Are you acting in accordance with the terms of your insurance policy?
Trustees should take note of the 29 August 2007 High Court decision in CGU Insurance Limited v AMP Financial Planning Pty Ltd [2007] HCA 36.
In this case, the High Court considered an appeal from the Full Federal Court brought by CGU Insurance Ltd (CGU). The issue before the court was whether CGU was liable to indemnify AMP Financial Planning Pty Ltd (AMP) under a professional risks contract of insurance in respect of amounts paid by AMP in settlement to certain investors who had lost money because of investments placed by two financial advisers. The High Court overturned the Full Federal Court's decision and allowed the appeal.
AMP had informed CGU that it was aware of potential claims arising as a result of the investments. ASIC made clear to AMP that it expected an ‘efficient, fair and timely’ resolution of the claims and that this obligation ‘should override any insurance concerns’. AMP argued that ASIC had implied that AMP’s securities dealer’s licence was at risk. AMP clearly indicated to CGU that it intended to have regard to ASIC’s views and settle the claims.
AMP sought confirmation that CGU would indemnify it in relation to the claims on numerous occasions and provided a liability report in respect of the claims in accordance with the agreed protocol. While CGU accepted AMP’s settlement protocol, CGU did not agree to confer indemnity on AMP with respect to the claims before AMP settled the claims. CGU later denied AMP indemnity under the policy. CGU had repeatedly advised AMP to act as a ‘prudent uninsured’.
The High Court, by a 4–1 majority, held in favour of CGU on the basis that at no time did CGU accept liability for the claims and AMP had no reason to believe that CGU had done so. The court stated that AMP settled the claims and made payment to the investors for its own commercial reasons in order to preserve its own goodwill and to preserve relations with ASIC.
The difficulty resulting from this decision is how insureds should manage the competing pressures to deal with customers’ claims and regulators quickly against the need to receive confirmation of indemnification from their insurer before admitting liability or settling a claim.
An insured must be careful to observe the specific terms of its insurance policy before admitting liability to a regulator or to a claimant.
Trustees should also be mindful of the requirements under their indemnity insurance contracts when reporting breaches to ASIC or APRA. Breach reports need to be carefully worded to balance trustees’ obligations under applicable legislation whilst not detrimentally affecting indemnification from their insurer. This can be a tricky matter.
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.