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Insurance and Reinsurance Forum8 September 2004

The issues surrounding insurer control of court proceedings.

When should an insurer take over the conduct of a matter? What arethe legal, practical and commercial ramifications?

Presented by

Andrew Buchanan and Jenni Priestley

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Contents

1. Insurer's Right to Conduct Litigation 31.1 The Doctrine of Subrogation 31.2 The Source of an Insurer's Subrogation Rights 31.3 What Rights of Subrogation Does an Insurer Have? 41.4 Restrictions on the Right of Subrogation 41.5 The Exercise of the Right of Subrogation 6

2. The Situation for Partially Un-Insured Claims 72.1 Control of the Proceedings 72.2 Costs of the Proceedings and Distribution of Proceeds 72.3 Position under the Insurance Contracts Act 1984 8

3. The Effect of Prior Conduct of the Insured or Insurer 93.1 Conduct of the Insured 93.2 Release of a Third Party 93.3 Insurance Contracts Act 1984 103.4 Conduct of the Insurer 10

4. Actions Where Fraud Is Alleged 114.1 Silbermann v CGU Insurance 114.2 Wilkie v Gordian Runoff & Anor 134.3 Conclusion 14

5. Privilege issues 145.1 General 145.2 Joint and common interest privilege 155.3 A recent case - Mercantile Mutual Insurance (NSW Workers Compensation)

Ltd v Murray 165.4 Privilege in pleadings and statements 18

6. Relationship between the insurer and the insured 196.1 General 196.2 When the insured does not want proceedings brought in its name 196.3 When the views and interests of the insured and insurer differ 196.4 Obligations on the insurer as controller of court proceedings 22

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1. Insurer's Right to Conduct Litigation

1.1 The Doctrine of Subrogation

Subrogation literally means the substitution of one person for another.1 The term is used to refer tothe situation in which an insurer, who has extended indemnity to an insured under a policy ofinsurance, becomes entitled to exercise the rights that the insured has against a third party whocaused or contributed to the loss sustained by the insured. 2

The doctrine of subrogation only applies to true indemnity insurance, and is generally notapplicable to life insurance3 or some forms of personal accident insurance.4 The doctrine is notadministered as a legal right, but as a principle that is applied to subserve the ends of justice and todo equity.5

In the insurance context, the doctrine of subrogation is associated with two discreet aspects of therelationship between an insurer and an insured:

1. the doctrine allows the insurer to exercise, in the insured's name, rights that the insuredmay have against third parties; and

2. the doctrine is associated with the principle that an insurer can claim from an insured anydouble recovery made by that insured.

An example of the latter situation would be where an insurer indemnifies an insured for the totalloss of the insured’s house by fire and the insured later recovers damages from a third party whocaused the fire. In such circumstances, the insurer would generally be entitled to recover thesedamages from the insured.6

1.2 The Source of an Insurer's Subrogation Rights

Although there has been some debate on this issue,7 the better view appears to be that the right ofsubrogation can arise in contract (for example, by direct grant by the insured as a condition of thepolicy), at common law and in equity.8 It is important to understand the nature of the doctrine ofsubrogation, as the manner in which rights of subrogation arise in a particular situation may restrictor expand the extent of those rights. For example, to the extent that a right of subrogation arisesin equity, the exercise of that right may be subject to equitable principles and equitable defences.

1 Leigh-Jones et al, “MacGillivray on Insurance Law”, 10th Ed (2003) at page 568

2Jindra v. Clayton, 247 Neb. 597, 529 N.W.2d 523 (1995); Tri-Par Investments LLC v Sousa 268 Neb 119 (2004). Seediscussion in CCH Australia Limited, "Australian and New Zealand Insurance Reporter" (2004)3 Solicitors and General Life Assurance Society v Lamb (1864) 2 De GJ & S 2514 Thobald v Railway Passengers’ Assurance Co (1854) 10 Exch 455 Cagle Inc v Sammons 198 Neb 595; 254 NW 2d 398 (1977). See CCH Australia Limited, "Australian and New ZealandInsurance Reporter" (2004)6 See, for example, Castellain v Preston (1883) 11 QBD 380; British Traders Insurance Co v Monson (1964) 111 CLR 867See Lord Napier v Hunter [1993] AC 713; Banque Financier de la Cite v Parc (Battersea) Ltd [1999] 1 AC 2218 Sutton, “Insurance Law in Australia”, 3rd Ed (1999) at paragraphs 16.14 to 16.17

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1.3 What Rights of Subrogation Does an Insurer Have?

(a) Rights as Against Third Parties

Generally, the right of subrogation enables the insurer to exercise all of the rights that the insuredhas against a third party (in so far as such rights are connected with the subject matter of theinsured’s loss). The rights, however, need not arise directly out of the loss.9

The insurer can exercise no better rights against a third party than the insured actually possesses.Therefore, any contractual modifications or limitations of the insured’s rights, will usually applyequally to the insurer’s rights by way of subrogation.10 In some instances, however, courts haveallowed insurers to enforce subrogated rights against a third party, despite an agreement to thecontrary between the insured and that third party, where the third party had knowledge of theinsurer’s rights.11 This concept will be discussed in more detail later in this presentation.

As the insurer is placed in the position of the insured, and generally brings proceedings in theinsured’s name, the third party is entitled to rely on any defences that would have been availableagainst the insured.12

Further, it is worth noting that in situations where the loss was caused by the insured, no right ofsubrogation exists against the insured, just as the insured has no right of action against itself.13

(b) Rights as Against the Insured

In situations where the insurer has extended indemnity to the insured, the insurer has the right torecover from the insured any funds the insured receives in reduction of the insured loss. However,where the insured receives moneys paid with the intention of merely benefiting the insured, ratherthan reducing the loss, the insurer is not entitled to recover such sums.14

1.4 Restrictions on the Right of Subrogation

(a) Terms Implied as Between the Insured and Third Parties

In certain circumstances, the right of subrogation can be modified by the conduct of the insured.

