Upcoming Mallesons seminars
Headed by partners Hugh Scott-Mackenzie, Mark Darian-Smith and Justin McDonnell, our Brisbane team acts for insurers and larger self insured professional firms. The partners are assisted by senior associate Jennifer Fairfull and solicitor Anna Weedon.
The group practises principally in the defence of professional indemnity claims against accountants, solicitors and valuers, as well as public liability claims.
All members of our Brisbane team belong to a number of insurance related organisations both in Queensland and nationally. Some of our team currently serve as committee members to those organisations.
Justin McDonnell
Justin has been a partner of the firm since 1 January 1998. His practice largely encompasses indemnity issues for professionals. He has a particular interest in medical issues having advised clients in relation to matters such as ownership of medical records and on the health industry in Queensland. Justin has advised the Pharmaceutical Society of Australia (Queensland Branch) on The Compensation Policy and Reform Act 1995 and represented the Society at a Medical Trade Practices Forum conducted by the ACCC in 1996.
Justin worked for Linklaters & Paines in England for several years and dealt extensively with the Lloyd's and Institute of London Underwriters' markets, particularly on asbestosis issues. He also advised on the insolvent administration of London United Insurance.
Justin is the contributory editor to the chapter on "Insurance Intermediaries and Clients" in the text Law of Commercial and Professional Relationships.
Hugh Scott-Mackenzie
Hugh has been a partner of the firm since 1980. He has acted for insurers in a variety of matters ranging from professional indemnity and public liability claims to actions instituted by insurers against agents. Hugh has also dealt with a number of matters involving medical negligence and has served as the honorary solicitor of the Royal Flying Doctors Service (Victoria branch) and is a former legal member of the Dental Board of Queensland.
Mark Darian-Smith
A partner of the firm since 1991, Mark has handled several major professional indemnity claims, ranging from claims based on audits to tax advice. He has also advised on public liability matters and policy interpretation claims.
Jennifer Fairfull
Jennifer is a senior associate in the practice.
For more than seven years, Jennifer has acted for insurers representing solicitors, accountants and valuers. Her practice includes advising insurers on policy interpretation and indemnity issues. She has represented numerous private insurers in public and product liability and aviation matters.
Jennifer's experience extends to medical negligence. She has acted for the Medical Defence Union, various regional health authorities, private hospitals and private insurers. Jennifer's practice has included representing medical and health care professionals before the Medical Assessment Tribunal, Physiotherapist Board, Coronial Inquests and the preparation of material for Commissions of Inquiry.
Anna Weedon
Anna is a solicitor in the group whose practice involves acting for professionals in negligence and breach of retainer claims, as well as advising insurers on indemnity, liability, policy interpretation and general insurance agency issues.
International Recognition
Peter Stockdale, a partner of the insurance group based in our Sydney office has been named in Euromoney Legal Group's "Guide to the World's Leading Litigators". Peter is one of only seven litigators from Australia to receive a nomination.
Australian Insurance Institute
This is a comprehensive website providing information about the Institute and the services it offers. The site provides brief summaries of articles appearing in the AII Journal, although readers must request a hard copy of the journal itself in order to read a complete article. The site provides a useful search facility which enables users to access the resources of the AII library. Detailed information is provided on all courses offered by the Institute and upcoming events.
World Insurance Network
The World Insurance Network was established in 1995 as an initiative to provide electronic commerce services to the global insurance industry. This website contains general information about the organisation and provides access to articles and white papers concerning current issues involving electronic commerce and the insurance marketplace.
Government Resources on the world wide web
This site provides an excellent resource offering links to a comprehensive range of Federal and State Government websites. The site provides an effective "one stop shop" for anyone seeking information from a Government organisation
Insurance News Network
This American website is perhaps one of the most comprehensive industry based sites on the internet. The site offers general advice to consumers and provides a wealth of information concerning various insurance companies and products. The site also provides news reports relevant to the insurance industry. Although essentially a facility for American consumers, participants in the Australian insurance industry may find this site of interest.
