Insureds Disputes with Third Parties - Essay Example

Student Name: Instructor: Course: Date: Areas of conflict of interests those are common when dealing with an insured and insured’s disputes with third parties INTRODUCTION Insurance practices in Australia are governed or regulated by the Insurance laws that are enshrined in the Australian Constitution and subsequent amendments that have been enabled through enactment of Acts. It is important for any insurance agency to contract the services of a lawyer as required by law and in the interest of the company in discharging its duties to the clients; the insured in this case1. Over many years, insurance practice has been known for a number of interests that may arise in the course of their operations most of, which happen between their clients, the insured, and them and/or, the insured and their third parties. It is vital that the law firm representing a client insurance company takes note of these conflicts of interests in order to develop workable approaches into solving the disputes that may arise. It is the duty of the legal firm to protect the interests of the client’s clients, who are the insured in this case, because of the fact that the inured are the reason for the existence of the insurance company and their interests must be safeguarded2. In some instances, some legal firms representing client insurance firms might decide to opt out of the cases, which involve dispute resolution between the insured and the third party because the cases are minor. However, any legal firm representing an insurance company must critically consider the definition of the term “Client” with respect to an insurance company. Any Insurance company is under obligation to protect the rights of its own clients3, who are the insured, under the contractual terms of agreements that exist between the two parties: the insured and the insurer. Under normal circumstances, the insured, by any means whatsoever must not accept any liability by him to a third party and must inform the insurance company immediately4. The insurance company will in turn, inform the legal firm of the matter and request for direction in handling the issue. This is the point where a number of issues can come up for example; the third party might for instance be a client of the legal firm, which is representing the Insurance Company. This will definitely mean that conflict of interests will arise in such a scenario because the two disputing parties happen to be the clients of the legal firm. Some disputes that may emerge, could bar the legal firm from continuing the dispute resolution and at such an instance, it is advisable that the third party seeks an independent counsel to defend itself from the insured5. It is also equally important to consider these disputes it the case of the insured and the insurer. If the insurer and the inured are in a dispute, and the legal firm or the attorney is barred by a conflict of interest from representing the two, then the attorney or the legal firm is under no obligation to withdraw from representing the two. In such as a case therefore, it is the duty of the insured to seek an independent attorney to represent him or her in the dispute. In relation to that, the insurer may sometimes refuse to defend the client in respect to the third party disputes and as such, the insured is entitled to confidentiality of information. The insured in this case the insurer is the privy to the dispute and any disclosure of information to the insurer may constitute to waiver of any applicable privileges6. A number of conflicts of interest may arise when dealing with the insured and disputes between the insured and the third parties. It is important that a legal firm carefully analyses these conflicts of interests in order to be fully prepared to handle any possible problems in future. However, it is also equally important to note that some conflicts of interest may not be foreseeable and competency of the legal firm will be essential in such a scenario. AREAS OF CONFLICT OF INTEREST BETWEEN INSURED AND INSURED’S DISPUTES WITH THIRD PARTY One area where a conflict of interest between the insured and the insured’s third party is likely to occur is in liability insurance7. Under liability insurance, a conflict of interest may occur whereby upon occurrence of an insured event, there arises a question of whether the insured is liable to a third party. In such cases, third parties often make claims against the insured. The insured then asks the insurer to indemnify the third parties for claims they have filed through the third’s party claim. When the insured asks the insurer to indemnify third parties’ claims, a dispute arises because the insurer has to investigate whether the insured is actually liable to settle any claims put forward by the third parties. Third party disputes commonly occur in liability insurance. Liability insurance is common in general insurance policies whereby third party beneficiaries of the policies are involved8. Section 48 of the Insurance Contract Act states that an individual who is not a contract of general insurance as is specified as being covered by the general insurance policy has a right to recover from the insurer the amount of loss suffered as a result of