in designing and constructing a subdivision which had been inundated by floodwaters. The appellant was the Council’s insurer. The Council filed defences and served a third party notice on the appellant claiming indemnity. The appellant filed a defence relying on an exclusion clause. The Council was left to conduct the defence and settled with the landholders. It amended its third party notice to claim the amounts of the settlements. In its defence the appellant admitted that the settlements were reasonable. The trial of the third party proceedings was conducted on the basis that the only issue for determination was the exclusion clause (see [15]-[18]). Williams JA, with whom the other members of the Court agreed, quoted a number of cases including Unity and the passage from the judgment of Halse Rogers J in Edwards cited above. His Honour then said (at [30], emphasis added):

“That passage is of significance if only because it was referred to, without any major criticism, by McHugh J at 613-4 and Gummow J at 625 in Unity Insurance v Rocco Pezzano. It can make no difference, in my view, that in Edwards the insurer had initially repudiated liability whereas here there was a mere standing by (with full knowledge) on the appellant’s part leaving the conduct of the antecedent proceedings to the respondent.”

52                  On the facts of Hurlock the second sentence of this passage is puzzling. The appellant had done more than merely stand by. It had by its pleadings positively denied liability to indemnify the Council. In the light of the findings of the trial judge and the Court of Appeal, this was a wrongful denial and thus a breach of the policy. The appellant had moreover admitted that the settlements were reasonable and the trial was conducted on the basis that the only question is issue was whether the exclusion clause applied. If that passage means that an indemnity insurer who does not breach the policy but merely stands by becomes liable for a reasonable settlement made by the insured then I respectfully disagree.

53                  Senior counsel for AMPFP referred to C E Heath Underwriting & Insurance (Australia) Pty Ltd v Campbell Wallis Moule & Co Pty Ltd [1992] 1 VR 386, Nigel Watts Fashion Agencies Pty Limited v GIO General Limited (1995) 8 ANZ Insurance Cases 61-235 and ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374. In my view these authorities are of no assistance in the present case. They all deal with the situation of an insurer who assumes conduct of the defence of an insured and then does something, or fails to do something, which is alleged to give rise to an estoppel or constitute an election.

54                  In the present case the breach alleged in par 19 of the statement of claim (all references to pleadings are to the final amended version) did not occur until, at the earliest, 14 November 2002, which was after AMPFP made the payments to the 47 Investors. There is no allegation in the statement of claim of an earlier repudiation or anticipatory breach. Accordingly AMPFP cannot recover by way of damages amounts paid out before any breach occurred.

55                  I should briefly note in this context that in par 33 of the statement of claim AMPFP alleges that pursuant to s 13 of the Insurance Contracts Act 1984 (Cth), CGU owed it a duty to act towards it with the utmost good faith. In par 35 it is said that CGU breached that duty by failing to comply with the Protocol, failing to communicate its decisions within 14 days of receipt of a liability report or within a reasonable time and (in particular (d)) “wrongfully denying indemnity in relation to the investor claims after having behaved as alleged herein”.

56                  Even if, which seems doubtful, par 33 alleges a contractual breach, for the reasons I shall shortly mention (Issue 3.5 below), there is no substance in the allegation of lack of utmost good faith.

57                  It is not correct to say, as AMPFP asserted in final submissions, that the significance of the Settlements being made before the alleged breach was raised for the first time in CGU’s opening at the commencement of the trial. The argument I have upheld was clearly foreshadowed by Mr Caleo, junior counsel for CGU, at a directions hearing on 5 April 2004. In any event AMPFP has not alleged any forensic prejudice arising from the way CGU has conducted its defence.

Issue 3: If yes to 1 and no to 2, can AMPFP avoid that result by reason of its having, with CGU’s knowledge, paid Investors under the Settlements pursuant to the Protocol and on the basis of:

3.1 Estoppel

58                  An important element of the setting in which this issue arises is that AMPFP has never suggested that the Protocol effected a variation of the contracts of insurance constituted by the Policies. CGU never became contractually liable to pay AMPFP amounts that AMPFP had agreed to pay under the settlements 14 days after (or a reasonable time after) provision of liability reports by AMPFP.

59                  AMPFP’s case on estoppel is as follows:

1. By agreeing to the Protocol as the means by which the Investors’ claims would be managed and, where appropriate, settled, and by instructing AMPFP to act as a “prudent uninsured” until a decision on indemnity was made, and by standing by while AMPFP settled Investor claims full details of which had been given to CGU, CGU is now estopped from relying on the fact that AMPFP settled claims prior to CGU denying cover under the policy in toto.

2. As a result of CGU agreeing in principle to the Protocol and being informed on numerous occasions to act as a prudent uninsured, AMPFP was induced by CGU to believe that:

(a) CGU was aware of and accepted AMPFP’s obligation and intention to deal with the Investor claims prudently and in an efficient, honest and fair manner, as required, in particular, in order to protect AMFP’s licence under the Law (see s 826(1)(j));

(b) CGU would provide its instructions either to settle or to defend the investor claims within 14 days of the provision by AMPFP to CGU of each liability report in accordance with the Protocol;

(c) if CGU failed to respond to AMPFP’s requests for instructions, AMPFP might reasonably proceed to settle the investor claims notified to CGU under the Protocol as it was legally and commercially compelled to do; and

(d) by so settling, AMPFP would not adversely affect its rights to obtain indemnity under the insurance contracts in the manner which CGU now submits occurred.