For example, a term may be implied into a contractual relationship between the insured and a thirdparty, which prevents the insurer seeking recovery. The following two cases demonstrate thispoint:

(i) Mark Rowlands Limited v Berni Inns Limited

In the English decision of Mark Rowlands Limited v Berni Inns Limited,15 premises were destroyedby fire due to the tenant’s negligence. The lease contained a provision stating that the landlord

9 Castellain v Preston (1883) 11 QBD 38010 See for example State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 22811 Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1988) 5 ANZ Ins Cas ¶60-88312 Sydney Turf Club v Crowley [1971] 1 NSWLR 72413Whilst this may sound like a trite proposition, it is not without relevance. For example, where a ship is lost in a collisionwith another ship owned by the same insured: Simpson v Thomson (1877) 3 App Cas 27914 Castellain v Preston (1883) 11 QBD 38015 [1986] 1 QB 211

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would insure the premises and apply any insurance monies to restoring the premises. The tenantwas obliged to pay monies to the landlord in respect of insurance. The tenant was also obliged toeffect repairs to the premises but not where the damage was caused by fire. The landlord hadtaken out an insurance policy over the premises, which did not name the tenant.

When the premises burnt down, the insurer attempted to bring an action in negligence against thetenant (after indemnifying the landlord). The English Court of Appeal took the view that theintention of the parties must have been that in the event of damage by fire, whether due to accidentor negligence, the landlord’s loss was to be recouped from the insurance monies and that, in thatevent, the landlord would have no further claim against the tenant. As a result of this finding, theinsurer’s subrogated action failed.

(ii) Bit Badger Pty Ltd v Cunich

The above case can be contrasted with the more recent Queensland decision of Justice White inBit Badger Pty Ltd v Cunich.16

This matter again concerned a situation where the landlord alone was insured under the relevantpolicy, although the tenant paid the premiums. A crucial term of the lease was that which providedthat the tenant was liable for damage caused by fire unless the fire was not caused by the tenant.Further, the tenant provided several indemnities to the landlord which extended to damage by firein certain circumstances. Again, the premises were damaged by fire, allegedly due to the default ofthe tenant.

The tenant argued for an implied term that the landlord was not entitled to recover from the tenant ifit had been indemnified by the insurer. Justice White refused to imply such a term into the lease.In particular, it seems Her Honour was disinclined to do so in face of an express term making thetenant liable for damage caused by fire which resulted from the tenant’s negligence.

Therefore, it can be seen that the contractual relationship between the insured and a third partymay well determine whether or the not the insurer has any rights to be subrogated to and that theresults will turn on the facts of each particular case.

(b) Statutory Restrictions on the Right of Subrogation

Certain further restrictions on subrogation rights are imposed by the Insurance Contracts Act 1984.

Subject to certain conditions, section 65 of the Insurance Contracts Act 1984 prevents an insurerfrom enforcing subrogated rights against a third party where the insured has not exercised thoserights and might reasonably be expected not to exercise those rights by reason of:

(i) a family or other personal relationship between the insured and the thirdparty; or

(ii) the insured having consented (expressly or impliedly) to the use by thethird party of a ‘road motor vehicle’17 that is the subject of the relevantinsurance policy.

16 (1996) 9 ANZ Ins Cas ¶61-31217 See the definition in s65(7): essentially a road vehicle seating 2 or more

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In addition, section 66 of the Insurance Contracts Act 1984 prevents an insurer from bringing asubrogated action against an insured's employee in respect of a loss where the conduct that gaverise to the loss occurred in the course of the employee's employment, unless such conductamounted to ‘serious or wilful misconduct.’

(c) Waiver of Subrogation Clauses

An express waiver of subrogation clause may also restrict an insurer’s subrogation rights.

Such clauses usually provide that the insurer agrees to waive its rights of subrogation against theinsured or other persons not insured by the policy. Clearly, the parties to the contract of insuranceor parties who are entitled to the benefit of the contract of insurance can enforce the terms of suchclauses (as with any contractual term). However, persons who are not entitled to enforce the policyof insurance may nonetheless be able to obtain the benefit of a waiver of subrogation clause.

An example of this is the case of Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd,18

where the respondents, who were not parties to the contract of insurance, had sought to obtain thebenefit of a waiver of subrogation clause in a Construction All Risks policy. The Court held that thedefinition of the assured under the policy was wide enough to encompass the respondents.Nonetheless, the Court also held that it was not necessary for the respondents to establish thatthey were a party to the contract of insurance or otherwise entitled to sue upon it to obtain thebenefit of the waiver of subrogation clause. Indeed, the Court took the view that the nature of thewaiver of subrogation clause was such as to prevent the insurer’s rights of subrogation fromcoming into existence at all.

Another significant case in this area is the decision of the Queensland Court of Appeal in GPSPower Pty Ltd and Ors v Gardiner Willis & Associates Pty Ltd.19 The Court approved the decision inWoodside. In doing so, the Court stated that subrogation clauses should be given their naturalmeaning. The Court also dismissed the suggestion that the application of such clauses wasrestricted to situations where the party attempting to claim the benefit of the waiver of subrogationclause was insured under the relevant policy in respect of the relevant loss.

From these cases, it can be seen that waiver of subrogation clauses may have a wider effect thaninitially intended.

1.5 The Exercise of the Right of Subrogation

There are generally two preconditions to the exercise of the right of subrogation (subject to theexpress terms of the policy):

1. the insurer must be liable for the relevant loss; and

2. the insurer must have indemnified the insured to the full extent required by the policy.

In respect of the first requirement, it appears that an insurer is not entitled to exercise its rights ofsubrogation if the contract with the insured is void, even in circumstances where the insurer hasalready made a payment under that contract.20

18 (1999) 10 ANZ Ins CAS ¶61-39519 (2001) 11 ANZ Ins CAS ¶61-48220 John Edwards & Co v Motor Union Insurance Co Ltd [1922] 2 KB 249

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As to the second requirement, it seems that for the right of subrogation to arise, the insurer musthave fully indemnified the insured to the extent required under the policy, even if this does notprovide the insured with a complete indemnity.21

The case of Page v Scottish Insurance Co Ltd22 is illustrative of a situation in which the secondprecondition was not satisfied. In that case the insurer had indemnified the insured for certainmotor vehicle repairs, but had disputed its liability under the policy in respect of other losses. TheCourt held that until it had fully discharged all of its obligations under the insurance policy, theinsurer was not entitled to exercise any right of subrogation.23

Further, in Scottish Union & National Insurance Co v Davis,24 the court held that the insurer wasnot entitled to exercise subrogation rights where repairs that the insurer had authorised to a motorvehicle were carried out unsatisfactorily, as the insured had not been fully indemnified.25

2. The Situation for Partially Un-Insured Claims

2.1 Control of the Proceedings

If an insurer has fully indemnified an insured in respect of a loss, it will be entitled, by virtue of itssubrogation rights, to control any proceedings brought against a third party in respect of that loss.

