Paul O’Brien – Director
Dougal Langusch – Director
On 18 September 2024, the NSW Court of Appeal delivered its judgment in relation to the long-running coverage dispute between CIMIC Group Limited (formerly Leighton Holdings Limited) and a number of its D&O insurers on the 2010 and 2011 years of account: Zurich Australian Insurance Limited v CIMIC Group Limited & Ors [2024] NSWCA 229.
The decision represents a significant development in Australian insurance law and deals with a wide range of coverage issues including declaratory relief, non-disclosure and misrepresentation, continuous cover, notification and equitable contribution between insurers.
YPOL acted for Zurich, which was one of four appellants. Zurich was successful in setting aside declaratory relief granted by the primary judge against it and other insurers on the 2010 D&O program.
This article provides an outline only of this complex and important judgment, which will likely be of significance for the numerous coverage issues that can emerge from large financial lines claims on multi-layer insurance programs. Each of those issues deserves separate and detailed attention.
Background
CIMIC is a large construction group based in Australia with multinational operations. In 2010, when it was a publicly listed entity known as Leighton, it submitted bids for the first and third phases of a large US-funded project involving the construction of oil infrastructure in the Persian Gulf off Iraq.
In late 2011, during document review for an unrelated class action, Leighton’s solicitors came across a handwritten memo (the so-called ‘Iraq File Note’) recording a conversation on 23 November 2010 between two then senior executives. One was a COO of Leighton and managing director of one of its overseas subsidiaries. The other, who made the note, was also a COO of Leighton and the incoming CEO-elect. Neither was still employed by Leighton by the time the Iraq File Note was discovered.
The Iraq File Note recorded one of the executives as saying that there was an opportunity to obtain further work in Iraq by making payments to a local subcontractor, Unaoil, which exceeded the value of Unaoil’s work, and that the same had been done to secure the first phase work; effectively, that Leighton had obtained the work through overpaying a local party and was proposing to do the same again.
After the Iraq File Note was discovered, some 12 months after it was created, Leighton notified the ASX and the Australian Federal Police. This precipitated multiple investigations, causing legal representation expenses to be incurred on behalf of insured persons, and ultimately led to multiple shareholder class actions. One of those class actions was settled in late 2019 for $32.4m.
CIMIC claimed indemnity under its 2011 D&O policy for legal representation expenses and losses incurred in relation to the settled class action, totalling about $45.67m. The 2011 insurers denied cover on the basis of (innocent) non-disclosure and misrepresentation.
CIMIC brought proceedings seeking indemnity from the 2011 insurers. In the alternative, it sought a declaration to the effect that it was entitled to late-notify the matter to the relevant 2010 insurers, including Zurich, the 2010 tower having been significantly eroded by the earlier unrelated class action. No monetary relief (other than costs) was sought against the 2010 insurers and CIMIC made no claim on the 2010 policy for indemnity for the matters which are the subject of these proceedings.
At first instance,[1] CIMIC largely failed in its claims against the 2011 insurers (apart from some relatively contained legal representation expenses) on the basis of non-disclosure and misrepresentation.
The primary judge granted CIMIC a declaration against the 2010 insurers, albeit in a different and much-expanded form compared to that which it originally sought.
One of the primary layer 2011 insurers, AIG, brought a cross-claim for double insurance contribution from the working layer excess insurers of the 2010 tower, Berkley and Swiss Re, on the basis that cover would have been available under the 2010 policy if CIMIC had sought it. AIG succeeded before the primary judge on that claim but, because it had largely defeated CIMIC’s indemnity claim, the double insurance contribution affected Berkley only and AIG was awarded a relatively limited judgment sum.
Appeals
Appeals were filed by Zurich, Berkley, Arch/Dual and Chubb. The appeals varied in scope, but all four involved the same 11 parties from the first instance proceedings.
Cross-appeals were filed by CIMIC (in the Zurich and Berkley appeals) and AIG (in the Zurich and Berkley appeals).
Notices of contention were filed by CIMIC (in the Berkley appeal), AIG (in the Zurich and Berkley appeals), Chubb (in the Berkley appeal), Liberty (in the Zurich and Berkley appeals), Catlin (in the Berkley appeal) and Swiss Re (in the Zurich appeal).
The multiple notices were condensed into 16 agreed issues on which the appeal was conducted, plus one additional issue that was raised at the hearing.
Zurich’s appeal raised a broad range of issues relating to both years of account, including whether the primary judge erred in granting declaratory relief against the 2010 insurers, and whether the interaction between the non-disclosure and continuous cover provisions of the 2011 policy precluded the 2011 insurers from reducing their liability on the grounds of non-disclosure and misrepresentation by CIMIC.
