The Future of Recoveries in Class Actions – Insurer Beware

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By Nieva Connell, Partner 

The decision of Francis v Powercor; Lenehan v Powercor [2020] VSC 836 was handed down by Her Honour Justice Nichols shortly prior to Christmas 2020 to not much fuss. On the face of it, it’s just another in a line of decisions about bushfire class actions; this time two class actions arising from bushfires in Terang and The Sisters. However, it has important implications for insurers who insure group members who fall within a “class” the subject of a class action. As will very frequently be the case with large property losses, many people who fell within the Francis and Lenehan class actions had insured and partly insured losses. Her Honour effectively found that, unless the insurance policy specifically provides for it, insurers have no rights to priority or to pro rata return of insured losses. The decision turns on its head the practice of pro rata-ing insured and uninsured losses, which had been adopted in all previous bushfire-related class action settlements in Victoria.

Background

Each of the Francis and Lenehan class actions was commenced on an “open” basis, so group members were caught by the class if they had suffered personal injury, loss or damage to property, or pure economic loss, as a result of the fires. As is the case with open class actions, the group members were given the opportunity to opt out of the class actions during the course of the proceedings.

The parties ultimately settled the class actions, with the defendants agreeing to pay the plaintiffs and group members a lump sum of money, to be distributed between group members in a manner to be later determined.

The plaintiffs sought court approval for the proposed settlements and for a proposed scheme for the distribution of moneys between group members, pursuant to s 33V of the Supreme Court Act 1986 (Vic).

The proposed distribution schemes provided for the distribution of moneys between group members, and also between insured group members and their insurers.

The Issues

Insurance Australia Group (IAG), Allianz Australia Limited and QBE Insurance (Australia) Ltd (the Insurer Objectors or Insurers) between them insured most, but not all, insured group members and had made payments to them in respect of losses sustained in the bushfires.

The Insurer Objectors objected to that part of the scheme by which the plaintiffs proposed that moneys be distributed between insured group members and their insurers. Whilst the Insurers sought that moneys be distributed to them via the scheme, they disagreed with the manner in which the plaintiff law firm (Maddens) proposed that that occur.

The Insurers did not object to the overall settlement sums to be distributed between group members in each proceeding, nor to the manner in which the settlement sum was to be distributed between group members. They did, however, object to the allocations of funds as between the insured group members and the insurers. That is, once the amount of a settlement sum had been determined for an insured group member, it then had to be allocated as between the insured group member and their insurer. The Insurers objected to the manner in which the plaintiff’s law firm determined that the allocation should be made. (It probably goes without saying, however, the settlement sum was significantly less than the actual losses incurred by the group members and Insurers, so there were insufficient settlement funds for insured group members and Insurers to recover their full losses.)

Whilst there is an interesting side-story in this case that relates to the apparent animosity between the plaintiff’s law firm and the Insurers, the purpose of this article is not to explore that issue. It is sufficient to note that Her Honour referred to “the overly combative manner in which Maddens conducted itself specifically on the question of the respective interests of insured group members and their insurers”.

The real issue of interest to insurers is the decision the Court made about the priority that should be accorded to insurers in class actions, when an insured has a partly insured and partly uninsured loss, and the settlement sum was insufficient for both to recover their full losses.

The Insurers submitted that s. 67 of the Insurance Contracts Act 1984 (Cth) (the ICA)[1] applies, and they ought to be entitled to pro rata distribution of the settlement sum. The plaintiff law firm submitted s.67 did not apply and that they should determine the allocation as between the insured group members and Insurers.

The Decision

Her Honour concluded, where the relevant contract of insurance is silent about the priority as between insurer and insured in respect of amounts recovered from third parties:

  1. Section 67 of the ICA did not apply (because, according to Her Honour, the class action settlement was not a “recovery” by the Insurer Objectors, rather, it was a recovery by the group member);
  2. There is no prima facie rule that the settlement sum should be distributed on a pro rata basis between group members and Insurers[2].

What Next for Insurers?

The decision of Her Honour will be a surprising result for many insurers. Insurers must now decide how to respond to the decision. The obvious responses appear to be:

  1. To amend policy wordings so that they are clearly worded to provide for a priority of recovered funds (if the current policy wording does not so provide). This will take time, but (one would think) should not have a negative impact on the commerciality of policies (as most ‘mum and dad’ consumers, such as those who might be struck by bushfire, storm or flood, will not have regard to such a clause when determining who to insure with).
  2. To opt their insured’s out of class actions and take control of their own recoveries (assuming the policy wording allows the insurer to take such action), or amend policy wordings to permit insurers to opt insured’s out of class actions.

[1] Section 67of the ICA, where it applies, determines the priority in which insureds and insurers are entitled to recover moneys and provides rules for the distribution of those funds accordingly. In short, the party who has “recovered” the money will be accorded priority.

[2] There have been many cases in which a division between insurers and insureds on a “pro-rata” basis (as the Insurers sought here) has been adopted by consent. However, prior to this proceeding there was no existing authority considering the application of s 67 to a representative proceeding issued under Part 4A of the Supreme Court Act (Vic) (or similar Australian legislation), or like proceedings in any comparable jurisdiction

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