The increasing trend to use Third Party Declaratory Relief Applications against Insurers

Overview

A third party claimant, not a party to a policy of insurance, can seek recourse to the proceeds of that policy, through the application of either the Corporations Act (ss 562 and 601AG), the Bankruptcy Act (s117) or the Insurance Contracts Act (s 51).

Relief can also be sought pursuant to section 6 of the Law Reform Miscellaneous Provisions Act 1946. The operation of this provision is now restricted by reason of the decision of the NSW Court of Appeal in Chubb Insurance Company of Australia Ltd v Moore.1 Section 6 is not an available remedy to a third party claimant, where the event giving rise to the claim, occurred before the inception of the relevant policy. However, it is still available to occurrence based policies and, prima facie, also applies to claims made policies providing the ‘relevant event’ occurred during the occurrence of the policy.

A declaratory relief may be sought by a third party to resolve insurance liability disputes pursuant to any of the above provisions. There are a number of reported cases where this remedy has been employed.2

Nature of Declaratory Relief

The power of the superior Courts of both Federal Court of Australia and Supreme Court of NSW to give declaratory relief, has wide utility and scope. Both an insurer and insured can there by seek a determination regarding their respective rights and obligations under a policy of insurance. 

The declaration is a pronouncement upon the existence or non-existence of a legal and/or factual state of affairs. It does not create rights or obligations capable of enforcement without further order of the Court. A declaration is not a coercive judgement which can be enforced, in contrast to an injunction or money judgment.

A party may be entitled to declaratory relief; providing there is a justiciable controversy. The applicant must be affected and have a real interest. A declaration made must have some practical effect as between the parties.

Important Decided Cases

In Ashmere Cove Pty Ltd v Beekink,3 French J in the Federal Court of Australia, granted the applicants an order so as to enable it to seek a declaration against the insurers. Although the applicants had no legal right as against the insurer, a judgment in their favour against the company created a priority right in the proceeds of a successful claim against the insurers, thus giving the applicant liquidators a very real interest in having the insurers’ obligations in the company determined in favour of allowing the joinder.

The decision of French J was approved by the Full Court of the Federal Court in Employers Reinsurance Corporation v Ashmere Cove Pty Ltd.4 The applicant investors successfully sought leave to join the professional indemnity insurers of the entity KMF (in liquidation), which was responsible for a failed investment scheme. The claim against the insurer was for a declaration that the policy responded to KMF’s liability to those investors.

The Full Court of the Federal Court held that the declaration had the ‘practical effect’ of binding the insurer and insured, in that the insurer would have a full opportunity to contest the question the subject of the declaration. It would be an abuse of process for the insurer to attempt to relitigate the issue in other proceedings.

On appeal to the Full Court of the Federal Court, the insurer argued that the decision below should be defeated on constitutional grounds. The insurer also argued unsuccessfully that because there was no privity of contract, the appeal should succeed.

The High Court decides

In C.G.U Insurance Ltd v Blakely,5 the High Court of Australia decided that a third party claimant could join an insolvent defendant’s insurer to proceedings seeking a declaration that the insurer be liable to indemnify the defendant. The liquidators of Akron Roads Pty Ltd had commenced an insolvent trading claim against its directors. The defendant’s insurer, CGU Insurance, denied indemnity under their professional indemnity policy. Akron’s liquidators obtained leave from the Victorian Supreme Court to join CGU and a director under the policy.

The High Court of Australia decided that there was a justiciable controversy in this case because of s 562 ofCorporations Act and s 117 of Bankruptcy Act 1966. Those provisions, in effect, conferred on Akron Roads a right to receive from the liquidators of the company, and the Trustee of the bankrupt estate of the director, the proceeds of the policy payable to cover their liability to Akron’s liquidators. In these circumstances, it was Akron’s liquidators, rather than the company and director which would benefit by the making of the declaration. The Court considered that it was unlikely that those parties or CGU would be permitted to relitigate the indemnity issue in subsequent proceedings.

Implications

The Courts now recognise that:

  • A third party claimant can make application for declaratory relief against an insurer.
  • The absence of privity in contract does not matter, nor is the absence of a dispute between the insured and insurer.
  • Although a declaration is not a right, enforceable directly by the third party against the insurer, it can still have practical utility. This can be used by a third party which can encourage the liquidator or Trustee in Bankruptcy to commence proceedings against the insurer.
  • A third party claimant can directly involve the insurer of an insolvent insured defendant.