Berkley’s appeal raised overlapping issues and also challenged the outcome of AIG’s double insurance cross-claim.
CIMIC was represented in the proceedings by Allens, who discovered the Iraq File Note while acting for Leighton in the unrelated matter and thereafter represented Leighton/CIMIC in multiple capacities arising from the discovery, including the various class actions.
The appeals were heard before White JA, Stern JA and Griffiths AJA, who delivered a joint judgment dealing with all four appeals.
Declaratory relief
Zurich raised two arguments against the making of the declaration against the 2010 insurers.
The first, referred to in the judgment as Issue 12, was a pleading point. Due to the way in which CIMIC framed the proceedings from the outset, there was no pleaded case with which Zurich could engage. There was no claim for indemnity from the 2010 insurers and no relief other than declaratory relief was sought against them. CIMIC did not plead the facts and circumstances based on which it said it should have a contingent declaration, other than to assert that it asked the 2010 insurers for an admission that it ‘remains entitled’ to notify circumstances and the insurers had refused to give such an admission.
The second, referred to as Issue 13, went to finality and the Court’s power to make declarations. Zurich submitted that CIMIC’s state of mind during the 2010 policy period is not determinative of any right that CIMIC has against the 2010 insurers; at best, it is a subsidiary fact. Should CIMIC attempt to bring a belated claim against the 2010 insurers, all defences to that claim remain on the table and available to Zurich. As such, the Court at first instance should not have exercised judicial power to make the declaration where it did not go to any complete or final relief and was really of no utility.
The Court of Appeal upheld both arguments, holding that the primary judge erred in assuming that the Court had jurisdiction to grant such a declaration. It was significant that CIMIC had made no indemnity claim against the 2010 insurers, which distinguished this case from authorities such as CGU Insurance Limited v Blakely[2] and National Australia Bank Limited v Nautilus Insurance Pte Ltd (No. 2).[3] The Court accepted Zurich’s submission that the declaration did not finally determine the parties’ rights because, if CIMIC wished to enforce any right or obtain indemnity against the 2010 insurers, it would not only have to give notification and lodge a claim, but it would also have to invoke s.54 of the Insurance Contracts Act 1984 (Cth) (ICA) to excuse its earlier omission to do so, in circumstances where it should be assumed that the 2010 insurers would raise substantive and/or procedural defences to such claim.
Their Honours went on to observe that the declaration not being directed to an ultimate fact or issue was highlighted by other considerations, including the fact that it left open for future disputation the question of the adequacy of the terms of any future notification and whether those terms fell within the ambit of clause 5.1 of the policy, the notification clause.
The Court of Appeal concluded that the primary judge erred in making the declaration, because the Court below lacked jurisdiction to do so in the circumstances. The declaration was, in substance and effect, an advisory opinion and it ought not to have been made. Alternatively, the Court held that the primary judge’s discretion miscarried in making the declaration.
Construction of the 2011 policy
A significant issue in the matter, referred to in the judgment as Issue 1, related to whether the 2011 insurers were precluded from reducing their liability under s.28 of the ICA. This issue concerned the proper construction of the 2011 policy, specifically the interaction between the non-disclosure and continuous cover provisions.
Zurich submitted that if cover was not available to CIMIC under the main insuring provisions of the 2011 policy, it was nevertheless available under the continuous cover provisions of that policy. This was because, Zurich argued, the 2011 insurers (with the exception of Catlin, a new participant on CIMIC’s D&O program for 2011) had waived their right to raise innocent non-disclosure or misrepresentation defences in relation to CIMIC’s claim for company securities claims loss, which was by far the largest component of CIMIC’s claim.
While the Court of Appeal agreed that clause 5.3 of the 2011 policy (the continuous cover clause) is an insuring clause, it disagreed that the clause amounted to a waiver of the 2011 insurers’ rights under s.28(3) for non-disclosure. The Court went on to hold that clear words would be expected in order to conclude that the duty of disclosure had been waived.
Ultimately, the Court did not accept the reading of these provisions contended for by Zurich, preferring the primary judge’s interpretation that clause 7.1 of the 2011 policy fully preserved the 2011 insurers’ rights and remedies concerning innocent non-disclosure for company securities claims. That being so, on its proper construction, the continuous cover clause did not impliedly waive non-disclosure rights and remedies preserved by clause 7.1.
Separately, certain of the 2011 insurers argued at first instance and on appeal that if the continuous cover provisions of the 2011 policy were activated, they would operate to import the existing unrelated erosion of the 2010 policy (approximately $75.5m) into the 2011 cover. That would have the result that CIMIC’s claims in these proceedings (if they had been successful) would be pushed much further up the 2011 tower. That argument failed before the primary judge and before the Court of Appeal.
