A class action over damages caused in the Blue Mountains (NSW) in 2013 has been commenced in the NSW Supreme Court. In NSW a ‘class action’ is an ‘opt out’ process. A person who has been injured or suffered a loss can begin an action on behalf of the ‘class’ of people who suffered losses in the same event. Once that happens all members of the class are part of the litigation unless they ‘opt out’. The idea is not to have multiple cases going over the same ground and the same facts. In this instance all the people who suffered losses shouldn’t have to sue the same defendant; if the representative plaintiff can prove that the defendant was negligent then everyone should get the benefit of that finding thereby reducing duplication and expense.
So it was that Mr Johnston instructed Maddens lawyers to commence a legal action against Endeavour Energy alleging that they were responsible, in negligence, for the fire that broke out on 17 October 2013 in Springwood. Mr Johnston defined the class of plaintiffs broadly and as required by the rules various notices were sent out and published to bring the action to their attention so that they could exercise their rights to ‘opt out’.
Many of the people who had suffered a loss were insured by insurance companies owned by Insurance Australia Group Ltd (IAG). IAG owns NRMA Insurance, CGU Insurance and Wesfarmers Insurance which also traded as Coles Insurance and Lumley’s. The various insurance companies had paid out on policies to 565 individuals and companies that were included in the class of plaintiff’s in Mr Johnston’s case. IAG purported to exercise its rights as the insurer to act on behalf of those it had insured.
The rule is a rule of subrogation. Put simply it means that if an insurer has paid out on the policy it stands with all the rights of the insured and can sue, in the insured’s own name, to recover the amount it has paid out. What the IAG insurers want to do here was to also recover, on behalf of their policy holders, the uninsured losses. That is if an insured person had cover for $600 000 but the cost of rebuilding was $800 000 then they had an uninsured loss of $200 000. The IAG wanted to run the litigation to recover all the money; it would be entitled to keep what it had paid out and give the extra to the policy holder. To achieve that objective, two people commenced another class action. The insurers advised Mr Johnston that all the people who they insured were ‘opting out’ of that class action and would instead be in the class action that IAG was running. But they never asked their policy holders if that is what they wanted …
So in Johnston v Endeavour Energy  NSWSC 1117, Garling J had to decide who was in what ‘class’. His Honour first looked at the law of subrogation and found it is not as simple as my description, above. In particular where a person was under insured or suffered uninsured as well as insured losses, they retained the right to bring their own action to recover damages. They would have an obligation to repay the insurer for any amount the insurer had paid under the policy, but the insurer was not able to commence proceedings in the name of the insured: ‘where the insurer’s payment to an insured does not cover the whole of the insured’s loss, an insured has and retains the right to recover his entire loss as the litigating plaintiff … without interference from the insurer’ .
An insurer could however litigate in the policy holders name if that was a term of the insurance contract. Here Garling J went through the various policies. Some did say that the insurer could conduct litigation to recover both the insured and uninsured losses and for people who had that policy, it was the end of the matter and the ‘opt out’ notices served by IAG were effective.
Other policies were not so worded. Some said that IAG may seek to recover uninsured losses if they were asked to do so by the insured, some said that the insurer could seek to recover insured losses but made no mention of uninsured losses. In those cases there was no right, under the contract, that would allow IAG insurance companies to conduct litigation on behalf of their policy holders to recover their uninsured losses.
It would appear that the driving issue was ‘priority’. If the claimants remained part of the Johnston class, then if they recovered they would get their uninsured losses, and any amount recovered above that would be repaid to their insurers. If they were part of the insurance company’s litigation, then it would be the insurers that would be paid first and any amount recovered in excess of the insured losses would go to the policy holders. As Garling J said (at ) ‘one might be forgiven for thinking that the real issue is whether it is the insurer or the insured who will carry the shortfall on any sums recovered’.
For some 30 claimants, their insurance policy gave to their insurance company the right to sue in their name to recover both their insured, and uninsured, losses. For those people the ‘opt out’ notice served by IAG was effective and they were removed from the Johnston class action with their rights to be determined by the class action that would be run by the insurers.
For the other 533 the ‘opt out’ notices were invalid as they were served by the insurer without proper authority. Those claimants, who had not chosen to ‘opt out’ of the Johnston action, now remain part of that action in order to recover their uninsured losses. The insurance company’s do retain the right to stand in the shoes of their policy holder in order to recover any money paid under the insurance policy (ie the insured losses) and so the two actions will no doubt proceed in tandem.
I’m guessing that our upcoming insurance policies will have slightly different wording as a result of this ruling… The insurance companies aren’t going to leave this door open in the future.
Looks to me like the lawyers focused on the 533 clear instances and did not really argue about whether the other 30 were also invalid. That is likely to be another court case some time in the future. The case seems to have been argued on pure contract terms, caveat emptor. My contract with my doctor cannot be caveat emptor, and neither can my insurance contract – they are both uberrima fides; and the contract term tries to make the principal subservient to the agent.
It’s true there was no argument over the 30 where the parties agreed the insurer did stand in the shoes of the insured. Where there is no dispute there is nothing for the lawyers to argue about. It will certainly be a court case in that the insurers are running their class action to recover the insured losses and the uninsured losses for the 30. I don’t imagine however that it will be an action by any of them to get a different result. I’m not sure about the ‘Uberrima fides’ (Utmost good faith) reference – presumably you don’t think they were acting in that capacity but the insurers may genuinely have believed that they could do a better job and allocate more resources to the of their policy holders. I don’t think we can infer that they were not acting ‘in good faith’.