3. There is a conventional estoppel by conduct made out here because:

(a)                CGU made a representation or fostered an assumption;

(b)               AMPFP relied to its detriment on the representation or assumption by proceeding to deal with and settle claims with the Investors on the basis of the agreed Protocol; and

(c)                for CGU to act contrary to the representation or assumption would be unconscionable in all the circumstances; Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428-429, per Brennan J: Commonwealth v Verwayen (1990) 170 CLR 394 at 441-442, per Deane J; New Zealand Pelt Export Co. Ltd v Trade Indemnity [2004] VSCA 163 at [96]-[99]; and Meagher Gummow & Lehane, Equity Doctrines & Remedies 4^th ed. at 17-050.

60                  For a start, I am not satisfied there was any relevant reliance by AMPFP. Up until the receipt of the letter of 14 November 2002 it recognised, as was the fact, that CGU had neither admitted nor denied liability to indemnify under the Policies. The most senior responsible person at AMPFP who gave evidence (although not, it would seem, the ultimate decision maker) was Mr Stephen Tudjman. He is a legal practitioner. He said in cross-examination:

“Q … Until receipt of that letter of 14 November [2002], whenever that occurred at the earliest, there was no denial of liability?

A That’s my recollection.

Q So you were acting on the basis that the policy was on foot. Leave aside the question of whether it ceased to be on foot after that date, but you were acting on the basis that the policy was on foot?

A Yes.”

61                  AMPFP had no belief that CGU had accepted liability. On the contrary, it was apparent to it that CGU had not yet made up its mind. CGU was, to use Ms Sutherland’s metaphor, sitting on the fence. It was equally possible that CGU might, at some future time, deny liability. AMPFP entered into the Settlements and paid the Investors not in reliance of any commitment or promise or representation by CGU but because AMPFP considered the Settlements were desirable in its own interests, especially having regard to the attitude of ASIC.

62                  The term “prudent insurer” is not, as far as the evidence in this case goes, a term of art used with some special significance in the insurance industry. As a matter of ordinary language I think it simply means that AMPFP was to act as though it were uninsured, but as a prudent person would, faced with the Investors’ claims. Thus a prudent person in that situation would, amongst other things, take legal advice and have lawyers, or other suitable persons, investigate and verify the factual basis of the claims and, where appropriate, negotiate a settlement.

63                  The real significance of the term to my mind is that CGU made it clear that AMPFP was to be no worse off in respect of it rights (if any) under the Policies by negotiating with the Investors and entering into the Settlements. One particular consequence of that is that CGU would not refuse indemnity on the basis that AMPFP had entered into the Settlements without CGU’s prior written consent (Policies cl 7.6) or that Investors had not obtained an order of a civil court or an originating process (Polices cl 12.1 and cl 12.2). A prudent uninsured person, being ex hypothese not bound by any policy of insurance, would not be subject to such restrictions. Neither would AMPFP.

64                  This bears on another flaw in AMPFP’s estoppel case. AMPFP has not shown any detriment. CGU’s defence makes it clear in par 21(c)(ii) that it does not deny the claim for indemnity on the two grounds mentioned. So AMPFP is no worse off vis-à-vis its policy rights (if any) by having entered into the Settlements.

65                  To the extent that unconscionability on CGU’s part forms an element of AMPFP’s estoppel case, it must be rejected. It is not yet finally established whether the defendant should know or intend that the plaintiff would act in reliance on the assumption or expectation (Waltons at 428-9 per Brennan J) or whether it is enough that the defendant ought to have known that the plaintiff would so act (Verwayen at 444 per Deane J). In New Zealand Pelt Export Co Ltd v Trade Indemnity New Zealand Ltd [2004] VSCA 163 at [99] the Victorian Court of Appeal expressed a preference for the latter position although it was not necessary in that case for their Honours to form a concluded view.

66                  The present case arises out of dealings between a large insurer and a member of one of the country’s largest financial groups, each advised by experienced insurance lawyers. CGU made it plain that it reserved liability under the Policies. I fail to see how CGU ought to have known that AMPFP would think its (CGU’s) attitude was any different. Still less is there any basis for a finding that CGU intended AMPFP should so think. No such suggestion was put to CGU’s witnesses whose evidence, particularly that of Ms Solomon, was quite to the contrary.

3.2 Waiver

67                  AMPFP argued that CGU, through its “election to agree to the Protocol as the method for assessing and dealing with claims” and its “election to inform AMPFP to act as a prudent uninsured”, waived any right to rely on an argument that no settlement could be made prior to a final denial of liability under the Policies. Reference was made to Verwayen at 406 per Mason CJ, 451 per Dawson J, 471 per Toohey J and 497 per McHugh J.

68                  For the doctrine of election to operate there must be an election between two inconsistent rights (Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 642 per Stephen J) or a choice, communicated to the other party, made when events occur which enable the electing party to exercise alternative and inconsistent rights (Sargent at 655-666 per Mason J).

69                  The perhaps overlapping (Verwayen at 406-407) concept of waiver connotes an intentional act with knowledge. The conduct of the person said to have waived is looked at to see whether, in the words of Isaacs J in Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 at 326,

“ … he has elected to get some advantage to which he would not otherwise have been entitled, so as to deny him a later election to the contrary.”

