Counting The Costs - Important implications for both trustees and insurers in TPD litigation By Roger Frare | October 2007 Area of Expertise | Insurance & Financial Services
Summary Who pays the legal costs and how much is recoverable can have a big impact on group life insurers’ and trustees’ bottom line once the litigation has concluded. These issues were played out in a recent decision which provides a guide as how to best manage your company’s exposure.
Who Does This Impact? Group life insurers, superannuation trustees and their advisors.
What Action Should be Taken? This paper outlines how parties can position themselves to take best advantage of costs orders and how to identify when an Offer of Compromise will be valid or invalid.
In the latest instalment of Sayseng v Kellogg Superannuation Pty Ltd1, the Court was called upon to determine the issues relating to both an award of costs and the basis upon which those costs were recoverable. The Supreme Court proceedings related to the insurer’s declinature of the plaintiff’s claim for a TPD benefit under a group life insurance policy. The plaintiff was successful at first instance and again when the insurer appealed that decision. The plaintiff was unsuccessful against the trustee. At the hearing on costs, the plaintiff was seeking: •
Party/party costs from the insurer up to the date of the Offer of Compromise and Indemnity costs thereafter;
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An order that the trustee pay the plaintiff’s costs of both proceedings on a party/party basis; and
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In the alternative, an order that the insurer pay the trustee’s costs by the making of a Bullock order.
An Offer of Compromise is an offer made by a party pursuant to Rule 20 of the Uniform Civil Procedure Rules 2005. If rejected and the judgment amount is more favourable to the party that made the offer than the amount of the Offer of Compromise, then that party is entitled to an award for indemnity costs from the date of the offer. An award of indemnity costs results in a significantly larger recovery than the amount that is recoverable on an ordinary party/party basis.
The Plaintiff’s Case Against the Insurer The plaintiff served two Offers of Compromise on the insurer with the following terms: •
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Judgment for the plaintiff in the sum of $150,000 plus interest at the Supreme Court rate from 1 April 2001 to date of acceptance, plus costs as agreed or assessed.
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Counting The Costs - Important implications for both trustees and insurers in TPD litigation by Roger Frare
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This offer remains open for 28 days.
The offers were not accepted by the insurer and the plaintiff submitted that he was entitled to indemnity costs from the date of those offers. The insurer accepted that it should pay the plaintiff’s costs, but contended that the costs should be payable on an ordinary party/party basis. Further, it was submitted that: “The offers required judgment in favour of the plaintiff and as such were based on a misconception of the arrangement between the insurer and the trustee and a failure to recognise that he could not obtain judgment for an amount under the policy payable by the insurer to him.” Nicholas J agreed with the insurer and ordered that the plaintiff was only entitled to costs on an ordinary party/party basis. His Honour stated that “in my opinion the insurer is not open to criticism for rejecting a proposal whereby it was required to accept a judgment which could not have been obtained by the plaintiff in the proceedings”2.
The Plaintiff’s Case Against the Trustee Despite being unsuccessful in his claim against the trustee, the plaintiff submitted that he was entitled to receive payment of his costs. It was argued that he was compelled to join the trustee to the proceedings as he had no direct relationship with the insurer. Further, the plaintiff contended that “when the proceedings are viewed overall, the plaintiff should be regarded as successful against both the trustee and the insurer in that he has established entitlement to payment from the fund, being a result which should carry with it an order for costs against both defendants”. Nicholas J preferred the trustee’s submissions that costs should follow the event and ordered the plaintiff to pay the trustee’s costs on an ordinary party/party basis.
The Plaintiff’s Claim for a Bullock Order Following his unsuccessful application against the trustee, the plaintiff submitted that the Court should make a Bullock order, being an order that the unsuccessful defendant (the insurer), pay the costs of the successful defendant (the trustee)2. It was put that, because the success of his claim against the trustee depended on latter being entitled to payment under the policy, the insurer effectively controlled the settlement of his claim by the trustee. In response, the insurer submitted that the plaintiff’s decision to join the trustee was not attributable to the insurer’s conduct or its relationship with the trustee and in any event, the trustee was successful against the plaintiff. Nicholas J was persuaded by the plaintiff’s argument. His Honour found that the litigation was triggered by the insurer’s denial of liability under the policy and agreed with the plaintiff’s submission that he was forced to join the trustee as it was the only party against which the plaintiff had a direct claim. Nicholas J stated that: “He was forced to rely on payment by the insurer to the trustee under the policy who, in turn, enabled payment by the trustee from him to the fund…the wrongful conduct of the insurer precluded the trustee from meeting the plaintiff’s claim regardless of the trustee’s bona
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Counting The Costs - Important implications for both trustees and insurers in TPD litigation by Roger Frare
fide conduct in forming its own opinion … shortly stated, the reality was that the plaintiff’s path was blocked as a result of the insurer’s breach of duty of good faith and fair dealing towards him.” Accordingly, his Honour found that the insurer should pay the trustee’s costs of the proceedings on a party/party basis by the making of a Bullock order.
Implications The Court’s refusal to award indemnity costs to the plaintiff is a welcome decision for group life insurers. It means that an insurer can now reject a plaintiff’s Offer of Compromise when it is not constructed appropriately, without fear of reprisal in the form of an indemnity costs order. In this regard, upon receipt of an Offer of Compromise insurers and trustees should consider the following approach: •
Examine the actual terms of the offer and ascertain whether the plaintiff can actually obtain those specific orders at the hearing, i.e. is the offer valid?
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Consider the prospects of success at the hearing.
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Analyse whether the offer is more or less favourable than what the plaintiff could possibly obtain at the hearing.
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Make a commercial decision to accept or reject the offer.
The decision does however sound a warning note for group life insurers in dealing with trustees as it confirms that they will be ordered to pay the trustee’s costs via the making of a Bullock order, in circumstances where the trustee’s decision is dependant upon the receipt of an insured benefit from the insurer and the trustee becomes a party to the litigation as a result of the insurer’s unsuccessful denial of the claim. It follows that insurers should consider their relationship with trustees and in certain circumstances may be better off, where possible, to offer to indemnify the trustee and take over the defence of the proceedings on the trustee’s behalf by mutual agreement.
In drafting group policies, trustees and insurers should consider making provision for the management of litigated claims and consider the inclusion of subrogation of rights clauses.
Endnotes 1
[2007] NSWSC 1009 Pursuant to the decision in Bullock v London General Omnibus Co (1907) 1 KB 264 see also the principles elucidated in Gould & Anor v Vaggelas & Ors (1983-1985) CLR 215 2
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Counting The Costs - Important implications for both trustees and insurers in TPD litigation by Roger Frare
For more information, please contact:
Roger Frare Lawyer T: 02 8257 5753 roger.frare@turkslegal.com.au
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