Hill, Kara; Slade, Ben --- "Insuring justice through class actions: The potential of third party claims against insurers" [2019] PrecedentAULA 60; (2019) 154 Precedent 40

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INSURING JUSTICE THROUGH CLASS ACTIONS

THE POTENTIAL OF THIRD PARTY CLAIMS AGAINST INSURERS

By Kara Hill and Ben Slade

A recent decision of the Federal Court of Australia in the Radio Rentals class action has the potential to extend the access to justice achievable through class actions.

This may be possible in cases where respondents are unable to meet a judgment in whole or in part by joining insurers as respondents to the proceedings.

One of the greatest strengths of the class actions regime is its ability to provide access to justice to large numbers of people who have suffered small amounts of loss. But what happens when the number of people who have suffered loss and the size of that loss is so large that a respondent cannot pay?

The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Third Party Claims Act) offers one potential answer to this question, by allowing applicants to join a respondent’s insurer to the proceeding as a party to contribute to meeting the losses claimed. This is the approach that the lead applicant in the class action against Thorn Australia Pty Ltd t/as Radio Rentals (Radio Rentals)^[1] successfully took in May 2019. In Simpson v Thorn Australia Pty Ltd t/as Radio Rentals (No. 2) [2019] FCA 838, Gleeson J granted the application for leave to continue proceedings against an insurer pursuant to s4 and s5 of the Act.

The Radio Rentals class action has over 186,000 class members who have suffered an estimated total combined loss of more than $100 million.^[2] Radio Rentals is a solvent company, but is unlikely to be able to pay the quantum of damages.

The Radio Rentals class action provides a case study on how the relatively new Third Party Claims Act could be used in class actions in a situation where a company is solvent, but unable to meet all of its liability. Through this case study, we explore the positive implications that this Act could have on enhancing the capacity of the class actions regime to deliver its objective: to expand access to justice. We argue that the Third Party Claims Act, by opening up the possibility to join insurers and getting them to top up damages that the company cannot otherwise pay, can close the gap between the loss suffered by class members and the amount of compensation that class members receive.

CASE STUDY: RADIO RENTALS CLASS ACTION^[3]

The class action against Radio Rentals is an example of how class actions can give hundreds of thousands of vulnerable people access to justice. Radio Rentals is a consumer leasing company which leases items such as fridges, televisions and washing machines to consumers. Radio Rentals’ trademarked slogan for its leases was ‘Rent Try $1 Buy’. The class action has been brought by Casey Simpson, a pensioner and single mother of five children. Ms Simpson entered into four leases with Radio Rentals, including one for a second-hand mattress and bedframe. Ms Simpson has brought the case on behalf of around 186,000 people who entered into around 465,000 consumer leases over a six-year period. Many or most of the class members are financially vulnerable people and a large proportion of customers were receiving Centrelink payments. Ms Simpson and the other class members claim that Radio Rentals contracts contained a number of unfair contract terms and that it engaged in misleading or deceptive conduct, as well as unconscionable conduct.

The total damages for all class members is estimated to be in excess of $100 million. Ms Simpson and class members claim compensation on the basis that Radio Rentals’ customers paid excessive amounts on their ‘Rent Try $1 Buy’ leases and that, contrary to Radio Rentals’ advertising, customers were not entitled to buy the rented goods for $1. A significant barrier to the class members getting full compensation is the fact that Radio Rentals’ parent company, Thorn Group Limited (Thorn), is in a weak and deteriorating financial position. On 30 May 2019, Thorn announced a net loss of $14.9 million for the 2019 financial year.^[4] This is off the back of a year of shaky results for Thorn’s Radio Rentals arm, including a decline in revenue and a slowing number of new leases.^[5]

Radio Rentals’ declining results created the risk that, despite being solvent, the company would not have the funds to pay over $100 million in compensation to class members. This means that if the case is successful class members would only receive a fraction of their total loss, either by a low settlement amount or by Radio Rentals only being able to partly satisfy a judgment against it. To avoid this outcome and to give class members the best opportunity to receive compensation matching their loss, the applicant sought leave to join Radio Rentals’ insurer, AIG Australia Limited, to the proceeding as a respondent under the Third Party Claims Act.

