The moral of the story is: always check with the insurer before paying compensation. AMP won’t be making that mistake again, and it has a $3.24 million reminder on its balance sheet.

The High Court decision handed down last week found CGU was not liable for payments made to some AMP clients following a scandal over poor advice in 1999.

AMP advisers Ashok Pal and Anthony Howarth recommended that investors place their money with Hibiscus Spa, which was in deep financial strife at the time. Mr Pal was a director of the failing spa manufacturer.

Under pressure from the Australian Securities and Investments Commission (ASIC) to settle the resultant investor complaints, AMP paid out $3.24 million to 47 retail investors in an enforceable undertaking. It then made a claim on its professional indemnity (PI) policy with CGU.

But the insurer argued the payments were hasty and made before it had agreed on its liability. The full bench of the Federal Court accepted an AMP appeal, but the High Court agreed with the original Federal Court decision.

The four to one judgement found AMP had not established by appropriate evidence that the claims were reasonable. It also found CGU did not influence AMP into believing it would not have to prove its liability for any claim relating to Hibiscus Spa.

Ebsworth & Ebsworth partner Tricia Hobson says the decision may have an indirect effect on the way ASIC deals with similar cases in future.

“ASIC may find that an entity is not quite as willing to move so quickly,” she told Sunrise Exchange News. “If a company’s insurance cover is possibly at risk, it may be less likely to take on enforced undertakings on short notice.”