70                  No such thing occurred in the present case. There was no inconsistency between CGU accepting that AMPFP could go ahead and investigate and settle claims and, on the other hand, CGU reserving its rights under the Policies, as it expressly did. As already explained, AMPFP did not lose such rights as it might have had under the Policies.

3.3 Unconscionable conduct

71                  AMPFP alleged that CGU’s denial of indemnity under the Policies was unconscionable conduct in contravention of s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). That provision prohibits conduct in trade or commerce in relation to financial services that is “unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories”.

72                  There could be no suggestion that AMPFP suffered from some special disadvantage or disabling condition, or even that it was at a bargaining disadvantage vis-à-vis CGU (not that the latter would make CGU’s conduct unconscionable anyway: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153).

3.4 Misleading and deceptive conduct

73                  AMPFP argued that for CGU “now to seek to resile from its representations as to future matters” would contravene s 12DA of the ASIC Act (misleading or deceptive conduct) and s 12DB(1)(g) (false or misleading representations concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy).

74                  For the reasons already mentioned, CGU made no representations from which to resile.

3.5 Breach of the obligation of utmost good faith

75                  It is said that each time CGU “failed to provide indemnity within the time period and after the provision of the information, in respect of each claim contemplated by the Protocol, CGU repudiated liability under the policy in respect of that claim”. AMPFP submits that these failures constituted breaches of CGU’s implied duty of utmost good faith imposed by s 13 of the Insurance Contracts Act and therefore constituted breaches of the Policies in respect of every settled claim.

76                  An allegation of breach of the duty of utmost good faith requires proof of some want of honesty: CIC Insurance Ltd v Barwon Region Water Authority [1939] 1 VR 683 at 699. Fairness would require that any such allegation be put to the CGU witnesses. This did not happen. The substance and effect of their evidence was that they did not regard the Protocol as imposing any obligation of any sort on CGU . This belief was not challenged.

77                  The passage of time between AMPFP’s payments under the Settlements and denial of indemnity by CGU did not disadvantage AMPFP. The subsequent delay cannot retrospectively be a cause of the payments. If AMPFP were to succeed, it would be entitled to interest, as it claims in the present case.

78                  In any event, as already pointed out, the Protocol did not operate as a contractual variation of the Policies. So for CGU to decline to yield to the 14 day demand was not a repudiation of its liability under the Policies.

79                  Moreover, it is a trifle disingenuous for AMPFP to complain of delay by CGU in making a decision on indemnity. While AMP wanted indemnity, it recognised that once CGU accepted this liability it would want to take over the defence of the Investors’ claims. This might well result in CGU reaching settlements with Investors which did not meet ASIC’s expectations. Thus AMPFP had a motive to settle as many claims as it could while the indemnity issue remained unresolved. In one respect therefore, the longer CGU delayed a decision, the better from AMPFP’s point of view.

80                  In the period between November 2001 and 6 February 2002 AMPFP paid out 16 Investors. In response to demands made by Minter Ellison in late September and early October 2001 for payment within 14 days after provision of the liability report pursuant to the Protocol, Ms Solomon responded with letters saying that the time frame as stipulated was unrealistic, confirming that a meeting was arranged for 5 October and stating that she anticipated being in a position to respond within 28 days of that meeting (i.e. by 2 November 2001). Of the 16 Investors, AMPFP paid 5 before 2 November and another 7 before the end of November.

81                  The thinking behind AMPFP’s approach is shown in internal emails sent by Mr Tudjman. On 27 August 2001 he wrote:

“CGU have now engaged new lawyers [i.e. Solomon and Associates]to represent them and are pushing for these lawyers to take over the conduct of the claims (which has the potential to conflict with ASIC’s views as to the manner in which the claims are to be resolved). We have set up a meeting with these lawyers on 24 September and in the meantime are working virtually full time to finalise as many outstanding claims as possible before that meeting (to add another reason why it makes no sense for them to pursue this at this stage). Instead, we will use the meeting to press CGU to indemnify AMPFP in respect of the claims paid to date (or in the pipeline). Will keep you posted.”

Mr Tudjman agreed in cross-examination that AMPFP wanted to settle as many claims as it could before CGU “did something which had the potential to conflict with ASIC’s view”. He did not accept the proposition that it really suited AMPFP that CGU were “dragging their feet” on the question of indemnity, but I think that is a fair inference.

82                  On 25 September 2001 Mr Tudjman wrote:

‘At CGU’s request, yesterday’s proposed meeting to progress the indemnity issue has been put back until Friday week (5 October 2001). CGU have still not yet indicated whether they will be indemnifying AMPFP. Their recent rumblings suggest they are leaning that way but on terms that they pressure investors to compromise their claims below the ASIC formula of return of capital plus reasonable interest and any costs. We consider (and have told CGU) it is inappropriate to depart from the ASIC formula and to do so puts AMPFP at risk in terms of its dealers licence. ASIC are expecting a report from us next month about the progress of claims.”