Insurance Laws Amendment Bill 1997
Underwriters of Lloyd's of London will soon be required to provide extra protection for Australian policyholders by establishing security trust fund arrangements in order to satisfy judgments obtained in Australia against the underwriters. The Insurance Laws Amendment Act 1997 assented to on 22 April 1998, amends the prudential supervisory arrangements under Part VII of the Insurance Act 1973 so as to reflect the restructuring of Lloyd's in the UK and make adequate preparation for any future liabilities.
The Act reflects the response in the UK to the heavy losses suffered by Lloyd's in the late 80s and 90s which made questionable the additional security provided by Names and the members' trust fund. The Australian legislation will, amongst other things, give the proposed Australian Prudential Regulation Authority (APRA) similar powers to externally regulate Lloyd's as those to be held by the Financial Services Authority in the UK.
The major changes the Insurance Laws Amendment Act introduces in relation to the regulation of Lloyd's include the following.
Security trust funds to meet debts of Lloyd's underwriters
The establishment of `designated security trust funds' by Lloyd's underwriters in Australia, including former underwriters, to make funds available for the satisfaction of final judgments obtained in Australia against Lloyd's underwriters in respect of any class of insurance liabilities specified in the trust deed. The trustee is required to be a qualified corporation.
Security deposit to meet costs of judicial trusteeship
The funds may be placed under the judicial trusteeship of the Federal Court if the Court is satisfied that it is in the interests of the relevant policyholders or the fund is not being properly managed. Lloyd's, or a company nominated by Lloyd's, is required under the Act to provide to the Treasurer a deposit of $2 million, the ownership of which is transferred to the Commonwealth, to be available to meet the costs of judicial trusteeship of the trust funds. The Treasurer is to return any interest on the security deposit on application by Lloyd's, in order to maintain equality between Lloyd's and other corporate insurers who are free under the 1973 Act to invest the solvency margin amount.
Regulatory powers held by APRA
- Under the Act, the APRA has power to suspend or cancel authorisation for Lloyd's to carry on insurance business. It is interesting to note that this power is also exercisable if as a result of UK legislation, a substantial change is made to the constitution, powers, rights or obligations of Lloyd's or of Lloyd's underwriters. But it is unlikely to be used in this context since any move toward external regulation in the UK is unlikely to prejudice policyholders.
- The APRA has powers of inquiry, direction and investigation in relation to the designated security trust funds, enabling it to monitor closely the adequacy of the security provided by them. The APRA is also able to requisition actuarial reports which may provide advance notice of any threat to policyholders.
- The Act also provides for similar powers to regulate record keeping, auditing of accounts and disclosure as those which are currently held by the Insurance and Superannuation Commission in relation to corporate insurers.
Whilst recognising the unique role Lloyd's plays in the international insurance market, the Insurance Laws Amendment Act 1997 is intended to place Lloyd's underwriters on a level playing field with its competitors as regulated by the Insurance Act 1973. It is hoped that the safeguards provided by this Act will be sufficient to cover any future contingencies but that the future performance of Lloyd's will make recourse to them unnecessary.
Implementation of the Government's response to the Wallis recommendations following the Financial Systems Inquiry announced on 2 September 1997 is well on the way. The Australian financial sector reform legislation package was introduced on 26 March 1998 into the House of Representatives and has been passed in the form as introduced. The last bill in the package was debated by the Senate on 29 May and passed with some amendments. It is now remitted to the Lower House and due to be debated shortly, together with the other bills in the package which were amended by the Senate. It is still intended that the new framework for financial regulation will be in place by or shortly after 1 July 1998.
The Wallis recommendations which affected the insurance industry were discussed in the June 1997 issue of the Insurance Update. The legislation package is designed to implement those recommendations including,
- The establishment of a single Commonwealth agency to carry out prudential regulation of deposit-taking institutions, life and general insurance companies and superannuation funds to provide comparable regulation of all financial products. The agency is to be named the Australian Prudential Regulation Authority (APRA).
- Arrangements for the establishment of a single regulator to provide Commonwealth regulation of corporations, market integrity and consumer protection in the financial system. The proposed regulator, named the Australian Securities and Investments Commission (ASIC), will take over such responsibilities currently undertaken by the ASC, the ISC, the ACCC, the Australian Financial Institutions Commissions and associated State supervisory authorities.