However, the situation is somewhat unclear where the insured has not been fully indemnified forthe loss sustained and both the insurer and the insured have an interest in the outcome of theproceedings. The general position appears to be that the insured is entitled to retain control of theproceedings (subject to any term in the policy or agreement to the contrary).26 It has beensuggested, however, that there may be an exception to this principle in a situation in which theinsured's interest in the outcome of the subrogated action is small compared with the insurer's, inwhich case the insurer would be entitled to control the proceedings. 27

In any event, the party in control of the proceedings must have due regard to the interests of theother party in conducting or settling the proceedings. 28 Such an obligation would arguably arisefrom the duty of utmost good faith.

2.2 Costs of the Proceedings and Distribution of Proceeds

An issue does arise, however, as to which party is liable the costs of such proceedings and thedistribution of the proceeds of a successful claim.

21 See for example, GPS Power Pty Ltd and Ors v Gardiner Willis & Associates Pty Ltd (2001) 11 ANZ Ins Cas ¶61-48222 (1929) 98 LJKB 30823 CCH Australia Limited, "Australian and New Zealand Insurance Reporter" (2004) at paragraph [27-260]24 (1970) 1 Lloyd's Rep 119025 CCH Australia Limited, "Australian and New Zealand Insurance Reporter" (2004) at paragraph [27-260]26 Commercial Union Assurance Co v Lister (1874) LR 9 Ch App 483; Morley v Moore [1936] 2 KB 539; Bourne vStanbridge [1965] 1 All ER 241; Arthur Barnett Ltd v National Insurance Co of New Zealand [1965] NZLR 874. See Kelly &Ball “Principles of Insurance Law” (2004) at [9.0110]27 See Kelly & Ball's “Principles of Insurance Law” (2004) at [9.0110]28 Arthur Barnett Ltd v National Insurance Co of New Zealand Ltd [1965] NZLR 874

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It appears that the insured will be liable for the costs of proceedings if they are instituted without theconsent of the insurer.29 Further, if the insurer commences proceedings, it appears that it will beliable for the costs thereof if the proceedings are unsuccessful.30 If the proceedings are successful,the House of Lords31 considered that the costs borne by the insured (e.g. the amount exceedingthe insured’s indemnity) should be recovered first. The insurer is then entitled to recover theamount of the indemnity that it provided to the insured under the policy. Finally, the insured mayrecover the excess paid under the policy. Alternatively, the insurer and the insured may reachagreement as to the payment of the costs of the action and the distribution of proceeds.

Unfortunately, the situation is somewhat unclear when recovery is made in respect of both insuredand uninsured losses. It has been suggested that the insurer should recover for any insured loss inpriority to the insured and where it is not possible to determine whether a particular recoveryrelates to insured or uninsured loss, the amount should be proportioned pro rata.32

2.3 Position under the Insurance Contracts Act 1984

For insurance contracts governed by the Insurance Contracts Act 1984, section 67 provides thatthe insured is entitled to receive from the insurer any funds recovered by the insurer. However,unless the policy provides otherwise, the insured cannot recover:

(a) an amount greater than the amount by which the sum recovered exceeds theamount paid by the insurer to the insured in respect of the loss; or

(b) an amount that, together with the amount paid by the insurer to the insuredexceeds the amount of the insured’s loss.

The relevant “amount” is exclusive of the insurer’s administrative and legal costs.

Essentially the intention of the above provision is that if the insurer, in the exercise of its rights ofsubrogation, recovers an amount in excess of the insured’s loss, that amount belongs to theinsurer. Otherwise, any amount recovered in excess of the amount previously paid by the insurerto the insured, where the insured has not been fully indemnified, goes to the insured, subject to theproviso that the insured can never receive, in total, an amount greater than their loss.

However, the insurer and insured are free to agree as to the distribution of the proceeds of anyrecovery action either before or after a loss occurs.

29 National Fire Insurance Co v MacLaren (1886) 12 OR 682; Baloise Fire Insurance Co v Martin [1937] 2 DLR 24; Kelly &Ball “Principles of Insurance Law” (2004) at [9.0110]30 See Kelly & Ball “Principles of Insurance Law” (2004) at [9.0110]31Lord Napier v Hunter [1993] AC 71332 See Kelly & Ball “Principles of Insurance Law” (2004) at [9.0120]

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3. The Effect of Prior Conduct of the Insured or Insurer

3.1 Conduct of the Insured

An insured is under a general duty not to engage in any conduct that would prejudice thesubrogation rights of the insurer, even in the absence of an express term to that effect in theinsurance policy.33

Specifically, after a loss has occurred, the insured must not purport to release a third party againstwhom it may have a right of action.34 This would interfere with the insurer’s subrogation of thatright.35 Further, in conducting litigation against a third party, the insured must ensure that it hasproper regard for the insurer’s rights.

The availability of an action against a third party is the fundamental basis of an insurer’ssubrogation rights and an insurer will generally be bound by any settlement or abandonment of aclaim by the insured.36 If a third party accepts a release provided by the insured and is unaware ofthe insurer’s interests, the release will act as a defence against a claim by the insurer. In addition,if proceedings have already been unsuccessfully commenced by the insured against a third party,the insurer will be faced with a defence that ‘the insured himself has already taken and concludedproceedings in respect of a claim based upon a loss which was outside the cover,’ 37 for example,proceedings for an uninsured part of a loss.

Such conduct by the insured would result in it being liable to the insurer for damages for thereduction or loss of the insurer's subrogation rights.38

3.2 Release of a Third Party

There is some doubt as to the extent to which a settlement or release of a claim by the party incontrol of the proceedings binds the other, where the third party has knowledge of the insured’sinterests.39

The better view appears to be that expressed in State Government Insurance Office (Qld) vBrisbane Stevedoring Pty Ltd,40 in which the Court indicated that an attempt by the insured toprejudice the insurer’s subrogation rights may be ineffective ‘because of knowledge of the