83                  On 22 October 2001 Mr Tudjman wrote:

“Attached is an excel spreadsheet identifying the current claims status. To date AMPFP has paid claims totalling approx $434,000 with claims totalling approx $2.4m still in the pipeline. Our meeting with CGU on 5 October did not produce an outcome on indemnity. The meeting was productive in the sense that it focused on the claims process we are undertaking and concluded on the basis that we provided CGU with further information and documentation about aspects of the claims process (which we have done). In the lead up, there were rumblings CGU may simply assume conduct of the claims and manage them on terms inconsistent with ASIC’s expectations. We pointed out the risks to AMPFP of such a course and, on Minters advice, we are now endeavouring to conclude the claims process ASAP so as to reduce the risk of this occurring. I am available (any day except tomorrow) to meet if you wish to discuss.”

He accepted in cross-examination that AMPFP was hurrying to complete the claims before CGU took over the conduct of them because CGU would probably have a different view from ASIC. One is reminded of St Augustine’s prayer, “Lord make me chaste, but not yet”.

Issue 4: Did AMPFP have any liability to Investors under ss 817, 818 or 819 of the Law in respect of any alleged wrongful conduct of Pal or Howarth?

84                  The provisions of the Law bear on the case in the following way. AMPFP alleges (statement of claim par 18) that CGU is liable to indemnify it in respect of each Investor’s claim pursuant to the Policies. To that plea, in pars 18A and 18B of its defence, CGU asserts, amongst other things, that AMPFP was not liable under ss 817, 818 or 819 of the Law for the conduct of Pal and Howarth and/or could have relied on the exculpatory provision of s 819(4). For the reasons above, I have concluded that, in respect of payments made under the Settlements, (i) AMPFP has not established that it was legally liable to Investors and that (ii) CGU is not liable in damages because the payments were made before any breach of the Policies. It is therefore strictly unnecessary to consider the provisions of the Law. However these issues were fully argued and it is desirable that I make findings. Of course findings on these issues can only be expressed in terms of probable likelihoods assessed on the hearsay evidence available and without hearing from any Investors.

85                  Section 817 of the Law relevantly provided:

“Where a person engages in conduct as a representative of another person (in this section called the principal), then, as between the principal and a third person (other than the Commission), the principal is liable in respect of that conduct in the same manner, and to the same extent, as if the principal had engaged in it.”

Section 817, in the words of Mandie J in Newman v Financial Wisdom Ltd [2004] VSC 216 at [208], “appears to do no more than broadly state a basic principle of the law of agency, namely, that where a person engages in conduct “as a” representative of another person (the principal), the principal is liable to a third person in respect of that conduct in the same manner and to the same effect as if the principal had engaged in it”. The principal may be liable even if the conduct was fraudulent and exclusively for the benefit of the agent: Lloyd v Grace, Smith & Co [1912] AC 716, Polkinghorne v Holland (1934) 51 CLR 143, Capricorn Financial Planners Pty Ltd v Australian Securities and Investments Commission (1999) 31 ACSR 46.

86                  For the purposes of Ch 7 of the Law, the word “representative” means a securities representative: s 9. Section 94(1) and (2) define the expression “securities representative”. Those subsections provide:

“94(1) [Meaning of “securities representative”] Subject to subsection (2) a person is a securities representative of another person if, and only if, the first-mentioned person:

(a) is employed by; or

(b) acts for or by arrangement with;

the other person in connection with a securities business or investment advice business carried on by the other person.

94(2) [Persons who hold authorities] Except for the purposes of paragraph 88(1)(b):

(a) a person who holds a proper authority from a securities licensee is a securities representative of the licensee; and

(b) a person who holds an invalid securities authority from another person is a securities representative of the other person.

87                  Section 94(3) and (4) then define the circumstances in which a person will engage in conduct “as” a securities representative of another person. Those subsections provide:

“94(3) [Acting as securities representative] Subject to subsection (4), a person does an act, or engages in conduct, as a securities representative of another person if, and only if, the first-mentioned person does the act, or engages in the conduct:

(a) in connection with a securities business or investment advice business carried on by the other person;

(b) while the first-mentioned person is a securities representative of the other person;

(c) as employee or agent of, or otherwise on behalf of, on account of, or for the benefit of, the other person; and

(d) otherwise than in the course of work of a kind ordinarily done by accountants, clerks or cashiers.

94(4) [Holding out to be securities representative] Except for the purposes of Division 4 of Part 7.3, a person who holds himself, herself or itself out to be a securities representative of another person does an act as a securities representative of the other person.”

88                  A claimant can rely on s 820(1)(a) which provides in effect for a presumption that the representative acted “as a” representative of the underlying principal if the conduct was engaged in at the time when (“while”) the person was a representative of the indemnifying principal: Newman loc cit.

89                  However the very fact that s 820(1) is expressed in terms of a presumption shows that this question must ultimately turn on the evidence. It seems that, in contrast to what happened in Capricorn (see [4]), Pal and Haworth did not mention AMPFP to Investors but presented themselves as operating on behalf of MAG. In relation to investments such as Hibiscus, Pal and Howarth’s conduct does not seem to have been “in connection with” any securities business or investment advice business of AMPFP within the meaning of s 94(3)(a). As far as one can tell at the moment, it seems unlikely that AMPFP could be made liable under s 817.

90                  Section 818 deals with the situation where a person is the representative of two or more principals and engages in conduct in circumstances where it is not proved on whose behalf the person acted. This section was not relied on in final submissions.