Factual findings, non-disclosure and misrepresentation
On the 2011 insurers’ notices of contention, the Court upheld the primary judge’s findings that Leighton (as CIMIC was at the time) breached its duty of disclosure and made a misrepresentation to the 2011 insurers, and that this entitled the 2011 insurers to reduce their liability to nil. These were Issues 6 and 7 referred to in the judgment.
The 2011 insurers also sought additional findings about Leighton/CIMIC’s conduct and state of knowledge, beyond those which the primary judge had been prepared to make. These went to a range of matters, referred to as Issue 8, including the truth of the representations recorded in the Iraq File Note, whether there had in fact been corrupt or improper payments to win the Iraq work, and whether the Leighton executive recorded in the Iraq File Note knew that such payments were or may be unlawful.
The 2011 insurers were partially successful in this, with the Court of Appeal being satisfied on balance that the representations recorded in the Iraq File Note were true, that Leighton paid money to Unaoil to assist it in winning work in Iraq, that the executive in question was aware that the payment may be unlawful and that his knowledge should be attributed to Leighton. Had it been necessary to do so, the Court would have found that Leighton’s failure to disclose this knowledge was a further breach of its duty of disclosure and a misrepresentation to the 2011 insurers.
However, the Court of Appeal was not satisfied that any corrupt payments were actually made using Leighton’s money, nor that the executive in question knew or believed that the payment to Unaoil was unlawful (as opposed to being aware that it ‘may’ be unlawful).
Double insurance
The Court upheld Berkley’s appeal against the primary judge’s finding that AIG, one of the primary layer 2011 insurers, was entitled to contribution from Berkley on the basis of double insurance.
After discussing the principles underpinning double insurance, in particular the requirement that the liabilities of each insurer be coordinate, their Honours moved to considering what would be required for CIMIC to engage s.54 of the ICA, in order to lodge a late notification under the 2010 policy and potentially engage cover that policy.
The notification clause of the 2010 policy, clause 5.1, permitted Leighton to give notice of ‘any circumstances reasonably expected to give rise to a Claim’. Such notice was required to include reasons for anticipating ‘“that” Claim’ with full particulars. If notice of such circumstances was given, clause 5.4 provided that a later ‘Claim’ arising from the circumstances notified would be covered by the same policy. The Court contrasted this with the notification provision considered in FAI General Insurance Co Limited v Australian Hospital Care Pty Limited,[4] which referred to the insured becoming aware, during the policy period, of an occurrence which might subsequently give rise to a claim.
Focusing on the wording of clause 5.1, the requisite omission in order for CIMIC to engage s.54 to lodge a late notification under the 2010 policy would be Leighton’s omission to notify the 2010 insurers of ‘circumstances reasonably expected to give rise to a Claim’, with reasons and full particulars.
No party contended, and the primary judge did not find, that Leighton, through its relevant officers, in fact held the expectation that a claim would arise from the facts, matters and circumstances recorded in the Iraq File Note. As their Honours observed, ‘(t)here is a difference between having a reasonable expectation and its being reasonable to have an expectation’. A reasonable person in the position of Leighton’s executives could have had such an expectation, but in the context of clause 5.1, the failure to form that expectation was not a relevant omission (and was not alleged to be a relevant omission) for the purposes of obtaining relief under s.54.
Accordingly, the Court of Appeal held that the primary judge erred in ordering contribution from Berkley in favour of AIG.
Conclusion
This is a complex and important decision. While the result highlights the unusual way in which CIMIC framed its case, including the joinder of the 2010 insurers against whom there was no claim for indemnity, the judgment has potential implications for numerous areas of insurance law.
The judgment is an important addition to Australian caselaw on the availability of declaratory relief in the context of indemnity insurance.
Further, the Court’s conclusion on the interaction between the non-disclosure and continuous cover provisions of the 2011 policy may have ramifications for the interpretation of continuous cover clauses in Australia and will certainly have ramifications for their subsequent drafting.
This article provides a summary of the judgment and is not intended as a detailed discussion of its likely implications, which may continue to emerge for some time. Future consideration of the decision by the Courts, within the profession and within the insurance industry generally deserves ongoing monitoring.
[1] CIMIC Group Ltd v AIG Group Ltd [2022] NSWSC 999
[2] (2016) 259 CLR 339; [2016] HCA 2
[3] [2019] FCA 1543
[4] (2001) 204 CLR 641; [2001] HCA 38
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This article is intended to provide a general summary only and does not purport to be comprehensive. It is not, and not intended to be, legal advice.
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