Insurance List jurisdiction - NAB v Nautilus Insurance

In 2016, the Federal Court introduced the Insurance List for Short Matters. Its intention was to provide a forum for the quick and efficient resolution of insurance disputes, primarily concerning policy construction and questions of law.

The recent decision in National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543 (NAB v Nautilus) has shown just how an effective tool it may be, particularly for insureds, when used strategically.

Background

From the late 1980s until February 2016, National Australia Bank Limited (NAB) wholly owned Clydesdale Bank Plc (Clydesdale), a bank operating in the United Kingdom.

In 2012, the Financial Services Authority (now known as the Financial Conduct Authority) (Regulator), found Clydesdale had mis-sold Interest Rate Hedging Products (IRHP), such as stand-alone derivative products and tailored business loan products. 

Clydesdale and NAB entered into an agreement with the Regulator to conduct a review and redress program concerning its sales of IHRPs (IHRP Program). They were amongst a number of UK-based banks to enter into an agreement of this type.

The IHRP program extended to products that were not regulated. This was one of the central issues between NAB’s and its insurers. 

Soon after commencing the IHRP program, Clydesdale and NAB began a similar program into the sale of fixed rate loans (Fixed Rate Loan Program). Clydesdale and NAB were not obliged to begin the Fixed Rate Loan Program but commenced it following customer complaints.

NAB subsequently sought indemnity under “Comprehensive Crime/Electronic Crime and Civil Liability Insurance Policies” (Policies) for both of the review and redress programs. Nautilus Insurance Pte Ltd was the insurer of the Policies for each of the policy years from 31 March 2012 to 31 March 2015. Each of these Policies were in substantially the same terms. Nautilus, in turn, entered into separate reinsurance policies for each of the relevant policy years. Those reinsurance policies were underwritten by various underwriters at Lloyd’s.

NAB’s claim was for the amounts paid as compensation to aggrieved customers and for the costs of conducting the programs (the latter as Defence Costs). Its total claim is in excess of £357 million. Because of the size of the claim, the Policy’s reinsurers became involved and took over conduct.

NAB’s solicitors and the solicitors for the two groups of reinsurers entered into extensive correspondence concerning NAB’s claim. This correspondence was crucial to Allsop CJ’s finding of jurisdiction.

The dispute

The substantive dispute between NAB on one hand, and Nautilus and the various reinsurers on the other, is set to be an interesting one. Broadly, it centres on the question of whether NAB is required to prove a pre-existing legal liability for each individual claim before it is entitled to indemnity. However, this is but one aspect of a “large, complex and interconnected controversy,” of which it was common ground that the proceeding would leave a large number of issues still to be resolved after its conclusion.

Because of this, when NAB proposed issuing proceedings seeking resolution of theses construction issues, the solicitors for one of the groups of reinsurers objected to the proposal. They insisted the proceeding should be commenced, if at all, incorporating all issues in dispute. They also foreshadowed an application challenging the Federal Court’s jurisdiction to hear a matter confined to the construction issues.

NAB soon after commenced the proceedings seeking the Court make declarations relating to the Policies’ construction. The declarations NAB seeks in the proceeding are substantially the same for each policy year.

 NAB’s declarations

The declarations NAB seeks maybe paraphrased as:

1. a declaration that the definition of Civil Liability includes agreements with third parties to pay the third party damages or compensation to settle a claim;

2.  a declaration that the definition of Loss included the payment of damages or compensation pursuant to a settlement agreement; and

3.  a declaration it is unnecessary for the purposes of:

   1. satisfying the definition of Civil Liability; or

   2. satisfying the definition of Loss; or

   3. satisfying the Assured’s entitlement to indemnity in respect of Defence Costs,

   for the Assured to first establish that it was legally liable to the third party.

Reinsurers’ application

As foreshadowed, the reinsurers made an interlocutory application seeking, amongst other things, to have the originating motion set aside or the proceedings dismissed, or summary judgment entered in favour of the respondents.

The reinsurers submissions in support of the application were, broadly, that the proceeding was not a matter attracting the Court’s jurisdiction. Alternatively, they submitted that the questions left unresolved rendered the proceeding hypothetical or inutile.

 The decision

Does the Federal Court have jurisdiction?

Allsop CJ dismissed the reinsurers’ application. In doing so, His Honour held the proceeding was a matter attracting the Court’s jurisdiction under s76 of the Constitution (Cth) and s39B(1A) of the Judiciary Act 1903 (Cth). This was despite the act of Parliament which enlivened s76 of the Constitution and s39B(1A) of the Judiciary Act, namely the Insurance Contracts Act 1984 (Cth) (ICA), not being directly relevant to an issue to be determined in the proceeding.

After considering the authorities, Allsop CJ concluded (at [84]):

Once one appreciates that the controversy identified independently of the proceedings is the matter, and if the matter is one that engages s75 or s76, the whole or part of that matter can be the subject of proceedings in a federal court if that court has jurisdiction to hear the matter by conferral of the relevant jurisdiction by reference to s75 or s76. If only part of the matter is sought to be resolved by the proceeding the court will not be denied authority to decide it because no federal issue is involved in the proceeding, as long as the question that arises in the proceeding can properly be seen to be part of a matter within federal jurisdiction, that is as part of “the controversy which is amenable to judicial determination in the proceeding. (references omitted)

As a result, Allsop CJ looked to the entire ambit of the controversy between NAB on one hand, and Nautilus and the reinsurers, on the other, to determine whether it contained a “matter”. In doing so, he considered the totality of the issues raised in correspondence between the parties.