THIRD PARTY CLAIMS ACT

The Third Party Claims Act commenced in NSW on 1 June 2017.^[6] The Act is the outcome of the NSW Law Reform Commission’s report, Third Party Claims on Insurance Money, which reviewed s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRMP Act).^[7] The NSW Law Reform Commission recommended that s6 of the LRMP Act be replaced and recommended a draft replacement Bill, which was adopted in full.

Section 6 of the LRMP Act allowed plaintiffs to access the proceeds of insurance through a ‘charge’ that attached to the money that the insurer would be required to pay under the insurance contract.^[8] Section 6 of the LRMP Act was criticised as being unintelligible, opaque and ambiguous.^[9] It was nonetheless frequently used against insolvent and liquidated companies to obtain compensation for those who had suffered loss caused by a company where it would be pointless to sue the defendant.

The Third Party Claims Act does away with the charge and provides a plaintiff with direct access to the insurer. Crucially, the NSW Law Reform Commission report said the provisions it drafted were framed to capture all possible scenarios of a defendant’s inability or failure to meet the relevant liability, including a company that is unable to meet the liability ‘in whole or in part’.^[10]

The words ‘in whole or in part’ have opened up the opportunity to join insurers to the proceeding if respondents can pay some of the losses claimed but not all of them. In class actions, like Radio Rentals, which have tens of thousands of group members who claim damages in the hundreds of millions of dollars, this allows class members to access insurance money and thereby improve their chance of recovering a greater proportion of the compensation claimed than would be possible if the liable company was left to meet this obligation alone.

APPLICATION TO JOIN THE INSURER

Ms Simpson was successful in her application to join the insurer. This success indicates the promise of this novel approach for class actions with large, group-wide damages in cases where companies are unable to pay. The application was novel, not only because the Act is relatively new and there are only a scattering of judgments relating to it, but also because it was used to join an insurer when the respondent was a solvent company.

The judgment confirms that three pre-conditions must be met before a judge can exercise the discretion to order joinder. These are the same as for s6 of the LRMP Act, as identified in Bede Polding College v Limit (No. 3) Limited.^[11] Radio Rentals’ insurer, AIG, accepted that the three pre-conditions were satisfied because there is:

• an arguable case against the insured, Radio Rentals;

• an arguable case that the relevant insurance policy responds; and

• a real possibility that, if a judgment is obtained, Radio Rentals would not be able to meet it.^[12]

Once the three pre-conditions are met, it is then for the judge to use his or her discretion to decide whether to grant the insurer leave. In the Radio Rentals case, AIG identified a number of reasons against the exercise of the discretion, which were, in summary:

• The representative nature of the proceeding, which concerns a single lead applicant, means that there is no prospect of a large money judgment immediately following the trial.

• Radio Rentals is still able to conduct a proper defence of the proceeding.

• Although AIG has denied liability to indemnify Radio Rentals, it will be bound by any outcome.

• The extent of the insurance dispute will be known only once the court delivers its judgment.

• If joined, AIG will incur costs, which may be unnecessary if the class action is unsuccessful.^[13]

In the end, the deciding factor was that AIG had denied the claims made by Radio Rentals and its director under the relevant insurance policies.^[14] Given the real possibility that if judgment was obtained, the insureds would not be able to meet it, Gleeson J said it was preferable that the insurance dispute be determined with minimal delay.^[15] Justice Gleeson said this was most likely to be achieved by joining the insurer, so that the insurance dispute could be determined by the judge who also determines the principal proceeding.^[16]

IMPLICATIONS OF DECISION FOR ACCESS TO JUSTICE

The Radio Rentals case study shows how access to justice can be hindered in circumstances where a defendant is in a weak financial position and its insurer is denying indemnity. It shows how this barrier may be overcome if a court is willing to intervene to minimise the risk that a company will be unable to meet its liability in part or in whole by joining an insurer when appropriate.