91                  The critical provision is s 819, which creates liability “whether or not (the) conduct is or would be within the scope of the representative’s employment by, or authority from, any person”. The touchstone is the belief and reliance of the client. At the relevant time, s 819 provided as follows:

“819(1) [Application of Section] This section applies where:

(a) at a time when a person (in this section called the representative”) is a representative of only one person (in this section called the “indemnifying principal”) or of 2 or more persons (in this section called the “indemnifying principals”), the representative, whether within or outside this jurisdiction:

(i) engages in particular conduct; or

(ii) proposes, or represents that the representative proposes, to engage in particular conduct;

(b) another person (in this section called the “client”) does, or omits to do, a particular act, whether within or outside this jurisdiction, because the client believes at a particular time in good faith that the representative engaged in, or proposed to engage in, as the case may be, that conduct:

(i) on behalf of some person (in this section called the “assumed principal”) whether or not identified, or identifiable, at that time by the client; and

(ii) in connection with a securities business or investment advice business carried on by the assumed principal; and

(c) it is reasonable to expect that a person in the client’s circumstances would so believe and would do, or omit to do, as the case may be, that act because of that belief;

whether or not that conduct is or would be within the scope of the representative’s employment by, or authority from any person.

819(2) [Indemnifying principal(s) liable] If:

(a) subparagraph (1)(a)(i) applies; or

(b) subparagraph (1)(a)(ii) applies and the representative engages in that conduct; then, for the purposes of a proceeding in a court;

(c) as between the indemnifying principal and the client or a person claiming through the client, the indemnifying principal is liable; or

(d) as between any of the indemnifying principals and the client or a person claiming through the client, each of the indemnifying principals is liable;

as the case may be, in respect of that conduct in the same manner, and to the same extent, as if he, she or it had engaged in it.

819(3) [Liability to pay damages] Without limiting the generality of subsection (2), the indemnifying principal, or each of the indemnifying principals, as the case may be, is liable to pay damages to the client in respect of any loss or damage that the client suffers as a result of doing, or omitting to do, as the case may be, the act referred to in paragraph (1)(b).

819(4) [ Where conduct engaged in for one of several principals] If:

(a) there are 2 or more indemnifying principals;

(b) 2 or more of them are parties (in this subsection called the “indemnifying parties”) to a proceeding in a court;

(c) it is proved for the purposes of the proceeding:

(i) that the representative engaged in that conduct as a representative of some person; and

(ii) who that person is; and

(d) that person is among the indemnifying parties;

subsection (2) and (3) do not apply, for the purposes of the proceeding, in relation to the indemnifying parties other than that person.”

92                  In final submissions CGU did not rely on the point which Mr Archibald and Mr Settle saw as an answer to liability under s 819, namely that the conduct of Pal and Howarth was not conduct in connection with a securities business or investment advice business carried on by AMPFP, within the meaning of s 819(1)(b)(ii). I think CGU’s (implicit) view is correct. What is relevant, consistently with the underlying purpose of s 819, is not whether, as a matter of fact, Pal and Howarth were giving advice in connection with an AMPFP business of the kind indicated. Rather the questions are whether the Investors reasonably and in good faith believed two things: (i) that Pal and Howarth were giving advice on behalf of some other person (whether or not identified or identifiable, although in fact likely to be identified as MAG) and (ii) that the advice was in connection with a securities business or investment advice business carried on by that person (again, most likely MAG).

93                  As I understand its case in final submissions, CGU did not argue for the non application of s 819; rather it submitted that AMPFP could have relied (and presumably still can rely) on the exculpatory provision in s 819(4).

Issue 5: If yes to 4, in any proceedings by Investors could AMPFP have relied on s 819(4) of the Law to avoid liability under s 819(2)?

94                  CGU contends that the evidence shows that in dealings with the Investors Pal and Howarth were acting as representatives of MAG. “Representative” means securities representative: s 9. They were securities representatives of MAG because they were employed by, or acted for or by arrangement with, MAG in connection with a securities business or investment advice business carried on by MAG: s 94(1).

95                  CGU points in particular to the account given by Tim Mullaly of ASIC as to the role of MAG. Mr Mullaly’s affidavit filed in Supreme Court of Victoria proceedings consistently refers to MAG as in effect the operating entity for Pal and Howarth’s activities. For example, “MAG, via its directors, borrowed clients’ funds from the MAG No 3 Trust Account” (par 42), “MAG, through its directors, loaned clients’ funds to other companies of which Pal, Nixon [Pal’s spouse] and/or Howarth were directors” (par 45), “MAG, through its directors and employees, offered…the opportunity to its clients to invest in shares in Tuska” (par 47). There are many references to files of MAG containing copy letters relating to investments.

96                  Conversely, the liability reports prepared by Minter Ellison do not suggest the Investors thought they were dealing with AMPFP. Liability is predicated purely on the temporal connection between the relevant conduct and the holding of a proper authority.

97                  AMPFP did not attempt to counter evidence of the kind just mentioned. Rather, it argued that s 819(4) only applies to proceedings brought by the Investors, and only if such proceedings were brought against MAG and AMPFP.