In that correspondence, amongst other things, NAB purported to notify Nautilus and the reinsurers of a claim relying on s54 of the ICA and a prospective claim for interest under s57 of the ICA. Additionally, NAB’s statement of claim made reference to its reliance on s54 of the ICA, though it formed the basis of no issue to be determined in the proceeding.

In what was a rather courageous submission, the reinsurers argued that mere reference to s54 was inadequate to provide a basis for jurisdiction. They submitted s54 merely “deprives insurers of what would otherwise be a basis for refusing to pay a claim under an insurance contract; it does not confer upon the insured a right that owes its existence to Federal law.” (At 94)

Allsop CJ held (at [95]):

I reject that submission. In relation to any contractual term such as requiring notification within the policy period, General Condition 2(i)(c), or General Condition 2(i)(e) that would in contract deny the insured a right to claim by giving the insurer a basis in contract not to pay, s54 operated as the foundation for the legal entitlement to deny the insurer’s contractual right. Without it, and without its operation, a contractual claim would fail; with it, and with its operation, the contractual claim can be made and enforced, subject to the statutory regime in the section. The federal law and its operation lie at the foundation of the insured’s rights; and at the foundation of the enforcement of the insured’s rights. Section 54 is a section which modifies the effect of contractual rights to enable a contractual claim to be made by denying a contractual basis for refusal to pay and substituting statutory rights based on proportionality.

Further, His Honour noted that s57 provides a code for the right to claim interest under the ICA.

The result was that ss54 and 57 were found to be sufficient hooks upon which to hang the Court’s jurisdiction. The only question left was whether they did so in this case, when the issues were not before the Court. Ultimately, Allsop CJ’s concluded they did.

Was NAB seeking answers to hypothetical questions?

Another argument the reinsurers made against NAB’s proceeding was that there was no real question to be resolved because it produces no foreseeable consequences for the parties. That is to say that the proceeding required the Court to answer hypothetical questions.

Again, Allsop CJ rejected this submission. In essence, he concluded that it did not matter that the declarations would leave questions still to be determined between the parties and thus would leave indemnity in doubt. The important thing for His Honour was that the proceeding would resolve a crucial issue in the dispute around which other issues centred. On this point, the reinsurers’ characterisation of the construction issue as an “important element” and a “fundamental bar to coverage” and an “insuperable problem” in correspondence with NAB’s solicitors came back to bite them.

Ultimately, His Honour concluded (at 120):

The proceeding discloses a matter, being the resolution of one aspect of the overall controversy. There are foreseeable consequences in that NAB (and all parties) will have the content of its (and their) rights and obligations under the policies clarified for the making of choices as to the conduct of the litigation. There is nothing theoretical or hypothetical whatsoever about the claim. The declaration will be given by reference to the agree or found facts relevant to the relief claimed. The answer to the questions involved in the declaration have been said by the reinsurers’ solicitors to be important in the languages that I have already quoted.

Did NAB’s proposed declarations lack utility?

Similarly, Allsop CJ rejected the reinsurers’ submission that the declarations lacked utility.

The reinsurer’s argument in this regard concerned the interlocking complexities of the case that will remain unlitigated.

His Honour agreed that the dispute is complex. However, His Honour held that this complexity was centred around a clear construction point. Again, the reinsurer’s solicitors’ comments about the importance of these construction points in correspondence was a basis for this finding.

In weighing this point, the Court’s goal of efficiently resolving disputes was quite important. Allsop CJ emphasised that construction point would likely not take more than a day to argue. It would avoid substantial costs of preparing a case proving pre-existing liability in each case, which may prove to have been unnecessary. That gave the case a practical utility.

 Conclusion

This decision highlights the usefulness of the Insurance List as a tool for the quick resolution of discrete insurance issues. Allsop CJ emphasised this in the following passage:

One of the purposes of this list was to provide a facility for insureds and insurers to have resolved short issues, short of a full trial, to facilitate the resolution of a wider dispute. I fully recognise that long experience tells one that the shortest way home in litigation is sometimes just to hear the case in full. But experience also tells one, and the experience of this List is clear, that with willing parties demonstrating a commitment to the overriding purpose in Pt VB of the Federal Court of Australia Act 1976 (Cth) and to solving a mutual commercial problem in good faith, shorter, cheaper and targeted techniques can be used to resolve the heart of a problem, allowing the parties to exercise common sense in the resolution of the balance of the matter.

That these kinds of issues may be determined without the need to prepare evidence and argument on every possible issue makes this mechanism particularly attractive for insureds.

However, it is still necessary to take care and advice before launching proceedings such as these as there is a possibility of an Anshun estoppel argument which may prevent further litigation after the declarations were made. Though, as Allsop CJ points out, those principles are not of mechanical application.

Ultimately, the decision highlights the importance of taking a strategic approach to insurance claims from the start of the claim process, particularly as the correspondence between the parties at this stage may form the basis for a court’s findings concerning the ambit of any dispute concerning that claim and thus the availability of the Insurance List to help in its resolution.

Edit 25/10/2019: One thing probably occurred to you when reading this but I felt I should make explicit is that if this decision stands, it potentially opens the way for similar proceedings in other commercial disputes. Obviously, those proceedings would also need to be the subject of careful advice before commencement so as to avoid the potential of an Anshun estoppel.

Update: The proceeding concluded in December 2019. Read my commentary about it here.