June 2018


Ruling 'significantly hits insurers'

by Kate Tilley, Resolve Editor

A Federal Court decision to directly join a liquidated company's D&O insurer into a damages case could have wide-ranging industry impacts, Sydney insurance lawyer King & Wood Mallesons partner Travis Toemoe has

Justice Brigitte Markovic's decision to approve a shareholder application to bring direct action against engineering and construction firm Forge Group's D&O insurers would have significant impacts on insurers and insureds, he said.

The application was made under the new NSW Civil Liability (Third Party Claims Against Insurers) Act 2017.

The Act reformed the law on third party claims on insurance monies. It repealed and replaced the controversial section 6 of the NSW Law Reform (Miscellaneous Provisions) Act 1946, which gave third-party claimants the right to enforce a statutory charge over insurance monies payable under policies if proceedings against insureds were impracticable.

Mr Toemoe said Justice Markovic's decision meant insurers needed to review policyholder co-operation obligations; insureds could expect higher premiums; and plaintiff lawyers would have a new, direct route to insurer funds.

"Insurers can expect to be joined directly to [more] actions and should review policy wordings imposing access, co-operation and assistance obligations to [better] defend those claims," Mr Toemoe said.

"Plaintiff lawyers may take the easier route to pursue [a] company's insurer directly, rather than seeking leave to pursue a company in liquidation ... [because] insurers are unlikely to be as well placed as companies to defend claims."

Mr Toemoe said the insurers – Chubb, Allianz and Axis Specialty Europe – had fought the Federal Court application, arguing they would "suffer irreparable prejudice" if it were approved. But Justice Markovic said she had to balance fairness between the parties and should not "attribute significant weight to the additional costs or prejudice to be borne by insurers". 

In a related but separate action, the NSW Supreme Court has refused Swiss Re and QBE permission to pursue three Forge company directors for more than $73 million in bonds issued only months before the business's March 2014 collapse.

On 2 March 2018, Justice David Hammerschlag rejected the (re)insurers' argument the directors were acting on their own behalf, not the company's, and should be liable for the losses. He ruled they were speaking on behalf of Forge Group Ltd when they made statements about Forge's profitability and cash flow.

Swiss Re and QBE had tried to sue Forge MD and CEO David Michael Simpson, CFO Donald James Montgomery and finance GM Andrew Bell over the bonds.

Justice Hammerschlag heard Forge had been contracted to build WA's Roy Hill iron ore project, which included subcontractor Samsung. Forge is separately being sued in the Federal Court for allegedly breaching the Roy Hill project contract (above).

The contract required Forge to post on-demand, unconditional, irrevocable security bonds. When Forge faced financial difficulties in late 2013, Samsung called in its investment and Forge sought additional bonds from Swiss Re and QBE to reimburse Samsung.

The bonds, totalling $108.696 million, issued in favour of Samsung for Forge's benefit were:

• 15 November 2013 Swiss Re for $3.85 million bond
• 19 December 2013 Swiss Re for $6 million
• 10 January 2014 Swiss Re for $20.749 million
• 10 January 2014 Swiss Re for $20.749 million
• 13 January 2014 QBE for $6 million
• 13 January 2014 QBE for $20.749 million
• 13 January 2014 QBE for $20.749 million.

After Forge collapsed, Swiss Re and QBE argued they would not have issued the bonds had they been aware of Forge's true financial position. They said Simpson, Montgomery and Bell had led them to believe Forge was solvent.

They had made statements to the (re)insurers and issued a public financial announcement. The (re)insurers said the decision to issue the bonds was directly linked to the directors' non-disclosure of the financial position and argued the directors were acting for their own benefit and should be liable for the losses.

Swiss Re received premiums for the bonds of $2,807,518.53 and was paid $10,044,512.53 by the receivers from Forge assets realised. It claimed damages for the amount it paid, less what it has received – $38,495,618.97.

QBE received premiums of $2,328,529.93 and was paid $10,044,512.53 by the receivers. It claimed damages of $35,124,607.57.

The three directors denied misleading the (re)insurers or engaging in deceptive conduct.

If they had, it was on Forge's behalf and not for personal gain. They said the (re)insurers' bond-issuing history showed they probably would have issued the bonds even had they been aware of Forge's financial position.

Justice Hammerschlag found Bell had failed to disclose Forge's financial position to the (re)insurers but was acting on Forge's behalf. His actions could not fairly be viewed as his own conduct under Australian consumer law.

"The non-disclosure was always Forge Group's. It does not become Bell's non-disclosure because he was not the one to disclose it." Justice Hammerschlag said the same applied to Simpson and Montgomery when they issued the announcement about Forge's purported solvency.

"Even if it is accepted they played a part in causing Forge to make the announcement, that does not make the announcement their own." Justice Hammerschlag said neither Swiss Re nor QBE had proved the directors' non-disclosure had impacted on their decision to issue the bonds.

"It is more probable than not the bonds would have been issued anyway," he said. "[To suggest] additional disclosures would have made the difference between issuing and not issuing the bonds is unrealistic."

Justice Hammerschlag said Swiss Re and QBE had "a direct and vital commercial interest in Forge's survival; and a long client history with Forge".

If they did not issue some of the bonds Forge was dead. "If they did issue, Forge had a prospect of survival because of the lucrative Roy Hill contract ... and therefore a prospect their unsecured exposure would be ‘managed', that is reduced or eliminated".

The bonds would increase Forge's prospects of achieving a trade sale or raising more equity.

"Swiss Re and QBE became, together with ANZ, part of the banking club which gave them commercial leverage. The security arrangements would prevent any one of [the three] from tipping Forge into an insolvency regime."

Swiss Re International SE v David Simpson [2018] NSWSC 233, 02/03/2018

Rushleigh Services Pty Ltd v Forge Group Ltd (in liquidation; receivers & managers appointed) [2018], FCA 26, 31/01/2018

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