98                  True it is, s 819(4) is directed to a setting where two or more “indemnifying principals” are “parties…to a proceeding in a court” and neither MAG nor the Investors are parties to the present proceeding. However, the present proceeding is concerned with insurance policies which provide a right of indemnity for certain kinds of claims for “civil liability”, defined as liability for the damages, costs and expenses which a civil court orders AMPFP to pay on such claims. Central to this case therefore, including, amongst other things, the issues as to the reasonableness of the Settlements and the liability of CGU to provide indemnity for unpaid claims, is the question whether AMPFP would be liable if the Investors were to bring actions against it. In assessing the potential liability of AMPFP in such hypothetical and notional actions the possible defences which AMPFP might raise are plainly relevant. Indeed the potential defences under s 819(4) seem just as relevant as the potential liabilities under s 819(2).

99                  It is sufficient for the purposes of s 819(4) that the indemnifying principals are (or, in the present context, would be) parties to the proceeding. The section would equally apply where an indemnifying principal is a party because it has been joined as a third party. MAG could be so joined although leave would be necessary since it is in liquidation. In any event, MAG could be joined as a defendant, which would overcome the difficulty Mandie J found in dealing with a similar argument in Newman at [225]-[226]. I would observe that the policy behind s 819(4) seems to be to mitigate to some extent the Draconian rigour of s 819, which creates liability whether or not the wrongdoer was the agent of the “indemnifying principal” and whether or not the client had even heard of the indemnifying principal in relation to the impugned conduct. At least where what might be termed the “real” principal is before the court, it seems reasonable that it alone should bear the burden, and s 819(4) has that effect. And this appears to be so irrespective of the solvency of the “real” principal.

Issue 6: Were the Settlements reasonable?

100               On the view I take, this question is irrelevant. However, it formed a major issue in the case and it is desirable that findings be made.

101               Reasonableness is to be judged by an objective standard: Unity at [6] per Brennan J and [129] per Hayne J. That fact that legal advice was received which recommended settlement is relevant, but not conclusive: ibid. The onus of proving reasonableness is on AMPFP.

102               The Settlements must be reasonable from the point of view of CGU as well as AMPFP, that is to say they must be based on a reasonable assessment of the risk faced by AMPFP if the Investors’ claims were to proceed to trial and judgment and CGU were liable to provide indemnity. Factors personal to the insured, such as fear of the adverse publicity of a trial, might reasonably influence the insured but they are not proper to be taken into account as between insured and insurer: Distillers at 32 per Stephen J; CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2001) 188 ALR 439 at [64].

103               In the present case, it is plain that the desire to placate ASIC was the major factor motivating AMPFP in entering into the Settlements. While that was perfectly understandable, indeed commendable, as between AMPFP and ASIC, it was not relevant to the assessment of the claims for which CGU might become liable for indemnity under the Policies. CGU’s contractual promise was to indemnify AMPFP against legal liabilities of a defined kind; its promise did not extend to providing indemnity against payments which AMPFP might make, however reasonably, to comply with the demands of regulators or to preserve its business reputation.

104               CGU submitted the following:

1. The actual decision-maker at AMPFP, its managing director Mr Greg Kirk, was not called. There was no evidence identifying the matters or documents he considered.

2. There was a conflict of interest in Minter Ellison acting for both AMPFP and Hillross where the latter’s insurer (HIH) was insolvent.

3. The investigation was one-sided. Pal and Howarth were not interviewed.

4. The chronology demonstrated that the driving force between the entire process of investigating, managing and paying Investor claims was the pressure imposed by ASIC for swift satisfaction of investor complaints. Between May 1999 (when complaints first surfaced) and January 2001, almost nothing had been done by AMPFP to deal with those complaints. The meeting held on 14 February 2001 with representatives from ASIC dramatically altered the stance adopted by AMPFP. Thereafter, there was an ever-present fear that ASIC might revoke the dealer licence held by AMPFP. In the meeting on 14 February 2001, the representatives of ASIC were adamant that AMPFP ought ensure that its own obligations to the client investors should override any concern about its insurance cover; ASIC stated that the position of the insurer should be irrelevant in the eyes of AMPFP. AMPFP knew that it had to proceed with management of the investor claims consistently with such views and it did so. Promptly, a plan was prepared that was expressly designed to give effect to the requirements of ASIC and was designed to ensure that “the bulk of claims should be resolved within the three months”. This plan was designed without any communication with CGU. The first step in implementing the plan – writing letters to investors – was also implemented without CGU having any opportunity to have an input. Even the Protocol, which derived from the overall project plan and directly reflected the requirements of ASIC, was not proposed to CGU as something to discuss or negotiate, but was being implemented even before it was received by CGU. The letter of 26 March 2001, which enclosed the proposed Protocol, was sent on the same day as another letter enclosing the first liability report, prepared in accordance with the proposed Protocol. By that date, pursuit of the Protocol was a fait accompli; CGU’s attitude was irrelevant.

5. The requirements of ASIC extended to the precise manner in which investors should be compensated. According to Mr David Heyworth, a Hillross officer who led the investigation on behalf of that company and AMPFP, ASIC required, in “very strong terms”, that all clients be compensated with replacement of capital, reasonable interest and costs. The attitude adopted by AMPFP was that, consistently with the requirements of ASIC, the claims should be settled and the question of recovery from “other parties” (including CGU) could wait until later. Throughout the process, AMPFP was adamant that it would not seek to negotiate less than full compensation for claimants.

