December 2016


Insurers re-examine subrogated recoveries and class actions

By Kate Tilley, Editor, Resolve

Large loss events, such as floods and bushfires, and significant amounts paid to insureds has caused insurers to look closely at subrogated recoveries and class actions as a recovery option, Susanna Khouri, Investment Manager with IMF Bentham Ltd, told an AILA NSW breakfast briefing.

She said Justice Garling's decision in Johnston v Endeavour Energy [2015] NSWSC 1117 illuminated difficult issues arising from an insurer exercising its subrogation rights in representative proceedings and the complexities arising from claimants with insured and uninsured losses.

The 17 October 2013 Springwood fire destroyed at least 193 homes and severely damaged another 109 homes. The Rural Fire Service said the fire may have started after interaction between power lines and trees during strong winds.

Some properties were fully insured, some were underinsured and some had no insurance. The estimated cost of claims was $100 million.

In May 2014, Sean Johnston launched a proceeding against Endeavour Energy as the statutory corporation responsible for electricity infrastructure in the Springwood/Winmalee area.

He was represented by Maddens Lawyers, a Victorian firm that acted in several class actions followed the Black Saturday bushfires in Victoria in February 2009.

Johnston was an "open class" proceeding so no positive action was required for individuals or corporations falling within the class definition to become members.

In August 2014, the court made orders about the opt-out process. Before the opt-out period expired, a solicitor acting for IAG signed six opt-out notices for IAG insureds and launched a second class action on behalf of Peter and Yvonne St Barbe More.

IAG notified its insureds and encouraged then to provide information about any other losses not covered by insurance.

"Some expressed concern to Maddens and the court that they wished to remain a member of the Johnston proceeding and steps had been taken without their authority," Ms Khouri said.

Mr Johnston's lawyers asked the court to order a process to allow group members in the More proceeding to register claims they wanted to bring in the Johnston proceeding. The court had to consider the nature and scope of the subrogation clauses which appeared in the different policies.

"At issue was whether a right of subrogation had arisen given the existence of uninsured losses and, if so, how the insurer's rights of subrogation could be pursued."

Ms Khouri said a range of challenging legal and case management issues arose, including:

• Claims captured by the Johnston proceeding were not co-extensive with claims captured by the More proceeding. In addition to property damage and other claims for economic loss, the Johnston proceeding included claims for personal injury. The More proceeding related only to property damage. That gave rise to the prospect of two proceedings in the Supreme Court with the same underlying facts.

• The order of payment from any recovery depended whether amounts were recovered by the insurer or the insured and the operation of s67 of the Insurance Contracts Act.

• As the Johnston proceeding was started first, the insureds were the dominus litis and had the right to pursue recovery of their loss.

Ms Khouri said class actions were an efficient mechanism to resolve multiple claims against the same respondent arising from a common event or cause.

"An interesting aspect of the Johnston decision and its impact on the More proceeding was the case management implications of the two actions continuing. Class actions are expensive and risky and a critical mass of claims is needed to make the action commercially viable." That was why Maddens sought to challenge IAG's opt-out notices.

Ms Khouri said commentators had suggested that if an insurer allowed the claims to be pursued by the insured as a member of a class action, the likely recovery to the insurer would be less due to the impact of uplifts on solicitors' costs or the participation of a litigation funder.

"While this may be true, this analysis does not account for all the risks of litigation and who bears the costs risk if the case is lost. If an insurer allows the claims to be pursued by the insured, the insurer is insulated from any risks of the claim failing."

Ms Khouri said class actions were expensive to conduct and could give rise to significant adverse costs risk. 

In the Kilmore East/Kinglake bushfire proceedings settlement, Maurice Blackburn was allocated $60 million in legal fees and disbursements. "You can be sure the defendants incurred costs of similar magnitude," she said.

Sources to fund class actions included:

• Solicitors acting on a no win/no fee basis
• Insurance such as after the event policies
• Litigation funding from commercial litigation funders
• Funding from significant stakeholders – for example insurers.

The role of insurers as funders was a recent development in several judgements – particularly the Kilmore East/Kinglake proceedings in the Victorian Supreme Court (Carol Ann Matthews v SPI Electricity Pty Ltd & Ors, proceedings no SCI 2009/04788). The judgements shed light on the role of insurers and pursuit of their subrogated rights though class actions.

In April 2013, SPI issued a notice to produce to Carol Matthews and a subpoena to Maurice Blackburn in aid of an application for security for costs. The subpoena's object was funding agreements between Maurice Blackburn and insurers of group members.

A significant part of the funding for disbursements came from a group of interested insurers.

In February 2013 steps were taken to "close the class" to facilitate settlement discussions. Insurers with a subrogated right for a group member's loss were required to register and only registered subrogated claimants would be permitted to claim compensation.

The question arose as to whether it was within the court's power to direct insurers of group members to register. While the insurer was not a group member as such (as it claims through the insured), the court held that insurers' equitable rights under the principle of subrogation and the broad power conferred under S33ZF of the Federal Court of Australia Act enabled the court to order subrogated insurers be required to register.

The funding insurers in the Kilmore East/Kinglake proceedings were members of a "consultative committee" that assisted Maurice Blackburn in managing the litigation. If a subrogated insurer in a class action adopts an active role, that may expose the insurer to orders for costs. 

Associate Justice Derham found the court had the power to make an order against the funding insurers but chose not to make any order. The court rejected a submission the funding insurers were like litigation funders and should bear both the risks and benefits of the litigation.

Ms Khouri said insurers that participated in the Kilmore East/Kinglake bushfire proceedings may have felt their participation was well justified because it has been reported they shared in a pool of about $140 million as part of the $500 million settlement.

Ms Khouri said some of those issues emerged in the class action against Seqwater, SunWater and the State of Queensland for the 2011 Wivenhoe Dam flood that IMF Bentham was funding.

"The role of IMF in this claim may give comfort to subrogated insurers as concerns [about] security for costs and funding of the proceeding are the responsibility of IMF Bentham," she said.

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