In the recent decision of Southern Classic Group Pty Ltd t/as Southern Classic Cars v Arch Underwriting at Lloyd’s Ltd on behalf of Syndicate 2012  NSWSC 1272, the Supreme Court of New South Wales looked at the extent of an insured’s cover under a management liability policy for liability arising from a claim by a former employee, which the insured had settled.
Some takeaway points for insurers:
The subject “liability” in these proceedings arose from a claim by a former Group Sales Manager of Southern Classic, a motor dealer (herein referred to as “Gordon”), who was also the brother of Southern Classic’s managing director (herein referred to as “John”). Gordon’s employment with Southern Classic had been terminated following an argument between Gordon and John, when John changed Gordon’s appointment in a manner which Gordon saw as a demotion.
Gordon commenced proceedings against Southern Classic seeking damages on the basis that Southern Classic had repudiated his employment contract; or terminated his employment contract or constructively dismissed him, and failed to pay him all of his remuneration and benefits entitlements. Relevantly, Gordon’s claim relied upon a report (the “Ivey Report”) which assessed the range of Gordon’s claim as between about $465,000 and $985,000. Southern Classic made a claim under its policy the day after proceedings were commenced and the insurer appointed its own solicitors to take up a defence of the proceedings.
The day prior to a mediation, the insurer’s solicitors provided Southern Classic with an advice which stated, inter alia, that a Court would likely find in favour of Gordon and that an attempt should be made to settle the claim for $300,000 inclusive of costs of approximately $100,000.
Gordon’s claim against Southern Classic was settled at the mediation for $375,000 plus costs. The costs were later assessed at some $306,000. The insurer contributed $100,000 to the settlement and paid half of Southern Classic’s costs of defending Gordon’s claim.
These proceedings concern a claim for indemnity by Southern Classic against its insurer for the balance of the settlement and for the costs it agreed to pay.
In a decision handed down on 16 August 2018, Stevenson J found that Southern Cross was entitled to indemnity but that the policy would not respond to components of Gordon’s claim. His Honour’s considerations and findings are summarised below.
Was the settlement reasonable?
The negotiations at the mediation were confidential and there was no evidence as to how the “$375,000 plus costs” settlement figure was arrived at or how that value was apportioned to each aspect of Gordon’s claim. The only evidence identifying the components of Gordon’s claim was from the Ivey Report. Nonetheless, counsel for the insurer did not suggest that John was influenced by anything other than commercial considerations when arriving at the settlement figure.
His Honour found the settlement to be reasonable. Advice by insurer’s solicitors had been that Gordon was likely to succeed in his claim. His Honour was persuaded that it was open to a Court to find that Gordon was entitled to 12 months’ notice of his termination. His Honour also found that the insurer’s solicitors had underestimated the value of Gordon’s unpaid sales claim. Whilst it was unlikely anyone could have predicted that Gordon’s assessed costs would exceed $300,000 (being triple the insurer’s solicitors’ estimate), His Honour considered settlement on a “plus costs” basis to be reasonable.
Was there a loss under the Policy?
The insuring clause in the policy provided that the insurer would pay on behalf of Southern Classic: “All loss on account of any claim against the company for an employment practice breach”. “Loss” was relevantly defined as: “Damages, compensation, settlements to which we have consented, claimant costs and defence costs which a person or entity becomes legally obliged to pay on account of a claim”. “Employment Practice Breach” was relevantly defined as: “Unfair or wrongful dismissal from or termination or discharge of employment (either actual or constructive, including breach of an implied contract)…”.
It was argued on behalf of the insurer that it did not consent to the settlement achieved at the mediation and as such, Southern Classic had not suffered any “loss” for the purposes of the Policy. His Honour did not agree. In circumstances where His Honour considered the settlement was reasonable, he considered it should be treated as a release from an asserted liability for the purposes of the insuring clause and that it was a “loss” for the purposes of the policy.
Did any exclusions apply?
It was submitted on behalf of the insurer that the claim was excluded on a number of bases. His Honour’s views on the application of these exclusions are briefly summarised as follows:
Applying the above findings to the calculations contained in the Ivey Report, His Honour found that this hypothesis would result in the policy responding to some 46% of Gordon’s claim. Adopting an admittedly broad brush approach, His Honour concluded that 46% of the claim by Gordon should be treated as loss to which the policy responds and therefore, that same proportion of the settlement sum (i.e. 46% of $375,000) should be adopted as representing that part of the settlement to which the policy responds.
It followed that the $306,000 costs component of the settlement must be similarly confined, with His Honour finding that Southern Classic was entitled to indemnity for 46% of the costs that it agreed to pay Gordon.
Read more here.
Daren Curry | Partner
T: +61 2 8289 5817
Frazer Hunt | Partner
T: +61 2 8035 7972
Katherine Ruschen | Partner
T: +61 2 8035 7964
Louise Cantrill | Partner
T: +61 2 8289 5846
Michael Down | Partner
T: +61 2 8289 5852
Stephen Aroney | Partner
T: +61 2 8289 5818
Stuart Eustice | Partner
T: +61 3 8568 9542
David Slatyer | Partner
T: +61 7 3228 0446
Mark Civitella | Partner
T: +61 8 6167 9812
David McKenna | Partner
T: +61 8 6167 9850