33 See discussion in Law Book Company, "Laws of Australia" (2004) at paragraph [237]34 West of England Fire Insurance Co v Isaacs (1897) 1 QB 226; Phoenix Assurance Co v Spooner (1905) 2 KB 75335 However, before a loss has occurred, the insured is free to agree with a third party to limit its rights against him or her, inwhich case the insurer would only be entitled to subrogate the limited rights. See CCH Australia Limited" Australian andNew Zealand Insurance Reporter" (2004)36 West of England Fire Insurance Co v Isaacs [1897] 1 QB 226; Nare Chemical v Cosmos Chemical 36 DLR (3d) 483;National Employers mutual General Insurance Co v CMT Constructions (1987) 4 ANZIC 60.824; Derrington & Ashton, “TheLaw of Liability Insurance,” (1990) at page 76137 Derrington & Ashton, “The Law of Liability Insurance,” (1990) at page 761-76238 State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228; Barnett Ltd v NationalInsurance Co of New Zealand Ltd (1965) NZLR 87439 See Kelly & Ball “Principles of Insurance Law” (2004) at [9.0110.15]40 (1969) 123 CLR 228

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circumstances which the person under obligation to the insured may have.’41 In the case ofMorganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd,42 Justice Smart cited the followingpassage from State Government Insurance Office (Qld) v Brisbane Stevedoring Company withapproval:

“It is settled law that an insured may not release, diminish, compromise or divert the benefit of anyright to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation. Onoccasions an attempt by the insured to do so will be ineffective against the insurer because of theknowledge of the circumstances which the person under obligation to the insured my have. On otheroccasions, when the insured’s act has become effective as against the insurer, the insured will beliable to the insurer in damages or possibly, on some occasions for money had and received.”

The Court in Morganite held that as the defendant was aware that an insurer was involved therelease entered into was ineffective against the insurer.43

The New South Wales Supreme Court again considered the issue in the case of Le v Williams,44

but did not ultimately decide whether the principle existed, instead deciding the case on othergrounds.

3.3 Insurance Contracts Act 1984

In addition, section 41 the Insurance Contracts Act 1984 provides a statutory mechanism wherebyan insured may settle or admit a claim against it if it has requested in writing that the insurerconfirm that it will admit that the contract applies to the claim and that it will conduct thenegotiations and legal proceedings on the insured's behalf, and the insurer does not reply within areasonable time.

3.4 Conduct of the Insurer

It is worth noting that settlement of an insured’s claim by an insurer in such as way as to prejudicethe insured’s rights, may allow the insured to claim damages against the insurer by ‘relying on animplied term in the policy to the effect that the insurer shall not exercise rights of subrogation to theinsured's prejudice.’45 However, this remedy is unlikely to be of much practical importance exceptin the situation in which the insured has lost the prospect of recovering an amount in excess of itsloss or where the insurer has also settled a claim for an uninsured loss.46

The issue of wavier has been discussed previously in this presentation. However, it is worth notingthat conduct of the insurer can also constitute a waiver of its rights of subrogation and thereby all ofits rights and remedies to which it may have been entitled by way of subrogation.47 For example, ifthe insurer agrees to conduct an insured’s defence, this may constitute a waiver of the insurer’s

41 See Kelly & Ball “Principles of Insurance Law” (2004) at [9.0110.15]42 (1988) 5 ANZ Ins Cas ¶60-88343 Law Book Company, "Laws of Australia" (2004) at paragraph [234]44 [2004] NSWSC 64545 England v Guardian Insurance Ltd [2000] Lloyd's Rep I.R. 404; Leigh-Jones et al, “MacGillivray on Insurance Law”, 10th

Ed (2003) at page 59146 Leigh-Jones et al, “MacGillivray on Insurance Law”, 10th Ed (2003) at page 59147 Larson-Juhl v Jaywest (2001) 11 ANZ Ins Cas ¶61-499

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right to rely on the breach of the policy by the insured to avoid liability.48 If the insured can showthat it would suffer material detriment, the doctrine of estoppel may also act to prevent the insurerfrom denying liability under the policy.49

4. Actions Where Fraud Is Alleged

Two recent New South Wales cases have considered whether an insurer can deny indemnity andrefuse to advance defence costs when seeking to rely on an exclusion clause relating to dishonestor fraudulent conduct.

4.1 Silbermann v CGU Insurance

In the case of Silbermann v CGU Insurance Ltd,50 the New South Wales Court of Appeal held thatan insurer can refuse to advance defence costs when relying on an exclusion clause relating todishonest or fraudulent conduct and such conduct has not been disproved or otherwise determinedin favour of the insured.

(a) The Facts

Mr Silbermann, Mr Rich and Mr Greaves (the directors) were former directors of One.Tel Ltd. Thedirectors sought a declaration obliging the insurer to indemnify them and to advance defence costsfor investigations brought by the Australian Securities & Investments Commission.

The contract of insurance provided for the following:

• a clause providing general cover for directors and officers for any loss arising out of anyclaim for which their corporation could not indemnify them;

• an automatic extension provision so that where the insurer did not take over the defence orsettlement of any claim, it will meet the defence costs of defending or settling any claim asit is incurred and prior to the finalisation of the claim, provided it had confirmed in writingthe indemnity for such a claim; and

• a provision to the effect that where the insurer has not confirmed indemnity nor taken overthe defence, it could, in its discretion, pay defence costs as they are incurred and prior tothe finalisation of the claim, provided it had consented in writing to such defence costsbefore they are incurred, such consent not being withheld unreasonably.

Exclusion clause 3 of the insurance policy excluded indemnity for any claim made against adirector or officer brought about by, contributed to by, or which involved fraud by the director orofficer. However, the exclusion was expressed to apply only to the extent that the relevant conducthad been established by judgment or other final adjudication adverse to the director or officer.

48 Lickiss v Milestone Motor Policies of Lloyds (1966) 2 All ER 972. See discussion in CH Australia Limited" Australian andNew Zealand Insurance Reporter," (2004) at paragraph [19-160]49 Territory Insurance Office v Adlington (1993) 7 ANZ Ins Cas ¶61-14950 Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd; Greaves v CGU Insurance Ltd [2003] NSWCA 203 (25 July2003)

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In reaching its ultimate decision, the New South Wales Court considered three separate questionsin relation to the construction of the particular Directors and Officers Liability Insurance Policy,namely:

1. whether or not the insurer could rely on a dishonesty exclusion in answer to the directors'claim for indemnity under the policy absent an existing judgment, order or after finaladjudication adverse to the directors;

2. whether the insurer was entitled to seek a judgment, order or other final adjudicationadverse to the directors so as to enable it to exclude liability in reliance on the dishonestyexclusion, in the same proceedings in which the directors made a claim for indemnityagainst the insurer; and

3. whether the dishonesty exclusion operated to exclude liability on the part of the insurer topay claims by the directors for indemnity for defence costs under relevant clauses of thepolicy.

The Court unanimously answered yes to both question 2 and question 3. However, the Court didnot reach agreement on the answer to the first question.