Besides providing a bigger potential pot of available money, there are other positive implications for access to justice through this decision. First, joining the insurer as a party brings the insurer within the purview of the court. The insurer will now have to participate actively in the proceeding by, for example, filing a defence which may outline its position on indemnity. The insurer may also need to provide discovery, respond to notices to admit, and interrogatories. This arms the applicant and class members with knowledge that may be beneficial to their case.

Secondly, any insurance dispute becomes an issue to be determined in the proceeding. These disputes may include whether exclusions apply and ultimately whether the insurance company is liable to indemnify the respondent for the claim. Having the insurer as a party provides plaintiffs with transparency about the policies, the amount of coverage and the areas of dispute. Importantly, it gives the plaintiffs the ability to advocate for a favourable construction of exclusion clauses or other areas of dispute before the judge who best knows the facts and circumstances of the case and who is best placed to decide whether a policy responds.

A third positive implication for access to justice is that the insurer will participate in a mediation, either by consent or by order of the court. Therefore, the insurer will not be able to play a disengaged role in mediations and will be required to justify its position regarding indemnity. This further increases the openness and transparency of insurance disputes by bringing these issues to the fore. Mediation will force an insurer to be open about its position on indemnity. A related implication is that, as a party to the proceeding, the insurance company will be incurring costs like other parties. This gives the insurer an incentive to settle early.

CONCLUSION

There are some challenges to the approach used in Radio Rentals for other class actions. The scope of the decision applies only to class actions commenced in NSW, where the Third Party Claims Act applies. Other jurisdictions continue to face barriers to accessing full compensation when companies are not in a solid financial position. The experience in NSW could inform similar law reform in other jurisdictions.

One concern is that joining the insurer will add to the applicant’s costs. This is because costs inevitably accompany prosecuting a claim against another defendant and because there is likely to be a contested interlocutory hearing to obtain leave to join the insurer. However, the potential benefits of ensuring access to justice for class members may be significant.

The case study of the Radio Rentals class action shows how significant the benefits might be. In a class action with around 186,000 class members, many of whom are vulnerable, ensuring that class members receive as much compensation as possible if their case is successful is crucial to achieving access to justice. Joining the insurer as a party puts class members in a stronger position to access insurance money than they otherwise would be by moving the available total compensation closer to the whole liability.

Kara Hill is a lawyer in the class actions department at Maurice Blackburn Lawyers in Sydney. PHONE [phone] EMAIL [e-mail].

Ben Slade is a principal lawyer in the class actions department at Maurice Blackburn Lawyers in Sydney. PHONE [phone] EMAIL [e-mail].

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^[1] Simpson v Thorn Australia Pty Ltd t/as Radio Rentals & Ors (NSD 448/2017).

^[2] Simpson v Thorn Australia Pty Ltd t/as Radio Rentals (No. 2) [2019] FCA 838 (Simpson v Thorn), [7].

^[3] This article draws on material filed in the Federal Court of Australia by the applicant, which was prepared by the authors.

^[4] Thorn Group Limited, ‘Thorn Announces Full Year 2019 Results’ (ASX/Media Release, 30 May 2019), <https://www.thorn.com.au/site/PDF/2647_0/ASXandMediaAnnouncement>.

^[5] Thorn Group Limited, Annual Report 2018, Annual Report to Shareholders (31 March 2019) 2-3.

^[6] Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), s3; NSW, Government Gazette, No. 61, 9 June 2017, 2396.

^[7] NSW Law Reform Commission, Third party claims on insurance money: Review of s6 of the Law Reform (Miscellaneous Provisions) Act 1946, Report 143 (2016).

^[8] Ibid, ix.

^[9] Ibid, 8.

^[10] Ibid, 35.

^[11] Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887.

^[12] Simpson v Thorn, [66].

^[13] Ibid.

^[14] Ibid, [68].

^[15] Ibid.

^[16] Ibid.