6. AMPFP deliberately hastened the Settlements so as to make as many as possible before CGU reached a decision on indemnity. Another illustration of this approach is that there were a total of 23 instances in which on the same day that CGU’s solicitors were informed that a particular investor was making a claim against AMPFP, Minter Ellison forwarded the liability report relevant to that investor and informed CGU’s solicitors that AMPFP proposed to make an offer of settlement in accordance with the liability report in 14 days.

7. In 34 cases AMPFP paid more than 100 per cent of the amount claimed by Investors in their interview records. Mostly the excess over that claim was constituted by interest. Typically the amount paid was between 110 and 120 per cent of the amount claimed.

8. The amounts paid to investors were unreasonable because the assessment of the prospects of AMPFP being adjudged liable to each of the investors failed entirely to take into account the provisions of s 819(4) of the Law.

105               I have not overlooked the fact that AMPFP was acting on the advice of a leading firm of commercial solicitors and obtained the advice of senior counsel, although in the latter case confined to the operation of s 819.

106               Nevertheless I am not satisfied that the Settlements were reasonable. For the reasons advanced by CGU and summarised above, the whole process was so dominated by pressure from ASIC that I am quite unable to conclude that the Settlements would have been reached in the agreed amounts, or indeed at all, had that pressure not existed. As Hayne J pointed out in Unity at [129], the reasoning is important. A settlement can fail the reasonableness test because of flaws in the process by which it was reached, quite apart from an assessment of settlement sum against predicted result of litigation. In the present case the reasoning that led AMPFP to make the Settlements in the way that it did was not to reach a compromise based on an assessment of the prospects of success of the claims, but to satisfy the demands of ASIC. AMPFP did not merely fail to give proper weight to the interests of CGU; it was explicitly told by ASIC to ignore those interests, and did so.

107               Apart from the question of process, the Settlements were unreasonable because they failed to take into account the availability of the s 819(4) defence. This might have been from ASIC’s point of view a “technical” defence and thus something which should have been ignored. But it seems not to have been considered at all.

Issue 7: Were the Civil Liability Claims of the Investors within the terms of cl 3.2 of the Policies?

108               Clause 3.2 provides:

“3.2 The types of Claim We cover

We provide this cover in respect of any of the following types of Civil Liability Claim arising in the conduct of the Insured Professional Business Practice:

(a)               Breach of duty (including a duty of confidentiality).

(b)               Defamation.

(c)                Loss of or damage to Documents which were in the Insured’s physical custody or control at the time of loss or damage.

(d)               Dishonest, fraudulent, criminal or malicious acts or omissions by an Employee or Principal of the Insured (but there is no cover to that Employee or Principal for these Claims).

(e)                Infringement of any patent, copyright, design or trademark.

(f)                 Breaches of the Trade Practices Act 1974 or similar Fair Trading legislation enacted throughout Australia (but not for criminal liability).

With one exception, the words or phrases appearing in bold type in these clauses are defined in cl 12 of the Policies.

109               CGU argued that, according to the liability reports, the liability to which AMPFP asserts it was subject was the statutory liability created by ss 817 and 819 of the Law and was therefore not within (a) to (f) of cl 3.2.

110               I do not agree. The Investors alleged Pal gave negligent advice as a result of which they suffered loss and damage. Negligence as a legal cause of action necessarily involves breach by the defendant of a duty owed to the plaintiff. Under ss 817 or 819 the Investors sought to make AMPFP liable under what might be termed a vicarious responsibility imposed by statute. The liability claims against AMPFP can therefore be properly characterised as being for breach of duty. This is the type of claim for which the Investors sought to make AMPFP liable. It is no different from a claim made against AMPFP for a defamatory publication made by an employee in the course of his employment. Put another way, the duty referred to in cl 3.2(a) does not necessarily have to be one owed by the insured. It is sufficient that the claim for which the insured is sought to be made liable is one that can be characterised is one alleging breach of a duty.

Issue 8: Did the Civil Liability Claims of the Investors arise in the course of the “Insured Professional Business Practice” of AMPFP?

111               “Insured Professional Business Practice” is defined in cl 12.10 as “The business of provision by the Insured of the professional services stated in the Schedule”. These in turn are defined as:

“Finance, Investment and Insurance Advisors, Licenced Security Dealers and Mortgage Originators”.

112               Clause 4.1 provides that “the conduct of the Insured Professional Business Practice by or on behalf of the Insured” includes:

“ … acts, errors or omissions of agents or consultants of the Insured while undertaking work which is reasonably incidental to the conduct by the Insured of the Insured Professional Business Practice and for which the Insured is liable.”

113               In special condition 4 it is provided that the Insured shall be indemnified

“ … in accordance with the terms, conditions, exceptions and limitations of this Policy in respect of its liability as a principal and licensed securities dealer for acts or omissions of its authorised representatives, but only on the basis that CGU Professional Risks Insurance retain the rights of subrogation against the authorised representatives.”

114               CGU argued the Policies do not cover the Investors’ claims since AMPFP was not liable for the acts of Pal or Howarth under common law principles of agency. Further it said that in special condition 4 the reference to liability “as a principal” for the acts of others is also tied to common law agency.

115               In my view the obvious purpose of special condition 4 was to provide indemnity for the kind of liability which AMPFP might incur by way of statutory extension of common law principles of agency. These liabilities were imposed on AMPFP by legislation specific to the kind of business which seems to have been its principal undertaking. By conducting this kind of business AMPFP was going to be exposed to liability for the acts of others in circumstances where common law liability would not attach. It would be a very uncommercial construction of the Policies to limit the liability to that which might exist at common law.