As a consequence of the formation of APRA and ASIC, the existing responsibilities of the ISC are to be allocated between the two new regulators. This is to be effected through amendments to various insurance legislation by the proposed Financial Sector Reform (Amendments & Transitional Provisions) Act 1998,
- The Insurance & Superannuation Commissioner Act 1987 is repealed thereby abolishing the office of the ISC.
- The regulatory responsibilities under the Insurance Contracts Act, the Insurance (Agents & Brokers) Act, section 113 of the Insurance Act (dealing with Code of Practice compliance) and the provisions relating to market integrity and consumer protection regulation in the Life Insurance Act are transferred to the ASIC.
- The regulatory responsibilities under the Insurance Act (except section 113) and the prudential regulation provisions of the Life Insurance Act are transferred to the APRA.
The package also includes a new Financial Sector (Shareholdings) Bill designed to implement a standardised regime for shareholding rules governing financial institutions including those in the insurance and deposit-taking sectors. Amendments to the Insurance Acquisitions & Takeovers Act facilitated the streamlining of such regulation by transferring responsibility for regulation of acquisitions and of issue of shares in Australian insurance companies from the ISC to the APRA.
Policy considerations have always played a part in the law of negligence and its development. Two recent decisions in the New South Wales Court of Appeal have highlighted the significant part public policy has played and continues to play. In CSR Limited v Wren (Court of Appeal 18 December 1997) and CSR Limited v Young (Court of Appeal 25 February 1998), the Court of Appeal considered the role of policy in the context of proximity.
Wren was a worker at Asbestos Products Pty Limited's (AP) factory situated in Alexandria, NSW. CSR was the holding company of AP.
In Young, the injured party lived as a small child at Wittenoom where blue asbestos was mined. Australian Blue Asbestos Limited (ABA) mined the asbestos located in and near Wittenoom. ABA was a wholly owned subsidiary of CSR.
In both cases, the Court of Appeal found CSR owed a duty to the injured plaintiffs. In Wren, the Court considered the part policy has played in the development of negligence and particularly proximity.
In establishing the parameters upon which to base its decision that a duty of care was owed, the Court of Appeal relied upon a summary given by Dawson J in Hill v Van Erp, (1997) 71 ALJR 487 where he said:
"Where a new category [of duty of care] is suggested, regard should be had in the first place to the established categories which may be helpful by way of analogy in determining whether to recognise a duty of care. That is how incremental development takes place. The process is effected by relevant policy considerations, such as the need to avoid indeterminate liability or the place of impediments in the way of ordinary commercial activities ... In the end, policy considerations will set the outer limit of the tort. As Lord Pearce said in Hedley Byrne & Co Limited v Hellar & Partners Limited: "How wide the sphere of duty of care in negligence is to be laid depends ultimately upon the court's assessment of the demands of society for protection from the carelessness of others".
CSR relied upon the fact that Wren was not an employee of CSR as one of the grounds for asserting that no duty of care arose.
The Court of Appeal looked at the nature of the relationship between CSR and AP and noted the following,
- The management staff of AP were CSR employees.
- The manager at AP had control over AP employees but not CSR employees.
- There was no evidence that the AP board directed or controlled a system of work or the working conditions in the factory.
Given that the whole of the management staff responsible for the operational aspects of AP's enterprise and therefore the conditions in which Wren worked were CSR staff, the court of Appeal found that CSR had a duty directly to Wren and that duty was co-extensive with that owed by an employer to an employee.
Further, the Court held that there were no policy considerations which required that duty to be modified or abrogated. Specifically, the Court said to impose a duty of care on CSR in the circumstances was not to expose it to liability "in an indeterminate amount for an indeterminate sum to an indeterminate class." That duty was already owed by CSR to its own employees who worked at AP. The imposition of a duty so formulated will not frustrate or restrict commercial activity. The reason CSR was found to be liable was that it brought itself into a relationship with the employees of AP by placing its staff in the role of management at AP.
