5. Legal Developments
AUSTRALIA
AILA-ANZIIF Insurance Law Annual Review, February 2006
Landmark decisions impact insurance law
The implications of landmark Australian court decisions were highlighted in presentations at a joint AILA-ANZIIF Insurance Law Annual Review in Brisbane in February.
Mark Waller, (Clayton Utz), cited a Victorian Court of Appeal case, Intergraph Best (Vic) Pty Ltd & Ors v QBE Insurance Ltd (2005) VSCA 180 (July 29, 2005), to reveal gaps that can exist in D&O policies. Intergraph operated a call centre for the Victorian Metropolitan Ambulance Service. A Royal Commission was held to investigate allegations of improper or illegal conduct by Intergraph in winning the call centre contract.
Directors and officers gave evidence during the commission, but did not incur legal costs. Intergraph incurred costs and paid for the directors' legal representation to attend the hearings. Intergraph claimed on its D&O policy for reimbursement. QBE denied liability because the policy only provided direct cover to directors and officers for claims against them arising out of the performance of their duties and to the company if it was required to indemnify directors and officers for such a claim.
Mr Waller said the case highlighted the importance of interaction between D&O insurance and any indemnity a company might give to its directors. "There was no legal obligation on Intergraph to fund the directors' defence. The policy only provided cover for directors' liabilities. The clear message is you have to look carefully at those arrangements to assess whether the policy responds. Because, to claim ... under those policies, you need to have the indemnity arrangements. This could have been solved if there was indemnity given by Intergraph to its directors, which is common practice, and if the directors had ... a policy of reimbursment of those costs from Intergraph."
Chris Brierley, (Ebsworth & Ebsworth), outlined a case in which the High Court found a real estate agent who issued a brochure with an inaccurate surveyor's diagram was not guilty of misleading or deceptive conduct. The diagram showed a swimming pool as being wholly within the boundaries of the property. The purchasers, who wanted to move the pool, won the right to get their deposit back when they decided not to buy the property and sued the agent.
The court, by majority, found the agent did no more than communicate what the vendor represented and disclaimers in the brochure were an adequate defence against misleading conduct.
Mr Brierley said the decision indicated a lenient approach to the inclusion of clearly visible disclaimers in promotional material.
Minter Ellison's Simon Alroe said the issue in Yaktine v Perpetual Trustees Victoria Ltd (2004)NSWSC 1078 was a dishonesty exclusion clause in a solicitor's professional indemnity policy.
The insurer denied cover because the solicitor witnessed forged signatures by a man who fraudulently secured power of attorney from his parents then sought to mortgage their property. There was considerable discussion on the interpretation of a policy wording that the exclusion applied where "the claim arises from any dishonest or fraudulent acts".
The insurer said the words "arises from" provided a broader exclusion clause that the traditional "brought about by". Chief Justice Young said there was no need to answer that question because the solicitor's dishonest conduct had sufficient causal connection to activate the exclusion clause. Mr Alroe said it was unfortunate Young CJ did not rule on that aspect because it would have significant implications for insurers.
DENMARK
How 30 Eggs Precluded a National Danish Rule
By Mikael Rosenmejer, Partner and Søren Vagner Nielsen, Associate Partner, Plesner Law Firm, Denmark
In 1998, a Danish consumer bought 30 eggs in a local supermarket. The eggs had been delivered to the supermarket by a purveyor (or producer) of eggs domiciled in another part of Denmark. The same evening, the consumer made an omelette and shortly after having enjoyed the meal, she and her husband became seriously ill with salmonella poisoning.
After their recovery, they took legal proceedings regarding claims for personal injury damages against the supermarket in its capacity as supplier of the eggs (intermediary), but omitted to take proceedings against the producer. The producer was therefore only a party to the case due to a third-party notice issued by the supermarket.
By judgment in 2002, the local district court found that the eggs had been defective, that there was a causal relation between the defect and the personal injuries of the consumers, and that contributory negligence from the consumers had not been proven. The supermarket was ordered to pay damages to the consumers, and the producer was ordered to indemnify the supermarket.
The judgment of the district court was appealed to the High Court by the supermarket and the producer. Upon request from the supermarket, the High court decided to stay the proceedings and ask for a ruling by the European Court of Justice as to whether the Danish rule imposing a vicarious liability on the intermediary for the producer's no-fault liability is in conflict with the EEC Directive on product liability (85/374/EEC of 25 July 1985).
