5 things we learn from the decision of the New South Wales Court of Appeal in Bank of Queensland v AIG Australia Limited.
The Petersen Superannuation Fund (‘Petersen’) and other investors innocently invested in a Ponzi Scheme. They deposited their funds into bank accounts which they had each opened with the Bank of Queensland (‘Bank’) in accordance with the Scheme’s requirements.
The Scheme’s operators withdrew the funds from those accounts for their own purposes.
In March 2016, Petersen, on its own behalf and on behalf of the other investors, filed Representative Proceedings in the Federal Court of Australia against the Bank. Petersen and the investors alleged that the Bank had failed to protect them by permitting their funds to be withdrawn when it knew that the Scheme was fraudulent.
In February 2018, the parties convened a mediation. The mediation resulted in the settlement of the Representative Proceedings on terms that the Bank pay Petersen and the investors $6 million.
The Federal Court of Australia approved the terms of that settlement on 6 March 2018.
The Bank held a civil liability insurance policy with various insurance companies. It made a claim for indemnity in respect of the amount which it had agreed to pay Petersen and the investors.
The insurers rejected the Bank’s claim. They argued that the Representative Proceedings involved numerous claims against the Bank each attracting a separate retention. As the total number of retentions exceeded the amount which the Bank had agreed to pay Petersen and the investors, the insurers argued that they were not obliged to pay anything.
The Bank took objection to the insurers’ response. It argued that the policy aggregated the Representative Proceedings into a single claim and, accordingly, limited the Bank’s obligation to one retention.
The Supreme Court of New South Wales supported the insurers. The Bank successfully appealed to the New South Wales Court of Appeal. The Court held that pursuant to the terms of the policy, the Representative Proceedings constituted a single claim attracting one retention. The insurers were therefore liable for the balance of the settlement amount.
Here are five things which we can take away for the Court of Appeal’s decision.
1. Policy Interpretation and the Role of the Reasonable Businessperson
Before the Court of Appeal even addressed the meaning of the insurance policy’s terms and conditions and their application to the relevant facts, it specifically noted the proper approach to policy interpretation.
The perspective is an objective one – what would a reasonable businessperson have understood the policy’s terms and conditions to mean? The factors which inform the reasonable businessperson’s understanding are the policy’s text, context and purpose.
The clause requiring the Court’s attention in this matter was an aggregation clause. As aggregation clauses are often expressed differently or set in different contexts, previous cases which have considered such clauses, offer little assistance. The reasonable businessperson can only take guidance from the clause’s text, context and purpose.
2. Representative Proceedings can constitute Multiple Claims.
Clause 2.2 of the insurance policy provided as follows ‘Claim means
(i) any suit or proceeding, including any civil proceeding, third party proceeding counter claim or arbitration proceeding (including proceeding before the Financial Ombudsman Service, brought by any person against an Insured for monetary damages or other relief, including non-pecuniary relief;
(ii) any verbal or written demand from any person that is the intention of the person to hold an Insured responsible for the results of any specified Wrongful Act;
(iii) any criminal proceedings brought against an Insured regarding any specified Wrongful Act of an Insured.
‘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; conversely where a claim involves more than one unrelated Wrongful Act, each unrelated Wrongful Act shall constitute a separate Claim.’
As the underlined words reveal, clause 2.2 concerns a 'suit or proceeding’ brought by any person against the insured. Does that extend to a ‘suit or proceeding’ brought on behalf of those persons?
The majority of the Court of Appeal accepted that the Representative Proceedings was structurally one ‘suit or proceeding’ but looked beyond that structure to conclude that the Representative Proceedings were really proceedings brought by each Member of the Representative Group particularly from the time each Member registered to become a class member.
They found further support for this conclusion in the Representative Proceedings itself, particularly the relief sought and the orders which the Representative Proceedings invited the Court to make.
3. One Wrongful Act
Clause 2.2 the policy was attracted if the claims emanated from the ‘one wrongful act’. What does the expression ‘one wrongful act’ mean?
The particular facts of the matter will answer this question.
The Bank argued that there was one wrongful act namely instructing its staff to continue to process withdrawals from investors’ bank accounts with the full knowledge knowing that the party giving the Bank the instructions to release the funds, was conducting a Ponzi Scheme.
The Court rejected this argument. Issuing a decree does not itself give rise to a claim. The act was releasing the funds on the rogue’s instructions knowing that the rogue was conducting a Ponzi Scheme. Each release of funds was, in the circumstances, a Wrongful Act.
The multiple claims against the Bank did not emanate from the ‘one wrongful act’. They emanated from multiple wrongful acts.
4. What work does the expression ‘series’ do?
Clause 2.2 refers to a ‘series’ of related wrongful acts. What work does the word ‘series’ do in that context?
There are two basic requirements.
Firstly, there is a requirement that the relevant events follow each other in a temporal succession. The courts do not see this as a very restrictive requirement and consider it satisfied in the absence of coincidence.
Secondly and only faintly, the relevant events must be similar in nature. The reference to faintly also recognises that there is an express additional requirement that where there is more than one wrongful act, those wrongful acts be related.
5. How are the Wrongful Acts related?
If there is more than one wrongful act, as the Court found to be the case in this matter, clause 2.2 required that those wrongful acts not only be in temporal succession but that they also be related. But related how?
Not all policies will use the same concept to relate one act to another. Some policies might require the acts to share a feature. Others might require the acts to flow from a common cause or collectively cause the claims against the insured.
Clause 2.2 of the insurance policy required the acts to share a feature. They had to be related wrongful acts.
The Court held that they were related. The majority considered it enough that the Representative Proceedings alleged the acts to be wrongful. The Chief Justice went further pointing to the similarity in their surrounding circumstances and, in particular, the fact that each of the Group members had the same financial planner who was an authorised signatory on the Group member’s account with the Bank and each payment was made when the Bank knew of the financial planner’s fraudulent activities.
Policy Drafting Tips
The language which insurers choose to use in drafting their aggregation clauses will be heavily relied upon by the courts to determine whether the clause has been engaged or not.
The key consideration is how insurers want to relate the relevant acts and omissions to each other. They may want to focus on their features. They may want to focus on their effect.
Courts will see this case as authority for the treatment of the claims within Representative Proceedings so if that is a risk that insurers are underwriting, how insurers aggregate claims may require specific attention.
The name of the case is Bank of Queensland Limited v AIG Australia Limited  NSWCA 190