Policyholder successfully appeals refusal to apply one deductible to multiple claims in Class Action

In good news for policyholders defending class actions, the NSW Court of Appeal has ruled that multiple claims in a class action against Bank of Queensland over a “Ponzi scheme” should be treated as a single claim under the Civil Liability Policy’s aggregation clause, meaning that only one deductible (or excess) was payable by the policyholder. 

The decision overturns the trial judge’s decision¹ which refused to deem the claims of class members to be a single claim on the basis that each of the Bank’s Wrongful Acts in processing the various fraudulent requests for different customers was not ‘a series of related’ acts. A copy of our article on the Supreme Court decision can be found here.

We said at the time that:

‘This is a harsh decision against the policyholder. While in many respects it comes down to the facts behind the class action, if this is the approach to be taken by insurers to the application of deductibles in the class actions they are charging increasing premiums to insure, we expect this to be the subject of further controversy.’

The Court of Appeal’s decision is therefore a welcome outcome for policyholders, particularly given the increasingly high premiums they are being charged for class action risks (both in professional indemnity and D&O policies). However, as the decision notes,²  the application of aggregation clauses will be heavily dependent on the particular facts and policy in question. Policyholders and their brokers should therefore continue to take particular care when reviewing their coverage to make sure they are securing coverage appropriate to their circumstances and anticipated risks. 

Background facts

The Bank of Queensland offered a ‘Money Market Deposit Account’ the terms of which included a requirement for signed written instructions and a promise to question suspicious instructions. A financial planner (independent of the Bank) acted as authorised signatory for at least 192 of its clients who held such accounts, and withdrew funds via email instructions. It became evident that the financial planner was operating a Ponzi scheme (in which it would withdraw one customer’s money for its own purposes or to pay another to give the illusion of a return on funds invested).

The 192 account holders signed a Class Member Registration Form and brought a class action against the Bank and its agent, alleging that, despite alleged knowledge of the scheme, they failed to question suspicious transactions, wrongly accepted email instructions and allowed withdrawals that were not authorised. The Bank and its agent each agreed to pay $6m in settlement of all the claims.

The Bank had a $2m deductible under its liability policy for ‘each and every Claim’, so lodged a claim for $4m with its insurers. The insurers pointed to the various actions of the financial planner for various customers and argued that at least three ‘Claims’ were made in the class action, therefore wiping out the entire $6m settlement.

The decision at first instance

The aggregation clause of the policy provided that:

 ‘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’.

‘Claim’ was defined to include:

‘(i) any suit or proceeding, including any civil proceeding… against the insured… or (ii) any verbal or written demand… of any specified Wrongful Act.’

On the key issue of whether the Bank’s alleged knowledge of the scheme and failure to question suspicious transactions was ‘a series of related Wrongful Acts’, the trial judge held that there had to be a logical or causal relationship between the Wrongful Acts. The trial judge held that this relationship did not exist here because each Wrongful Act was made on different occasions, from different accounts, causing loss to different parties and in response to different and separate purported email instructions. The trial judge considered that the mere fact that each occurrence was within the broader, more remote scheme of a fraudulent practice by the same financial planner was not sufficient to create a ‘causal or logical relationship’ between them.

The Court of Appeal decision

The Court of Appeal delivered three separate judgments, but all were broadly in alignment and unanimous in agreeing that the trial judge’s decision should be overturned. The claims were to be aggregated, and treated as a single ‘Claim’ for the purpose of the deductible payable under the policy, on the basis that the claims arose from ‘a series of related Wrongful Acts’.

The Appeal Court’s view was that a separate Wrongful Act occurred each time a request for a withdrawal was acted upon by the Bank.

It then went on to consider what level of connection was required to make those Wrongful Acts ‘related’ (or be a ‘series’), and concluded that the terms of the aggregation clause did not require a causal relationship between the Wrongful Acts. Instead, the identification of what would be a sufficient connecting factor was to be found in the clause’s reference to the acts being ‘wrongful’.

In this case, the reason the acts were wrongful was that the Bank allegedly acted with knowledge of the Ponzi scheme. The knowledge of the scheme was held to be a unifying factor sufficient to render the Wrongful Acts ‘related’ for the purpose of the aggregation clause. Essentially, each Wrongful Act consisted of the same breach (acting with knowledge), and that was sufficient for them to be deemed a ‘series of related Wrongful Acts’.

This finding meant that the multiple claims could be aggregated and treated as a single ‘Claim’ for the purpose of the policy’s deductible (or excess).

Comment

This decision is in our view sensible and a good outcome for policyholders, although, as the Appeal Court warned, the conclusion in each case will still depend on the terms used by the aggregation clause and the particular facts. To maximise the benefits of cover under liability policies for class action claims, policyholders and their brokers should carefully consider the class action risk to which the policyholder is exposed and, where possible, negotiate aggregation clauses tailored to the coverage required.  

Endnotes

1. Bank of Queensland Ltd v AIG Australia Ltd [2018] NSWSC 1689.
2. Bank of Queensland Ltd v AIG Australia Ltd [2019] NSWCA 190.