occurrence of an event which was insured under the general insurance policy. Sub-section 2 continues to say that this individual has the same obligations just like the insured to the insurer for recovery of the loss suffered. In sub-section 3, defenses available to the insurer under third party litigation are just the same as those under the insured case. However, there have been concerns about sub-section 3 regarding the issue of the insurer having similar defense in both third party litigation cases and insured cases in settlement of claims. With regard to issues concerning conflict of interest between the insured and insured’s third party disputes, section 48(3) of IC Act has been seen to raise some issues of concern. The fact that the insurer has similar defense9 when handling insured’s case and third parties case against the insured tends to give different meaning. One, some are of the view that provided that the litigation was put forward by the third party and not the insured, the defenses similar in kind to those that can be used in opposition to the third party can be used against the third party. Others are of the view that similar defenses available to the assured can be used against the third party. Due to these differing views, it has been suggested that the obligations of third party beneficiaries in dispute with the insured be clarified in order to remove the element of conflict of interest between the two. In the case of Commonwealth Bank of Australia v Baltica General Insurance Co Limited, Giles J10. held that, as a defense to a non-party claim (third party claim for indemnity), the insurer can rely on non-disclosure by the insured party11. This case is a good interpretation of Section 48. Furthermore, courts have given interpretations of section 48 by distinguishing between pre-contractual breaches and post contractual breaches. General liability policies usually have a stipulation that third party beneficiaries are entitled to some rights. When the insured event occurs, third party beneficiaries may put forward some claims basing their argument on presence of third party rights in the policy documents. The third party beneficiaries may or may not have suffered any loss from the occurrence of the event but due to presence of conflict of interest, that is, to claim indemnity, they end up filing for litigation. It is out of such occurrences that the policy document needs to be clearly drafted with clear stipulation of what the third party beneficiaries’ rights are and what are their positions if these rights are breached by the insured. In addition, the third party beneficiaries’ position needs to be clearly stipulated when the third party him/herself breaches the rights. In the case of General Motors acceptance Corporation Australia v RACQ Insurance Limited12, it was held that the third party’s right to recover under insurance contract exists only ‘in accordance with the contract’13. In resolving the dispute, an appointed lawyer can avoid having a conflict of interest by representing and advising the insurer. Such a lawyer should not exercise double standards-that is, he should not try to act for the insured while at the same time representing the insurer. The lawyer should also inform the insured of the insurer’s intention to resolve the matter at hand, recommend to the insured the need to obtain an independent legal representation or advice to facilitate any negotiations between the lawyer and the third party14. The South Australian Full Court suggested in Verson Clearing International Pty Ltd v Ward & Partners15 that a lawyer cannot advise the insured while acting for the insurer as it would conflict with the duty of loyalty the lawyer had to the insurer. This is so as it is odd for a third party to occupy a better position than the insured when the insurer makes claims based on the insured’s disclosure and the insurance contract terms entered by the insurer and the insured16. Where the genuine grounds for relief for misrepresentation, a breach or non-disclosure lies with the insurer, then the rights of the insurer ought to be reduced since it is the third party who is making the claim under the given policy where no specific recognitions to the contract are present. The question of whether the number of third party beneficiaries should be limited to those who existed during the time when the contract was made or not has been also addressed in the Issue Paper as a reference to section 48 of IC Act. The Issue Paper states that the number of beneficiaries should not be limited, as this would seriously reduce the ability of new third party beneficiaries to bring an n action directly against the insured. It has been discovered that limitation of the number of third party beneficiaries would undermine the efficiency of many forms of insurance policies17. For instance, when an insurance cover is being taken for contract work, it is usually unpredictable as to who the subcontractor will be. It is therefore advisable that the insured makes it clear at the outset of the contract of insurance those that will be entitled to third party benefits. In addition, the Review Panel is of the view that disputes between the insured and the third party in settlement of claims put forward by the third party can