(b) The Majority Judgment

Justices Beazley and Tobias, in the majority, answered yes to all three questions. They held thatan insurer could wait for the outcome of a claim involving fraud before indemnifying the insured fordefence costs. They considered that the insurers' discretion to refuse to pay defence costs wassubject only to the duty of utmost good faith. Provided the insurers had, on the informationavailable to them, a reasonable basis for invoking the dishonesty exclusion they could exercisetheir discretion not to pay defence costs.

However, the majority considered that the maintenance of the refusal to advance defence costswas subject to the insurer establishing by judgment or other final adjudication that the relevantconduct was dishonest or fraudulent.

(c) The Minority Judgment

Justice Hodgson answered no to question 1 and yes to questions 2 and 3. He noted that theconstruction and effect of the exclusion clause must be considered ‘in light of the apparentcommercial purpose of the Policy, namely to provide the insured with defence costs to fight claims,not excluding claims which allege dishonesty, and to provide indemnity against liability to thirdparties, at least where this liability is not contributed to by dishonesty.’51 Further, His Honour notedthat ‘questions of honesty of conduct of Directors and Officers of companies are often difficult andmarginal, and a finding of dishonesty should generally be made only after natural justice has beengiven to persons against whom allegations of dishonesty are made.’52

Justice Hodgson observed that in cases such as this one, an insured could contend that a fairdecision as to whether there was dishonesty or fraudulent conduct could not result without theadvancement of defence costs. Further, Justice Hodgson noted that an insurer could argue that it

51 at paragraph 4552 at paragraph 48

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would lose the benefit of the dishonesty exclusion if it were compelled to fund the defence. Hegave greater weight to the insured's interest in a fair hearing, and found in favour of the insured.

(d) Implications of the Decision

The decision in Silbermann is of considerable practical importance. It means that where an insurerhas discretion as to the payment of defence costs, it may rely on a fraud exclusion as a basis ofrefusal to pay, even though the exclusion is expressed to be subject to judgment or finaladjudication adverse to the insured. However, the insurer must exercise its discretion consistentlywith its legal obligation to act in good faith. In practice, this would require a legal opinion to theeffect that there is a reasonable basis for invoking the fraud exclusion.

4.2 Wilkie v Gordian Runoff & Anor

The New South Wales Supreme Court in the case of Daniel Wilkie v Gordian Runoff Limited &Anor (formerly known as GIO Insurance Limited),53 held that insurers can deny indemnity andrefuse to pay defence costs in cases in which they, in good faith, seek to rely on an exclusionclause applicable to dishonest or fraudulent conduct. Further, the Court considered that there wasno need for a judgment or other final adjudication to be made before an insurer can deny indemnityin reliance on a fraud or dishonesty exclusion, even if the exclusion is only expressed to apply if thefraud or dishonesty is established by judgment or final adjudication.

(a) The Facts

The insurer in this case issued the plaintiff with a Directors and Officers insurance policy. TheAustralian Securities and Investment Commission brought proceedings against Mr Wilkie forbreach of the Corporations Act 2001, alleging that Mr Wilkie knowingly permitted misleadinginformation to be provided to the auditors of the company and acted dishonestly in the discharge ofthe duties of his office.

Mr Wilkie sought consent for the advancement of his defence costs from the insurer. The insurernotified Mr Wilkie in writing that they were denying indemnity for the claim, based on the terms ofexclusion 7 in the insurance policy. Exclusion clause 7 operated to exclude insurance for lossesarising out of any claims that were based upon, attributable to, or in consequence of a dishonest orfraudulent act or omission where such act or omission has in fact occurred.

The words 'in fact' were defined to mean ‘the conduct referred to in those exclusions is admitted bythe insured or is subsequently established to have occurred following the adjudication of any court,tribunal or arbitrator.’

Clause 9 of the insurance policy provided for the advance payment of defence costs if:

• the insurer elected not to take over and conduct the defence or settlement of any claim;

• the insurer had not denied indemnity for the claim; and

• the written consent of the insurer was obtained prior to the insured incurring the defencecosts. The insurer could not unreasonably withhold such consent.

53 [2003] NSWSC 1059 (18 December 2003)

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(b) The Plaintiff's Submissions

Mr Wilkie argued that the relevant exclusion clause did not apply on the basis that the conduct thatwas the subject of the claim was not established to have occurred by the adjudication of any court,tribunal or arbitrator. In addition, Mr Wilkie asserted that the insurer only had the right to claw backdefence costs after it had been established by judgment or other final adjudication that indemnitywas not available under some exclusion or otherwise and not beforehand.

(c) The Judgment

Justice Nicholas adopted and followed the reasoning of Justice Tobias in Silbermann. He notedthat the insurance policy was not intended to provide a form of 'up front' indemnity for the defencecosts to the insured in the circumstances raised. Rather, the clear structure of the insurance policyentitled the insurers to refuse indemnity for any part of any loss, including defence costs, onsubstantiated grounds under exclusion clause 7.

Justice Nicholas ultimately agreed with the argument put forward by the insurer and held that theinsuring clause ‘required the insurer to pay any loss, which includes defence costs, arising fromany claim provided such loss does not fall within a category which is excluded under the policy.Exclusion 7 therefore operates to exclude indemnity against the final consequences of any claim,including defence costs incurred in defending it.’

4.3 Conclusion

The outcomes in both Silbermann and Wilkie provide insurers with a degree of comfort whencontemplating the exercise of their discretion to refuse indemnity in circumstances of dishonest orfraudulent conduct. While it is likely that similar reasoning will apply to most director and officerpolicies, the future state of the law in this area is not certain. In both of these cases, special leavehas now been granted to appeal to the High Court of Australia.54 Such an appeal may establishcertainty for insurers as to what circumstances they will be entitled to refuse to pay defence costsin reliance upon an exclusion clause relating to dishonest and fraudulent conduct.

5. Privilege issues

5.1 General

The existence of privilege in documents has always been and continues to be an importantissue for insurers to consider in the running of litigious matters. It is often said thatsometimes all it takes to make or a break a case is a single document, and with that ratherdaunting thought in mind it is important for insurers to take all steps possible to protect anyprivilege attaching to documents held by them and/or the insured in any proceedings.

