Proportionate liability is a very important issue in many insurance claims and it has taken on new significance since the 2013 High Court decision of Hunt & Hunt v Mitchell Morgan1.
Proportionate liability was introduced by legislation in Australian States and Territories over 10 years ago. These changes were in response to claims targeting what were perceived to be ‘deep- pocket’ insured defendants. In essence, proportionate liability means that a defendant should only be required to pay for the damage it caused where there is more than one wrongdoer. For example, if there are two concurrent wrongdoers and one of them is found to be 40 per cent liable for a plaintiff’s loss, then that wrongdoer should only be required to pay 40 per cent of the damages. This can mean that a plaintiff will not be able to recover a full award of damages if one or more defendants are insolvent or otherwise unable to pay even if another of the defendants is insured and able to pay. The ability for courts to apportion damages between wrongdoers can work in favour of insurers. If proportionate liability applies, an insured party will only be liable for its contribution to any loss thus reducing the cost of claims in terms of the damages paid and the amount expended in recovering contributions from the other defendants, some of whom may be insolvent.
In NSW, the proportionate liability regime is governed by the Civil Liability Act 2002. The key principle is set out in section 35. It says:
“ (1) In any proceedings involving an apportionable claim:
a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss, and the court may give judgment against the defendant for not more than that amount. …”
It is clear from the NSW legislation (and similar provisions in other jurisdictions) that a critical issue is whether or not two defendants are ‘concurrent wrongdoers’, and this was the main concern in the High Court’s decision of Hunt & Hunt v Mitchell Morgan. A ‘concurrent wrongdoer’ is a person who is one of two or more persons whose acts or omissions, caused, independently of each other or jointly, the damage or loss that is the subject of the claim2.
THE GAME CHANGER
Despite the introduction of this type of legislation, a concern remained that the narrow judicial interpretation of when proportionate liability would apply had led to defendants continuing to bear an unfair portion of damages. However, Hunt & Hunt v Mitchell Morgan changed the legal landscape for apportionable claims in 2013.
The interesting facts behind this case began when Mr Caradonna and Mr Vella agreed to promote a boxing match together and opened a joint bank account. To secure finance, Vella then collected three certificates of title from his solicitor. Then the problems started. Without Vella’s knowledge, Caradonna used one of these titles to borrow money for his own purposes. Caradonna was able to borrow money from Mitchell Morgan by forging Vella’s signature. A solicitor, Mr Flammia, fraudulently certified that he had witnessed Vella’s signatures on the documents. Mitchell Morgan registered the mortgage on the property’s title and deposited just over $1 million into the joint account opened by Caradonna and Vella. Caradonna withdrew the full amount by forging Vella’s signature, and then he closed the account. By the time Vella discovered all of this fraudulent conduct, both Caradonna and Flammia were bankrupt.
The law firm Hunt & Hunt had drafted the mortgage documents for Mitchell Morgan. The mortgage was found to be negligently drafted as it did not include a covenant to repay a specified sum. Due to the conduct of Caradonna and Flammia, the loan was void for forgery. Even though the mortgage was registered on title, it secured nothing because the loan agreement was void. This meant the innocent party, Vella, was not liable to repay Mitchell Morgan.
The key issue was whether proportionate liability would apply to these facts on the basis that the fraudsters and Hunt & Hunt were concurrent wrongdoers. That is, did the defendants cause the damage or loss that was the subject of the claim independently or jointly of each other? This was critical because nothing could be recovered from the fraudsters.
The majority of judges considered the loss suffered by Mitchell Morgan was the inability to recover the money advanced and the acts and omissions of all defendants contributed to the inability to recover the money. The fraudsters and Hunt & Hunt had caused this loss independently of each other – Caradonna and Flammia caused the loss by forging signatures and falsely certifying documents, whilst Hunt & Hunt caused the loss by its negligent drafting of the mortgage documents. All were found to be concurrent wrongdoers and the proportionate liability regime applied.
Given Hunt & Hunt had earlier been found to be only 12.5 per cent liable for the loss, they were only ordered to pay 12.5 per cent of the damages. This clearly disadvantaged Mitchell Morgan, who were most likely unable to recover 87.5 per cent of the damages awarded. On the other hand, the decision was hailed as a move in the right direction for many ‘deep-pocket’ defendants, who are so often those with insurance coverage. The High Court’s interpretation reinforces the principle that a partially liable defendant who was a concurrent wrongdoer is only required to pay its percentage share of an award of damages.
While this case demonstrates how valuable proportionate liability can be to some litigants, the regime is limited to certain types of claims. Proportionate liability only applies to claims for economic loss or property damage arising from a failure to take reasonable care and does not apply to personal injury claims in any State or Territory.
DIFFERENT LAWS IN DIFFERENT STATES
Potential litigants need to also be aware that proportionate liability regimes differ in significant ways in each jurisdiction. This means that an apportionable claim may be decided differently depending on which State or Territory’s law applies.
Some notable differences include:
- a non-party to a claim may still be found liable by a court, except in Victoria. The law in South Australia, Western Australia and Tasmania puts this position fairly forcefully in that a Court must consider the liability of a concurrent wrongdoer who is not involved in a case;
- in all jurisdictions, except Victoria, a person who has either intentionally or fraudulently caused a loss to a plaintiff is not entitled to the benefit of proportionate liability. In Victoria, it is only fraudulently caused loss that is excluded from the proportionate liability regime; and
- proportionate liability is expressly excluded from ‘consumer claims’ in Queensland and the Australian Capital Territory.
Perhaps the most significant difference is that in many jurisdictions, but not Queensland, it is possible to contract out of proportionate liability, as frequently occurs in building contracts. The law in Victoria, South Australia, the Australian Capital Territory and Northern Territory is silent on the issue of contracting out. While in New South Wales, Western Australia and Tasmania, the relevant law allows parties to exclude the operation of proportionate liability legislation by way of a contract term. This type of exclusion clause affects policies, and ultimately premiums, as the risks covered can be greater.
The inconsistencies in each jurisdiction have given rise to fears of forum shopping, where one party picks which law they want to govern the contract based on their own wants and needs. This can cause problems when one party has an advantage during contract negotiations.
UNIFORM LEGISLATION: THE FUTURE
As a result, uniform national legislation is currently being proposed. If introduced, uniform legislation is likely to influence further trial and appellate court decisions. So whilst the present position largely supports the insurance industry, proportionate liability is a developing area of law that is likely to have many twists and turns to come.
1 (2013) 247 CLR 613
2 Section 34(2) of the Civil Liability Act 2002 (NSW)
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