be resolved by ensuring that general liability contract of insurance are drawn sufficiently widely so that all the third party beneficiaries are mentioned18. Moreover, it should be ensured that their rights and positions are well stipulated, and that they are not limited to the existing beneficiaries when the contract is being done. Another area of conflict of interest between the insured and the third parties occurs in case of life insurance. Issues relating to third party beneficiaries in life insurance are mentioned in section 48A of the Insurance Contract Act19. The third party beneficiaries in this case are the mentioned third parties in the contract unlike in the case of general liability insurance where the third parties dealt with are unknown and are not mentioned in the contract20. Under the provisions of section 48A of the Insurance Contract Act, third party has a right to any money that becomes payable to the life insurance policyholder. With regard to this, there were some issues of concern in the first submission before release of the Issue Paper that, if the insurer decides not to pay the benefits to the third party, there were no legislative rights available to the third party of recovering the proceeds to be paid in accordance with the contract. Where the third party is aware of any benefits that ought to be paid to him/her in a life insurance contract, then the insurer declines to make the settlement, a dispute may arise between the insured and the third party. As the third party tries to recover the benefits payable to him in accordance with the contract, the insured may be of the opinion that the third party should not recover the amount, as he/she is merely a third party and not a party in the contract. Therefore, a conflict of interest arises. On release of Issue Paper, submissions were received that the Issue Paper supported the opinion that third parties had a right to recover proceeds directly against the insurer. It should not be the case that the third party must acquire a court order requiring the policyholder to implement the payment on their behalf, due to the technicalities in the law. There is a belief that, ‘the beneficiary has a direct right of action against the insurer to enforce her or his settlement under the contract, for the money is said to be payable even though the beneficiary is not a party to the contract, but there is no specific reference to this right of action as there was in the former section 48(2).21’ To solve this conflict, the Investment and Financial Services Association Limited (IFSA) in Australia recommended that IC Act-section 48A to be expanded to allow appointment of a life insured as a third party beneficiary to the life insurance contract22. By doing this, section 48A would be consistent with section 48 thereby giving the client maximum flexibility to appoint a third party beneficiary without any limitation. Therefore, the issue of having disputes over recovery of the amount payable under life insurance to a person who is not a nominated beneficiary is eliminated. Currently, the life insured is not referred to as a beneficiary of life insurance policy under section 48A23. Furthermore, Australian Investment and Financial Services Association Limited is of the preference that the nominated beneficiary to give a legally binding discharge on payment of proceeds from the policy. Therefore, the life insurer would have to make payments to a beneficiary as it has been legally expressed. In making a representation for the insured, an appointed lawyer may require to get information from the insured for the purpose of advising the insurer on the coverage of the insurance contract24. In order to do so and avoid creating an impression that a conflict of interest exists, the insured-appointed lawyer should first inform the insured his intention or rather the purpose for asking for more information or contract documentations. Then, the lawyer should advice the insured to get some independent legal advice on whether to disclose the required information and documentations to the insurer’s lawyer25. Despite the clear directions in Verson’s case, there are instances where the lawyer need to advice the insured the extent to which he/she is covered for a third party claim. To avoid jeopardizing his duty of loyalty to the insurer, the lawyer has to agree with the insurer client (insured) on the following matters before commencement of the advising process. The lawyer must expressly agree with the insured that; they are not advising or acting for the insured in relation to matters of insurance coverage, they are reserving the right to advice the insurer on insurance issues, and that they are only acting for the insured’s interest in relation to the his defense against third party’s claims26. When a lawyer is making a representation for the insurer, another area of conflict of interest may arise when the insurer informs the lawyer of possible intentions of limiting the scope of insurance concerning the amount of indemnity to be granted to the insured. In such instances, the lawyer should advice the insurer to seek independent legal counsel concerning the degree to which there is insurance for the third party. However, if a disagreement occurs concerning the degree to