Until late 1999 the leading authority on the question of privilege in Australia was the HighCourt decision in Grant v Downs55. That test for privilege outlined in that case was whetherthe communication in question had come into existence for the sole purpose of enabling

54 Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd [2004] HCATrans 217 (18 June 2004); Wilkie v GordianRunoff Ltd & Anor [2004] HCATrans 271 (6 August 2004).55 Grant v Downes (1976) 153 CLR 674

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the client to obtain, or the adviser to give, legal advice, or with reference to actual,proposed or threatened litigation.

The privilege landscape in Australia, however, changed markedly following the 2 decisionsof the High Court in late 1999 of Mann v Carnell56 and Esso Australia Resources Limited vThe Commissioner of Taxation57.

In the case of Mann v Carnell the High Court resolved a question of inconsistency betweenprivilege provided for under the Evidence Act 1995 and that provided for under thecommon law, holding that the relevant sections of the Evidence Act specifically limited theapplication of the privilege provided for to the adducing of evidence whether at trial or in thecourse of an interlocutory proceeding.

In the case of Esso Australia Resources Limited v The Commissioner of Taxation the HighCourt accepted the line of reasoning put forward by the appellant that the decision of Grantv Downs should be overturned, and found that the dominant purpose test should beregarded as being the appropriate test for privilege at common law.

The decision of the court in Esso has had the effect not only of firmly establishing thedominant purpose test, but also the consequential effect of broadening the scope ofprivilege doctrine generally. The decision has greatly increased the number and type ofdocuments over which privilege can validly be asserted, and has reduced insurers'exposure to the disclosure of documents such as accident reports, internal reports, lossassessors' reports or other documents created in investigating a claim. That is not, ofcourse, to suggest that all such documents attract legal professional privilege.

What follows is a short overview of two particular issues that may arise in connection withthe broader question of privilege, and a review of two recent cases in the area.

5.2 Joint and common interest privilege

Where an insurer and an insured together pursue the prosecution or defence ofproceedings, the privilege existing in documents created for the dominant purpose of alawyer providing legal advice or services, is a joint privilege. The privileged communicationmay be disclosed to each without breach of the privilege as each shares an interest in thesubject matter. The privilege is held jointly and waiver by one party is insufficient to waivethe other's privilege in the document.58

In a similar but slightly different manner, documents may be the subject of common interestprivilege where disclosure of the nature or contents of a document amongst others with acommon interest will not create a waiver of privilege by the disclosing party. An insurerand an insured may have a shared or similar interest in advancing a claim on behalf of theinsured, or in defeating a claim against the insured, and this will give rise to a shared orcommon interest privilege.

56 Mann v Carnell (1999) 201 CLR 1

57 Esso Australia Resources Limited v The Commissioner of Taxation (1999) 201 CLR 49

58 Mercantile Mutual Insurance (NSW Workers) [2004] NSWCA 151

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5.3 A recent case - Mercantile Mutual Insurance (NSW Workers Compensation) Ltdv Murray

An issue often of primary importance for insurers is whether privilege attaches to lossassessors reports. Prior to the Esso decision in 1999 it was often difficult to prove thatsuch reports were created for the sole purpose of obtaining legal advice. While it is noweasier to prove that in many cases such documents should attract privilege, other issuessuch as which party (insurer or insured) the privilege belongs to have remained uncertain.

In June 2004 the NSW Court of Appeal handed down its decision in the Mercantile MutualInsurance (NSW Workers Compensation) Ltd v Murray59 which was an appeal concerninga dispute between an insurer (the appellant) and its insured (the respondent) as to theinsurer's right to use statements provided by the insured to a claims assessorcommissioned to investigate a workplace injury.

Proceedings were commenced by Mr Lorraway (the plaintiff) against the insured claimingdamages for injuries sustained when a ladder collapsed from under him. The insurednotified its insurer seeking indemnity under a policy issued under the WorkersCompensation Act 1987.

The insurer arranged for claims assessors to conduct a full factual investigation, during thecourse of which the insured provided information to the assessor. The insurer retained alaw firm, Turks, to file a defence in the proceedings and to advise it as to liability, quantumand recovery. A copy of the assessor's report was provided to Turks and to the insurer.Shortly afterwards, a Notice of Grounds of Defence was filed by Turks on behalf of theinsured.

Some time later, the insurer advised the insured that it would not indemnify him, on thebasis that the plaintiff was not a deemed worker within the Act. A second law firm, GellsLawyers, then filed on behalf of the insured, a cross-claim against the insurer seekingindemnity. The insured also objected to Turks continuing to act for the insurer now thatindemnity was being disputed.

The insurer retained a third law firm, Moray & Agnew, to take over the proceedings.Despite the requests of the insured's solicitors not to do so, Turks forwarded to Moray &Agnew the full contents of their file, including the assessor's report. On the first day of thetrial the insured's solicitors sought production from the insurer of all copies of theassessor's report which it claimed represented privileged communications. It is this claim ofprivilege which formed the basis of the appeal

It was common ground between the insured and insurer that the assessor's report wassubject to client legal privilege. However, a dispute arose as to the identity of the client(s)entitled to invoke the privilege. The question that arose was whether the insurer couldhave access to the report and its enclosed statements in defence of the cross-claimbrought against it by the insured.

59 [2004] NSWCA 151

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At trial, Coorey DCJ held that the insured was the sole client of Turks and that privilege inthe relevant documents was that of the insured alone. Accordingly the insurer was orderedto produce to the court all copies of the assessor's report. The insurer appealed.

The Court of Appeal in allowing the appeal held (per Mason P, Handley JA and BrownieAJA agreeing) that:

(a) Turks became the respondent's solicitor when they filed a defence in theproceedings, however, they were also solicitor for the insurer and remained so, atleast until a conflict arose; and

(b) There was joint privilege in the report when commissioned. There was no breach ofprivilege or fiduciary duty when the insurer obtained its copy of the report.

Mason P found that the privilege that existed in the report was jointly held, stating:

'If two persons join in a legal enterprise, the privilege is their joint privilege. From this itfollows that the privileged communication may be disclosed to each without breach ofprivilege, because each client shares an interest in the subject matter of thecommunication.60 '

It was further held that while both parties would be entitled to maintain their privilegeagainst the rest of the world (with neither being capable of waiving the others privilege inthe document) that 'joint clients may not maintain privilege against each other61.