In Young the Court of Appeal considered the corporate relationship between CSR and ABA. CSR conceded a duty of care was owed by it to the workers employed by ABA. The Court found that CSR conducted operations at the mine through ABA. There was no reason to distinguish between the operations at the mine and the activities undertaken by ABA in running the town. It was these activities to which Young was exposed as a consequence of living in the town, and thus CSR had breached the duty it owed to Young.
Commentary
For insurers and corporations exposed to liability claims of this nature, the extension of the existence of a duty of care to the holding company in the circumstances in which CSR was placed is significant. The finding was not based upon the "piercing of any corporate veil" but by the extension of the concept of proximity giving rise to a duty of care. The Courts were careful to illustrate that these cases were simply further developments of existing principles and reinforced the part public policy plays in establishing the parameters of a duty of care.
Duke Group Limited (in liquidation) v Pilmer & Others
Supreme Court of South Australia (Mullighan J) - 30 January 1998
A recent decision of the Supreme Court of South Australia illustrates the potential liability of the members of a national partnership.
Nelson Wheeler's Perth office was retained to provide the shareholders of Kia Ora Gold Corporation NL (which later changed its name to The Duke Group) with a takeover report concerning the price of Western United Limited shares. The report was required pursuant to The Listing Rules of the Australian Stock Exchange. The report concluded that the price of the Western United shares was fair and reasonable and the Kia Ora shareholders subsequently gave their approval to the takeover.
Nelson Wheeler's valuation of the Western United shares turned out to be grossly inflated. Kia Ora paid approximately $112 million to complete the takeover. It transpired that the company was only worth about $5 million.
In an action brought by the liquidators of the Duke Group, the Court held that damages of over $94 million were payable. Liability for damages was apportioned between Nelson Wheeler and the directors of Western United (who had been aware of the overvaluation).
An important issue arose as to the liability of the individual partners of Nelson Wheeler. The plaintiff argued that Nelson Wheeler was a national firm of chartered accountants and consequently all of the national partners of Nelson Wheeler were jointly and severally liable to pay damages to the plaintiff. Nelson Wheeler argued that its organisation was merely an association of firms in different centres in Australia. It maintained that it did not operate a partnership but a federation of separate and distinct firms.
The Court considered the origin of the Nelson Wheeler organisation.
- A meeting had taken place in 1972 between representatives of accounting firms from Brisbane, Sydney, Melbourne, Adelaide and Perth. That meeting resolved that the parties would work together to form a national partnership and to co-ordinate business.
- A deed was subsequently drawn up recording the terms of the arrangement. The deed expressly purported to exclude the law of partnership. It envisaged a structure whereby the various firms would carry on independently but would co-ordinate for mutual benefit, using a single name.
The law of partnership required the Court to consider the reality of the business organisation, not just the documents creating the affiliation between the firms.
The Court found that the reality of the Nelson Wheeler organisation was that it practised as a national partnership.
- The organisation promoted itself as a national firm (in fact, there was a passage in the takeover report describing the firm as "a national firm of practising accountants with world-wide affiliates and associates").
- Representatives of the different offices of Nelson Wheeler participated in a national conference, co-ordinated relationships with national clients, and formed national committees to provide a consistent approach in such functions as auditing.
- The Nelson Wheeler offices also standardised fees, arranged referral work to one another and created common publications and brochures. The various offices of the organisation also co-ordinated to obtain national professional indemnity cover.
- All of the offices went by the name "Nelson Wheeler" and used common signage, stationery and advertising.
Having considered all of these factors, the Court concluded that the national organisation was, in reality, a partnership. The legal tests for partnership were met, namely; the organisation carried on the business of chartered accounting and this business was carried on in common between the various offices with a view to a profit.
The Court held that all of the members of the national organisation were liable to the plaintiff.
Commentary
This decision is a warning to those seeking to limit liability by way of separate partnership. Simply disavowing partnership - even by way of formal documentation such as a deed - will not necessarily insulate individuals from joint and several liability. If the reality of a business organisation is that it operates with members contributing to a common business venture for common profit there is a likelihood that a conclusion will be drawn that the organisation is, in truth, a partnership.