which there is insurance for a third party claim, the lawyer should stop representing the insurer. In such circumstances, the lawyer should advice both the insurer and the insured to seek independent legal counsel as in the case of Kennedy v Cynstock Pty Ltd27. In this case, Kearney J said that, “if a lawyer is faced with an actual conflict of interest because ‘he cannot breach (his client’) respective confidence to him, or act without their authority, or act contrary to the interest of either of them”. Then the lawyer’s duty is to propose that both the insurer and the insured to seek independent legal counsel for he cannot stand for two clients who have a conflicting interest in a court case. In fact, the lawyer must completely withdraw from the lawsuit especially where there is a substantial risk that the confident information provided to him by the insured might be disclosed and used by the insurer against the insured28. CONCLUSION In delivering a ruling for a conflict between the insured and insured’s third party, any judgment or award in favor of a third party, it should be based on the proof that the third party has suffered a loss. On the other hand, a ruling in favor of the insured, it should also be based on the proof that that the insured suffered a loss out of the actions of the third party. Conflict of interest between the insured and insured’s third party are common and arise when both parties have different opinions concerning recovery of the amount payable from an insurance contract policy whereby either of the parties is affected or both of them are affected. Where a conflict of interest is based on third party claims for indemnity is a general liability clause, the provisions of section 48(2) should be applied to ensure that only the claims by the third parties are only met in accordance with the insurance contract. Where the conflicts of interest occur between the insured party in a life insurance and the third party beneficiaries, the provisions of section 48A of Insurance Contract Act should be applied. This section enables only the nominated third party beneficiaries in the life insurance contract to recover the amount payable thereby preventing non-appointed third parties from recovering from amount payable in life insurance policy. Through the application of the provisions of the two sections, disputes between insured and insured’s third parties are amicably resolved without having to take either of the conflicting parties’ sides. With the provisions of the IC Act, it is advisable that the insured keeps the insurer aware of presence of disputes between him/her with the third party and more so, inform the insurer if the dispute is based on conflict of interest between the two in addition to seeking legal advice. For third parties, it is advisable that they are aware of their rights and positions when disputes between them and insured parties arise. It is evident at this point that formal process is essential in addressing conflicts of interest is essential in achieving complete resolution of such conflicts. Conflicts of interests are common to many transactions in the modern world and these conflicts may at times result into several disputes. It is important that a legal form representing any insurance company familiarize itself with all the possible disputes and ways of overcoming the most difficult disputes. Being prepared ensures that the liability of the legal can be reduced drastically by having readily available solutions within the reach of the firm. Client satisfaction will automatically be achieved when a firm is fully aware of any possible disputes. BIBLIOGRAPHY ARTICLES/ BOOKS/ REPORTS 1.Attard, M. "RESOLUTION OF INSURANCE DISPUTES." The Law Hand Book. July 1, 2010. http://www.lawhandbook.org.au/handbook/ch23s01s10.php# (accessed November 11, 2010). 2.Australia, Common wealth of. "A Review of Insurance Contract Act: Third Party Beneficiaries." Australian Government: The Tresuar. 2004. http://icareview.treasury.gov.au/content/Reports/FinalReport/12_Chapter10.asp#P1155_216008 (accessed November 11, 2010). 3. Mills, M., and N. Furlan. "Resolving Insurance Disputes:The Value of Less Formal Processes." ADR Bulletin (Berkely Electronic Press) 5, no. 1 (2002): 1-3. 4. Pynt, G. "The Insured's Claim agaisnt Its Liability Insurer After Resolution of the Claim Against the Insured." Australian Insurance Law Association, Western Australian Branch, March 2005: 1-18. 5. Pynt, G. Australian Insurance Law. LexisNexis Putterworths, 2008. 220-224 6. Robinson, A. "Third Party Act 2010." Insurance & Reinsurance. April 1, 2010. http://www.aar.com.au/pubs/insur/foinsurapr10.htm (accessed November 11, 2010). 7. Stempel, W. Jeffrey. Vol. 1, chap. 0735502366, 9780735502369 in Law of insurance contract disputes, edited by 3, 1706-1715. Aspen Publisher Online, 2005. 8. Sutton, K. Insurance Law in Australia. Sydney: LBC Information Services, 1999.119-126 CASE LAWS 9. Commonwealth Bank of Australia v Baltica General Insurance Co Limited (1992) 28 NSWLR 579 10. General Motors Acceptance Corporation Australia v RACQ Insurance Ltd (2003) 12 ANZ Ins Case 61-574 at [25] 11. Kennedy v Cynstock Pty Ltd (2001) 26 NSWLR 672 12. Verson Clearing International Pry Ltd v Ward & Partners (1999) ANZ CLR-45. Read More