Skip to content.

Home

Allens

Focus: High Court confirms insurer is not liable in contribution for HIH scheme payouts 

31 August 2011

In brief: Dismissing an appeal against a decision of the Victorian Court of Appeal, the High Court has determined that the doctrine of equitable contribution should not be extended to allow contribution claims to be made against an insurer by the administrator of the federally funded HIH policyholder relief scheme. The High Court held that the administrator's obligations were not coordinate with an insurer's liability to pay a claim under an insurance policy it had issued in respect of the liability giving rise to a payment the scheme made. Partner Dean Carrigan (view CV), Senior Associate Andrew Byrne and Lawyer Alice Dillon report on the High Court's decision.

How does it affect you?

  • A coordinate liability will exist where two or more obligors have a common legal burden to a third party, provided that their respective obligations can be characterised as 'of the same nature and to the same extent'.
  • As a defendant, it may be possible to reduce or offset your liability by making a claim for contribution based on other parties' coordinate liabilities in respect of the same liability. This decision confirms the legal principles governing coordinate liabilities and sets out the extent of the application of that doctrine.
  • In the context of the HIH Claims Support Scheme (the scheme), the High Court determined that the liability of HIH Claims Support Limited (HCSL) (the administrator of the scheme) to make payments to an HIH policyholder who made an application for payment under the scheme was not coordinate with that of an insurer who was separately liable for the losses that were the subject of the claim to the scheme. Therefore, HCSL was not entitled to seek contribution from the insurer.

Background

Following the collapse of HIH, the Federal Government set up the scheme to assist HIH policyholders. Under the scheme, certain qualifying HIH policyholders could apply to HCSL. If an application was accepted and the relevant HIH policy would have provided indemnity for the claim, HCSL would pay the policyholder 90 per cent of the claim value. The policyholder was required to assign their rights under their HIH policy to HCSL. HCSL would then submit a proof of debt in the winding up of HIH in the amount of the payments it had made.

In this case, an HIH policyholder, Mr Steele, was contracted to erect scaffolding to support a large video screen for use at the Australian Grand Prix. The structure supporting the screen collapsed and the screen was destroyed. Mr Steele was found liable and ordered to pay $1.4 million in damages. He made a claim against his HIH policy and, following HIH's collapse, applied to HCSL for assistance. HCSL made the payment and Mr Steele assigned his HIH policy rights to it.

The Australian Grand Prix Corporation held a separate insurance policy (the IAL policy) with a predecessor of Insurance Australia Limited (IAL) which, on its terms, would also have responded to a claim by Mr Steele for the damages awarded against him. Having made a payment to Mr Steele under the terms of the scheme, HCSL sought contribution from IAL, arguing that its liability to Mr Steele under the scheme was coordinate with IAL's liability to Mr Steele under the IAL policy.

Return to top

Procedural history

At first instance, the Victorian Supreme Court determined that the respective liabilities of HCSL and IAL to Mr Steele were not coordinate. Our 2009 Annual Review of Insurance & Reinsurance Law contains a note on that decision.

HCSL appealed the decision. The Victorian Court of Appeal dismissed the appeal. (See an article on the appeal in our 2010 Annual Review of Insurance & Reinsurance Law.)

HCSL appealed to the High Court.1

Return to top

The High Court decision

The High Court unanimously dismissed HCSL's appeal (Justice Heydon delivered a minority but consenting judgment). The court determined that, as there was no common interest or common burden between HCSL and IAL, their respective liabilities were not truly coordinate. In this respect, the court noted that, had Mr. Steele originally made a claim on the IAL policy and been paid out, IAL would not have had any right of recourse against HCSL for contribution. One aspect of coordinate liability is that both 'obligors' should be equally liable 'as between themselves' in respect of the primary liability – this characteristic did not apply here.

The court also noted that the obligations and benefits HCSL assumed in making payment to Mr Steele were different from the obligations and benefits IAL assumed under the IAL policy because, unlike IAL, HCSL had been assigned the right to recourse in the proof of debt process in the winding up of HIH. This assignment of rights meant that HCSL was a step removed from the original insurance HIH provided, and HCSL had a chance of recouping part or all of its payment as an assignee creditor in the HIH liquidation – ie via the proof of debt process. Further, the court reiterated that the right of contribution works both ways, and given IAL was not in a position to seek contribution from HCSL, the doctrine did not operate in these circumstances. Accordingly, the court determined that HCSL had not, as IAL contended, simply stepped into HIH's shoes, and held that the parties' liabilities were not coordinate.

In its decision, the court restated and relied upon the principles governing the doctrine of contribution set down in its earlier decisions in Burke v LFOT Pty Ltd2 and Friend v Brooker3. In this way, it confirmed that the essential test in determining whether liabilities are coordinate is whether they are 'of the same nature and to the same extent', and that relevant obligors must have a common legal burden to a party. The court noted, however, that a not too technical approach should be taken in assessing whether liabilities are coordinate.

Return to top

Implications

  • The High Court declined to extend the doctrine of contribution to this unusual set of circumstances but has not shut the door on an expansion of the doctrine in appropriate circumstances.
  • The Financial Claims Scheme legislation attempts to address any potential lack of 'coordinate liability' by providing that payments made under that scheme are taken to be payment by the insurer under the terms and conditions of the relevant policy.4
Footnotes
  1. HIH Claims Support Limited v Insurance Australia Limited [2011] HCA 31.
  2. Burke v LFOT Pty Ltd (2002) 209 CLR 282.
  3. Friend v Brooker (2009) 239 CLR 129.
  4. See section 62ZZM(2) of the Insurance Act 1973 (Cth).

For further information, please contact:

Return to top

Share with

What are these?

 

 

Recent Insurance & Reinsurance publications