Insurance for class actions: the importance of an effective aggregation clause

The recent decision of the New South Wales Supreme Court in Bank of Queensland Ltd v AIG Australia Ltd [2018] NSWSC 1689 (Bank of Queensland decision) highlights the importance of having a carefully worded and effective aggregation clause to provide adequate insurance cover in the event of a class action. 

In this instance, the Bank’s policy had an aggregation clause, but the Court found that it was ineffective for the Bank. This meant the Bank had to pay a deductible for each claim in the class action which meant that it had no cover. The decision shows that aggregation clauses that are drafted to respond to a series of related claims may not allow for the aggregation of the multiple claims making up a class action.

In the current climate, where class actions are on the rise, insureds should consider at the outset how their policy will respond in the event that a class action is brought against them.

THE CLASS ACTION

The class action arose from a claim made by Petersen and 191 other group members against Bank of Queensland, and its agent DDH Graham. It concerned Money Market Deposit Accounts (MMDA) that were offered and promoted by the Bank. DDH managed the accounts and promoted MMDAs to financial planners on behalf of the Bank. The financial planners commonly acted as authorised signatories on their clients’ accounts.

Petersen and 191 other parties were clients of Sherwin Financial Planners (SFP). SFP procured these clients to invest in an MMDA and encouraged them to appoint SFP as an authorised signatory. Peterson claimed that SFP was operating a Ponzi scheme and had misappropriated the funds deposited by the clients into their MMDA. Petersen brought a representative proceeding against the Bank and DDH, alleging that they had wrongfully allowed withdrawals from the accounts without the customer’s valid authority.

The matter settled at mediation. The Bank agreed to pay Petersen (on its own behalf and on behalf of the other 191 clients that signed a Class Member Registration Form) $6 million.

THE INSURANCE DISPUTE

The Bank then faced a dispute with its insurer, AIG. The Bank argued that the class action was only one claim and therefore, only one deductible was payable. AIG argued that each affected party had brought a separate claim, therefore the Bank had 192 deductibles.

THE POLICY

The Bank’s Civil Liability Insurance Policy required it to pay a ‘retention’ or deductible of $2 million for ‘each and every claim’ which arose. The Policy also provided that the insurer would only be liable for ‘the amount of loss and defence costs arising from a claim’ in excess of that amount. Accordingly, any claim costing less than $2 million was effectively uninsured.

‘Claim’ was defined in the policy as any suit or proceeding brought by any person against an Insured for monetary damages or other relief.

The Policy contained an aggregation clause which provided that:

“For the purposes of this policy all Claims arising out of, based upon or attributable to one or a series of related Wrongful Acts shall be considered to be a single Claim…”

The question for the Court was whether the class action was one claim or 192 claims.

THE DECISION

The Court found that, although there was only one ‘suit or proceeding’ (the Class Action), there were 191 other ‘claims’ made against the Bank, which all came into being when each party completed the Class Member Registration Form. The Court then considered whether the claims arose out of one wrongful act or a series of wrongful acts such that the Bank could benefit from the aggregation clause.

The Court held that the wrongful acts were the various purported withdrawals made from the MMDA. Each withdrawal was a separate act, made on a different occasion, from a different MMDA, causing loss to different parties and in response to different and separate purported instructions.

The Court stated that these transactions did not have a ‘sufficient degree’ of similarity, an ‘integral relationship’ or the necessary ‘causal’ or ‘logical’ interconnection to constitute a ‘series of related’ wrongful acts. Therefore, these withdrawals were not related and they could not be aggregated to a single claim under the policy.

This Court followed the previous decision of Morgan, Re Brighton Hall Securities (in liq)[1] in which it was said that ‘the whole essence of the representative claim is that there are multiple claims before the court’.[2]

As a result, the Bank was effectively uninsured against the Class Action – as each of the 192 individual claims in the class action was worth far less than $2 million.

TEST FOR AGGREGATION OF CLAIMS

In Australia, a class action may be commenced where:

• seven or more persons have claims against the same person;
• the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and
• the claims of all those persons give rise to a substantial common issue of law effect.

When an insured faces a class action which may consist of a large number of small claims, it naturally wants to be in a position where only one deducible will apply for the entire class action. This is because the effect of applying deductibles to each claim may mean that there is in effect no cover under the policy which would represent a non-commercial outcome.

Unfortunately, as illustrated in the Bank of Queensland decision, problems can arise where the test for aggregating claims for the purposes of imposing a deductible under a policy is narrower than the common factors amongst the class.

Typically, insurance policies allow for the aggregation of claims which arise from a common origin in some act or event specified by the clause or from a series of related acts or events.

In our experience, there is no standard form of wording used in the market and each policy has its own bespoke version of an aggregation clause. This has led to a number of court decisions interpreting specific policy wordings.

In Australia, where companies take out insurance for the purpose of providing cover in respect of class actions, the position taken by insurers in respect of aggregation clauses in the policies seems outdated and uncommercial.

In our view, cover should be provided on the basis that a specific deductible will apply to a class action. Alternatively, existing aggregation clauses should be amended to bring them into line with the test used for the aggregation of claims for the purposes of class actions.

^{[1] [2013] FCA 970.}

^{[2] Morgan, Re Brighton Hall Securities (in liq) [2013] FCA 970.}