Mason P further stated that in his view there was:

'no doubt that Turks became the respondent insured's solicitor when, on instructions fromthe insurer, they filed a defence in the plaintiff's proceedings… It follows that any informationdivulged confidentially by the insured to the solicitor would attract client-legal privilegewhether or not the insurer was also a client. On top of that, the solicitor would have beenunder duties of confidentiality and undivided loyalty to the insured client not to divulge thatinformation to the insurer without permission to the extent that the information was adverseto the insured's interests, unless of course the policy conditions clearly overrode any suchobligation.'62

Mason P, however, distinguished the current situation from any obligation on the solicitor tomaintaining confidentiality in connection with the assessors report, noting that at the time ofcommission of the report no conflict of interest had arisen, and there was no suggestionthat the assessor was secretly working in the insurer's interest

This Mercantile case is important as it provides some clarification on the nature of theprivilege attaching to a report prepared by a third party when both insured and insurer arerepresented by the same lawyers. The case also reinforces the fact that while the jointprivilege protects the parties from the production of those documents to third parties, itdoes not prevent the parties from using the documents in proceedings against one another.

60 Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray [2004] NSWCA 151 at paragraph 4161 Ibid at paragraph 4162 Ibid at paragraph 57

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5.4 Privilege in pleadings and statements

Another issue that often arises in connection with the running of court proceedings iswhether privilege attaches to pleadings and affidavits that have been filed and served in aproceeding, and if so whether at and what point of the proceeding privilege in thosedocuments is waived.

The NSW Court of Appeal case of Abigroup v Akins63 is authority for the proposition thatthe filing and service of witness statements pursuant to a court direction is "undercompulsion of law" and therefore does not entail a waiver of client legal privilege.

In the recent case of Ingot Capital Investments Pty Ltd & ors v Macquarie Equity CapitalMarkets Limited & Ors64 in the Supreme Court of New South Wales the question of theretention of privilege in documents that have been filed and served was again considered.

In this case Macquarie issued subpoenas to Henry Davis York as law firm of a third party,that third party being involved in different but arguably related proceedings, seeking accessto (amongst other documents) the pleadings and affidavits filed and served in those relatedproceedings. Henry Davis York resisted production of the subpoenaed documents on thegrounds that they were the subject of legal professional privilege.

Counsel for Macquarie did not attempt to argue that Abigroup v Akins was wrongly decidedbut rather that in this case it was clear that once the pleadings and affidavits were signedthey were no longer documents prepared for the dominant purpose of the lawyer providingadvice or services, but rather the advancement of a party's interests in a public forum.

Justice Bergin rejected this reasoning. Instead her Honour addressed the question ofwhether the relevant documents had been filed and served under compulsion of law asbeing the deciding factor in relation to whether privilege had been retained. Bergin J foundthere was no compulsion on a party to make a claim against another party65, meaning thatan originating process or statement of claim (regardless of whether requirements exist asto the form such documents should take) once filed and served will lose their privilegedstatus.

In relation to the affidavits, however, Bergin J applied Abigroup v Akins stating that thecase management practice of the Supreme Court requires that a party 'must' file asupporting affidavit with an originating process in circumstances where there is 'nonecessity to file and serve it until the evidence is given'66, and that that requirementamounted to a compulsion of law such that privilege continued to exist in the affidavit.

The relevance of this cases for insurers and insureds alike is that in conducting litigationproceedings both parties should be alert to the fact that privilege will continue to exist inaffidavits that have been filed and served unless and until they are read in open court, orsome other step is taken resulting in the waiver of privilege. This will be particularly

63 (1998) 43 NSWLR 53964 [2004] NSWSC 4065 ibid at paragraph 4466 Ibid at paragraph 45

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important in considering the purposes for which affidavits served on a party may be utilisedby that party.

It is also relevant to point out, that parties to proceedings have a general obligation not touse affidavits, witness statements, discovered documents and the like for ulterior purposes– that is, documents in the possession of a party to litigation purely because of theirparticipation in those proceedings should not be used for any purpose other than inconnection with the litigation.

6. Relationship between the insurer and the insured

6.1 General

As set out above, where the insurer has fully indemnified the insured for the actual loss, theinsurer is entitled to control proceedings regarding that loss. The question that arises,however, is what rights does the insurer have to enforce that position, and what are theobligations associated with control of court proceedings.

6.2 When the insured does not want proceedings brought in its name

One particular issue that can arise is the insurer's position if an insured objects toproceedings being brought in their name.

In such circumstances some of the options the insurer may consider include:

(a) bringing an action to compel the insured to allow the use of their name;

(b) bringing an action against the third party and the insured together, seeking anorder that the insured be substituted as a plaintiff;

(c) bringing an action jointly against the third party and the insured seeking an orderthat the third party pay damages to the insured and some further orders protectingthe insurer's interest in those monies as against the insured; or

(d) bringing an action against the insured for breach of the contract of insurance andpossibly the duty of utmost good faith.

6.3 When the views and interests of the insured and insurer differ

There are inevitably circumstances in which the interests of an insurer which has exercisedits right under a policy to take control of court proceedings differ from those of the insured.party. Such circumstances raise questions of whose interests are permitted to be regardedas paramount, and the extent to which the party with control of the proceedings is obligedto consider the other party to the insurance contract.

The case of Groom v Crocker67, while a relatively old case, remains (on the aspect of thecase that deals with the relationship between insurer, insured and solicitor at least) goodlaw, and highlights several relevant issues for consideration.

67 [1939] 1 KB 194

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In Groom v Crocker, William Groom was driving a car in which his brother Aubrey was apassenger. A lorry owned by Tear Bros collided with their car. Aubrey Groom sued TearBros and his brother William. William was insured against third party risks by the NationalFiremen's Union Mutual Insurance Society Limited. William's policy provided that:

(a) as the insured he was obligated to give all such information and assistance asrequired by the insurer to settle or resist any claim; and

(b) that the insurer would if and so long as it desires have absolute conduct andcontrol of all and any proceedings against the insured…and shall be entitled to usethe name of the insured to enforce for the benefit of the [insurer] any order madefor costs or otherwise or to make or defend any claim for indemnity or damageagainst third-parties.

Firemen's Union Mutual took control of the court proceedings on behalf of William. TearBros as owner of the lorry were also insured for third-party risks with a different insurer,Motor Union Insurance Co Ltd.

William's insurers and Crockers, the solicitors they appointed to act on William's and theirbehalf, realised that the negligence of Tear Bros was the sole cause of the collision, fromthe "very first moment" when they respectively considered the case.

