Hancock Foundation hits a dead end with insurance claim Hancock Foundation hits a dead end with insurance claim

Hancock Foundation hits a dead end with insurance claim

18 June 2013 | Professional Indemnity & Financial Lines
Hancock Family Memorial Foundation Ltd v Fieldhouse [No. 5] [2013] WASC 121

Last month, the Supreme Court of Western Australia handed down its latest decision in the highly publicised Hancock family litigation and in doing so, has had cause to consider the circumstances in which a third party can recover directly from another person’s insurer.

The claim before the court concerned a stoush over the value of a single share in Hancock Prospecting Pty Ltd to the Hancock Family Memorial Foundation Ltd (the Foundation). Lang Hancock sold the share in Hancock Prospecting to the Foundation over 20 years ago for $20million. In doing so, Lang reduced his loan obligations to the Foundation to nil. He died less than a year later. Disgruntled by the financial position it found itself in after Lang’s death, the Foundation has (in a long drawn out litigated saga), alleged that the price it paid for the share was far in excess of its actual worth.

Carnegie Fieldhouse was Lang’s solicitor. Lang had sought advice from Mr Fieldhouse as to how he could extract cash from the Hancock Group of Companies for his personal use (and to reduce his loan obligations to the Foundation) in a way that would incur little or no tax. It was Fieldhouse who suggested that Lang sell his only share in Hancock Prospecting to the Foundation. As a result, the Foundation sought to blame Fieldhouse for the losses it suffered as a result of the purchase of the share which it claims was, in fact, worth nothing.
The Foundation alleged that Fieldhouse owed it (as well as Lang) a duty of care and that that duty was breached when Fieldhouse failed to advise it that the share was worthless, or when he failed to advise directors of the Foundation to seek independent legal and accounting advice. The Foundation commenced the action against Fieldhouse in 1995. Fieldhouse died some 12 years later at which time the litigation had still not resolved. With Fieldhouse dead, the Foundation then resorted to section 51 of the Insurance Contracts Act (ICA) to attempt to recover from Fieldhouse’s insurers.

Section 51 of the ICA permits a person who is not a party to the insurance contract (the third party) to recover from an insurer under a contract of insurance in respect of an insured who has died. To operate, the section requires, amongst other things, that there be a contract of insurance and that the deceased insured be at least potentially liable in damages to the third party.

Fieldhouse had cover for the first $1.1million of every claim pursuant to a statutory professional indemnity scheme “owned” by the New South Wales Law Society and administered by LawCover. In 2010, the WA Supreme Court held that because of the features of the statutory scheme, there was no “contract of insurance” within the meaning of section 51 between Fieldhouse and the Law Society. As a result, the Foundation was not permitted to bring a claim against the Law Society under section 511. This meant that the Foundation was unable to access the first $1.1million of Fieldhouse’s cover.

Undeterred, the Foundation then claimed against 5 Lloyds’ syndicates who each provided excess professional indemnity cover to Fieldhouse. It was common ground that these excess polices provided top-up cover for any liability that exceeded indemnity provided by the underlying LawCover policy.

The Court in the most recent case held that the effect of the excess policies was to make payment or admission of liability or a finding of liability on the part of the underlying insurer (LawCover) a condition precedent to the syndicates’ liability to indemnify.

LawCover had granted indemnity to Fieldhouse and had conducted the defence of the claim on his behalf. However, neither Fieldhouse nor his estate had been held liable to pay the Foundation the full amount of Fieldhouse’s indemnity under the LawCover policy and, in those circumstances, LawCover had not admitted liability to pay the full amount of the indemnity. Furthermore, it was not possible for Fieldhouse to be held liable to the Foundation in the action because Fieldhouse had died and his estate has not been joined.
In those circumstances, the syndicates, as excess insurers, had no potential liability under their contracts of insurance and the Foundation was not entitled to recover from them pursuant to section 51 of the ICA.

Although the decision was made based on the specific wording of the particular excess policies, it seems a similar result is likely in circumstances where attempts are made by a third party to claim against an excess insurer under section 51 where the underlying policy cannot or has not been exhausted.

1The Hancock Family Memorial Foundation Lt v Fieldhouse [No 3] [2010] WASC 223

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Stephanie Cook

Stephanie Cook

Special Counsel