The Danish Act on Product Liability from 1989
Prior to 1989, the liabilities of the producer and the supplier for defective products were governed by case law based on the principle of fault. In some court cases, however, the producer was held liable on the basis of a no-fault liability. Furthermore, the suppliers were responsible for the liability of the producers according to a rule on vicarious liability.
The purpose of the Act on Product Liability from 1989 was to put the existing case law into statutory form and to implement the above-mentioned Directive in Denmark.
According to the Danish Act, the definition of a producer is in line with the definition found in the EEC Directive. Thus, a producer of a finished product, a component part or any raw material, or anyone producing or collecting a natural product is deemed to be a producer. Also a person putting his name, trademark or other distinguishing feature on a product is regarded as a producer. Further, any person who in the course of his business imports into the Community a product for distribution is a producer in the context of the Act and the Directive.
To prevent a situation where the consumer has to sue a producer outside the Community, the Directive and the Danish Act provide that if and when a producer of a product cannot be identified, each supplier of the product shall be treated as its producer, unless he informs the injured person of the identity of the producer or of the person who supplied him with the product.
However, in order to give the consumer a better protection, the Danish legislators broadened this last concept by imposing on each Danish supplier of a product a vicarious liability for the producer's no-fault liability. This means that an injured person can sue the shop where the defective product was bought, and the shop then has to ask the producer for indemnification.
Judgment of the European Court of Justice on 10 January 2006.
The essential questions brought before the European Court of Justice were:
1. Does the Directive preclude a national rule which regulates the liability of the intermediary by stating that the no-fault liability which the Directive introduces and imposes on the producer is transferred to the intermediary?
2. Does the Directive preclude a national rule which transfers the producer’s fault-based liability to the intermediary?
The Court states that the purpose of the Directive is to achieve complete harmonisation of the laws, regulations and administrative provisions of the Member States. (1)
The Court further states that the purpose of Articles 1 and 3 of the Directive is not only to regulate the liability of the producer, but to determine which of the number of operators taking part in the manufacture and marketing processes has to assume the liability established by the Directive.
Therefore, the Directive precludes a national rule like section 10 of the Danish Act according to which the no-fault liability established by the Directive and imposed on the producer is transferred to the intermediary.
Regarding the second question, the Court states that the Directive does not preclude the application of other systems of contractual or non-contractual liability based on other grounds, such as fault or a warranty in respect of latent defects. Therefore, the Directive does not preclude a national rule under which the producer’s fault-based liability is transferred to the intermediary.
The Consequences of the Judgment
If we recur to the pending Danish court case, the judgment of the European Court of Justice will mean that the High Court cannot base its decision on the same legal grounds as the district court.
The supermarket can only be held directly responsible for product liability to the consumers if it can be proven that the producer has displayed culpable conduct. If this fails, the supermarket shall be exempt from any liability and the consumers will have to sue the producer directly claiming that he has a no-fault liability for the consequences of marketing the defective eggs. However, as the consumers did not sue the producer directly in the first instance, more than three years have lapsed since the injury occurred and thus any claim against the producers is time-barred.
It is probably too early to determine to what extent the judgment from the European Court of Justice will prejudice the rights of the consumers. The case law prior to the Act from 1989 shows that the courts, due to their freedom to assess evidence, very often find that the producer has acted negligently if a product is defective, and some cases can even be construed to the effect that the burden of proof is put on the producer. Therefore, the judgment of the European Court may end up having limited effects on the results of the many pending court cases except for the fact that also in these cases many consumers will realize that time has passed while they have been awaiting the judgment from the European Court. This may mean that they are prevented from succeeding in advancing their claims directly against the producer as these claims are now time-barred.
(1) Cf. Case C-52/00: Commission v France, paragraph 24, and Case C-154/00 Commission v Greece, paragraph 20
This article was first published in Insurance Day on 27 January 2006 entitled ‘Stuck with a Rotten Egg’
The Law Commission and the Scottish Law Commission have published a scoping paper to invite views as to which aspects of insurance contract law give rise to difficulties and should therefore be reviewed. Opinions from all perspectives are welcome: industry, consumers, regulators, lawyers, academics and others.
It can also be accessed from the web link below which provides further information on the paper.