Issue 9: Were the Civil Liability Claims of the Investors excluded from indemnity by cl 6.3(e) of the Policies?

116               Clause 6.3(e) of the Policies provided:

“6. We do not cover any of the following Claims (or losses):

…

6.3              Assumed duty or obligation

Claims:

…

(e) arising from any business not conducted for or on behalf of the Insured firm or Incorporated body.”

117               CGU says that each of the Investors’ claims arose from the business conducted by Pal and Howarth either on their own behalf or on behalf of MAG, not AMPFP. CGU also points to evidence that Pal and Howarth held proper authorities on behalf of other dealers.

118               The Policies are commercial documents which have to be construed objectively in the light of their text and the surrounding circumstances known to the parties: Pacific Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045 at [22]. Here the circumstances which must be taken to have been known to the parties include the fact that AMPFP was a licensed securities dealer, that it would be likely to give proper authorities to securities representatives and that the statutory vicarious liability imposed by the Law would apply to it. Further it is to be inferred that there was nothing unusual about securities representatives having proper authorities on behalf of more than one dealer.

119               As already mentioned, special condition 4 was designed to make it clear that this particular feature of AMPFP’s business was covered. To the extent that there is a conflict between cl 6.3(e) and special condition 4, the application of two canons of construction has the effect that the latter prevails.

120               A typed (as special condition 4 is) or handwritten clause superadded to a printed form will be given greater effect. The typed or written words are the immediate language and terms selected by the parties themselves for the expression of their meaning and the printed words are a general formula adapted equally to their case and that of all other contracting parties upon similar occasions and subjects: Chitty on Contracts 29^th ed. 2004 at 12-070. Where different parts of an instrument are inconsistent, effect must be given to that part which is calculated to carry into effect the real intention of the parties as gathered from the instrument as a whole, and that part which would defeat it must be rejected: Chitty at 12-078.

Issue 10: Would any liability under the Policies include AMPFP’s investigation costs and legal costs?

121               AMPFP claimed as part of its damages $105,121.74 for internal investigation costs. This included the time cost of its employees and expenses such as travel and accommodation. At the same time there was an investigation of claims against Hillross. There were 61 AMPFP claims and 62 Hillross claims. In money terms AMPFP constituted 63 per cent of the total claimed. AMPFP’s claim in the present case is for the same percentage of the total AMPFP and Hillross internal investigation costs.

122               Investigation costs are dealt with in cl 3.3 of the Policies as follows:

“3.3 Claim Investigation Costs

We also pay … Claim Investigation Costs.

We only pay these, however, if either:

(a)               We incur them; or

(b)               the Insured incurs them after first obtaining Our agreement in writing and the costs and expenses are in Our view reasonable.”

123               There was no prior written agreement in the present case. AMPFP argued that the costs were recoverable as damages for breach of contract in accordance with ordinary contractual principles. A party placed in a difficult situation by reason of the breach of a duty owed to him will not be held disentitled to recover the cost of remedial measures merely because the party in breach can suggest other less burdensome measures might have been taken: Banco de Portugal v Waterlow [1932] AC 452 at 506, cited with approval in Unity at [36].

124               But for the reasons already explained these expenses were incurred before there was any breach by CGU.

125               AMPFP claims also legal costs paid to its solicitors. Costs for investigation of particular claims including in some instances apportionment between AMPFP and Hillross on the same basis as before and total $231,904.72. General investigation costs, also apportioned, total $214,927.21.

126               Again there was no prior written agreement. Ebsworth and Ebsworth’s letter of 11 May 2001 does not mention costs.

Issue 11: Should there be a declaration that CGU is obliged to indemnify it under the Policies in respect of unpaid claims?

127               This issue received virtually no attention at the trial although it is raised in par 1 of AMPFP’s application. AMPFP’s case was directed, understandably enough, towards recovery of the amounts it has paid out. It did not articulate an alternative case based on the assumption that it failed in its recovery claim but (as I have now held) succeeded on issues concerning terms of the Policies. The Policies are still on foot; there has been no suggestion of avoidance for non disclosure or like grounds.

128               I think it is reasonable that the parties be given the opportunity to make further submissions on this issue, in the light of my findings. The matter will be stood over for that purpose.

Summary of findings

129               AMPFP had to establish by admissible evidence, and not merely by proof of the Settlements, that it was legally liable to Investors. CGU is not liable in damages for AMPFP’s payouts on Settlements made before any breach of the Policies by CGU. AMPFP cannot avoid that result by reason of any estoppel or waiver, or any unconscionable conduct, misleading and deceptive conduct, or breach of the obligation of utmost good faith on the part of CGU. AMPFP would probably have been liable to Investors under s 819(2) of the Law but probably would have had a defence under s 819(4). The Settlements were not reasonable. The claims of the Investors were Civil Liability Claims within cl 3.2 of the Policies. The claims were in the course of the Insured Professional Business Practice of AMPFP. The claims are not excluded from indemnity by cl 6.3(e). Any liability under the Policies does not include AMPFP’s investigation costs and legal costs. The question of CGU’s liability to indemnify AMPFP for unpaid claims is adjourned for further submissions.

Associate:

Dated: 18 October 2004