Tear Bros' insurer invited William's insurer to do a deal with it to save themselves money.Tear Bros' insurer agreed to split both insurers' eventual liability to Aubrey Groom, 50/50.The price of this agreement was that William's insurer would file a defence for Williamadmitting the negligence alleged against him. Tear Bros' insurer would then denynegligence on its insured's part. The aim was to persuade Aubrey Groom to discontinueagainst Tear Bros and to proceed against William Groom only, the advantage being thatthe amount of damages would be the only issue. Given William's innocence it was likelythat damages would be small. The two insurers had a "knock for knock" agreement and itappears that the benefit for William's insurer was a similarly favourable apportionment ofliability in another matter.

Crockers instructed counsel to settle a defence admitting negligence on the part of William.Neither the insurer nor Crockers ever communicated with William "in regard to anythingwhatever"68 relating to the action or the defence.

William Groom then sued his insurer for damages for breach of duty and his solicitors,alternatively, in contract and tort and for libel. William's claim against the insurers failed forreasons which are not presently relevant, and it was the claim against the insurers that wasin issue in this case.

Crockers claimed that their conduct was in compliance with or covered by the instructionsgiven to them by the insurer and also defended themselves on the basis of the terms of thepolicy. The validity of the solicitor's defence depended on the true measure of the insurer'sright under the policy to give instructions.

Sir Green MR found that the effect of the provisions of the policy providing the insurer withthe right to conduct and control proceedings was as follows:

68 ibid. at 217.

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'The effect of the provisions in question is, I think, to give to the insurers the right to decideupon the proper tactics to pursue in the conduct of the action, provided that they do so inwhat they bona fide consider to be the common interest of themselves and their[insured]. But the insurers are in my opinion clearly not entitled to allow their judgment asto the best tactics to pursue to be influenced by the desire to obtain for themselves someadvantage altogether outside the litigation in question with which the [insured] has noconcern.'69

The Court of Appeal further found that while the insurance policy gave the insurer:

'an absolute right to control [its insured's] defence; but the scope of this right was, in myview, subject to certain implied boundaries and limitations. It was not one which they wouldbe entitled to exercise arbitrarily. They were bound to exercise a real discretion upon eachquestion as it arose in the conduct of the defence, making each decision after dueconsideration of the circumstances of the particular case…..

The [insurer] here in making [its] profitable bargain with the Motor Union were acting asmuch outside that discretion as if [it] had accepted a bribe from a stranger in considerationof [its] instructing the appellants to put on record in Aubrey's action an admission of therespondent's negligence. The inclusion of the other action in which the respondent had nointerest whatever, as a circumstance material to the exercise of [its] discretion, of itselfimported a failure to exercise the discretion which by the contract they had undertaken toexercise, and was therefore a breach of their contract, and that initial breach invalidated thewhole of their consequent instructions to the [solicitors]. The policy conferred upon [it] noright to call upon the [solicitors] to act on [its] mandate, and the solicitors derived noauthority from it to do what they did.'

The Court then made the following general observations regarding the duties of solicitorsand insurers, in circumstances where the solicitors are instructed by insurers who aredefending a claim by a third party against an insured:

The [solicitors] were acting from first to last in breach of their contractual duty to the[insured]. First, they were repudiating the very existence of the relationship of solicitor andclient between themselves and the [insured] which was constituted by the nomination of the[insured]; secondly, they were acting on orders which the [insurer] had not right to give, andtaking action with which they knew their client did not agree; and, thirdly, they did not informhim, or give him an opportunity to challenge the right of the insurer to give the instructionsthey had given, or, if need be, to intervene and conduct the defence of the case himself athis own expense.

The solicitor, nominated by the [insurer], is the solicitor for the [insured], who is his client.But he is also appointed by the [insurer] to protect its interests. If in regard to any questionof tactics in conducting the litigation the solicitor has reason to discern a conflict, or possibleconflict, of interest between the [insurer] and the [insured], it is the duty of the solicitor toinform the [insured] of the matter. If the [insured] then insists on a course that the [insurer]disapproves, it can refuse to conduct or control the proceedings any longer, and leave the[insured] to do so at his own cost, and at the risk, if the [insurer] is right in its view, of notbeing able to recover that cost under his policy.

69 ibid. at 203.

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While Groom v Crocker is a relatively extreme example of an insurer's blatant disregard forthe views and interests of the insured, it is useful in highlighting the relevant considerationsfor insurers and insureds in conducting litigation.

Several recent Australian cases including British American Tobacco Australia Services Ltdv Blanch70 and McKenzie v Director-General of Conservation and Natural Resources71

refer to Groom v Crocker as authority for the proposition that insurers and their solicitorsowe a duty to the insured to have proper regard to the interests of the insured inconducting the proceedings.

6.4 Obligations on the insurer as controller of court proceedings

It is a relatively well settled proposition that there is an obligation on whoever controls theproceedings to have proper regard to the interests of the other party to the insurancecontract. If the party in control of proceedings fails to have proper regard to the interests ofthe other party, and by doing so prejudices the other party's interests, that other party isentitled to make a claim for damages.72

While an insurer's right of subrogation is a broad one, it should not be interpreted in such away as to permit or require any action which would prejudice the substantial interests of theinsured. In taking control of court proceedings, issues which insurers (and their solicitors)should be aware of, and take into consideration include:

(a) their obligation to act bona fide;

(b) their obligation to have due regard to and to take into account the interests of theinsured;

(c) their obligation to act competently;

(d) their obligation to ensure that their instructions to solicitors and requirements madeof insureds are within the terms of the insurance policy as properly constructed;

(e) the fact that despite the apparent breadth of a policy wording providing for'absolute control' of proceedings that such a policy is still 'subject to certain impliedboundaries and limitations'73;

(f) the fact that in circumstances where a solicitor has been retained by an insurer todefend/prosecute a claim on behalf of an insured, that solicitor will ordinarilybecome the solicitor for the insured; and

(g) that if in conducting the litigation the solicitor identifies a conflict or possible conflictof interest between the insurer and the insured, it is the duty of the solicitor toinform the insured of the matter.

70 [2004] NSWSC 4071 [2001] VSC 22072 See Dufourcet and Co v Bishop (1886) 18 QBD 373; West of England Fire Insurance Co v Isaacs [1897] 1 QB 226;Phoenix Assurance Co Ltd v Spooner [1905] 2 KB 753; Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113 at 127–9; [1937] 1 All ER 714 at 723–5; Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2 QB 330; [1961] 2 All ER 487;Broadlands Properties Ltd v Guardian Assurance Co Ltd (1983) 3 ANZ Ins Cas 60–552.73 Groom v Crocker [1939] 1 KB 194 at