Few insurance law issues have created greater debate, and industry concern, than the entitlement of third-party claimants to issue proceedings against liability insurers.
The question of whether a defendant has insurance ought not be relevant to a court’s assessment of that defendant’s liability in negligence. That said, defence lawyers are generally reluctant to expose an insurance policy to judicial scrutiny. Some may be mindful of the following candid remarks of Lord Denning”
“In most of the cases that come before the Courts today, the parties appear at first sight to be ordinary persons or industrial companies or public authorities. But their true identity is obscured by masks. If you lift up the mask, you will usually find the legal aid funds or an insurance company or the taxpayer – all of whom are assumed to have limitless funds. In theory the Courts do not look behind the masks. But in practice they do. That is the reason why the law of negligence has been extended…That is the reason the awards of damages have escalated so as to exceed anything that even the wealthiest individual could pay.”
To borrow Lord Denning’s metaphor: liability insurers generally prefer to keep their identity obscured by masks.
Perhaps nowhere in the common law world (with the exception of New Zealand) has the issue of direct claims upon liability insurers been more vexed than in New South Wales, by reason of the oft-maligned section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
Following decades of criticism, and a comprehensive review by the NSW Law Reform Commission, section 6 has now, finally, been repealed. It has been replaced by the Civil Liability (Third Party Claims against Insurers) Act 2017 (NSW), which contains a new regime for third-party claimants to issue proceedings directly against liability insurers.
The new Act is drafted in plain English and is far more readable than the tortured syntax of section 6. Simplicity of expression, however, does not necessarily lead to certainty of outcome, for reasons including those discussed below.
Federal legislation In limited instances, Federal legislation gives claimants rights against liability insurers.
Section 117 of the Bankruptcy Act 1966 (Cth) and section 562 of the Corporations Act 2001 (Cth) apply, respectively, where the insured is bankrupt or else a company in liquidation. In general terms, they require the trustee-in-bankruptcy or liquidator to pay a third-party claimant any insurance moneys received in respect of a liability to that third party, in priority to other creditors.
Section 51 of the Insurance Contracts Act 1984 (Cth) and section 601AG of the Corporations Act apply in the case of natural persons and deregistered companies respectively. They give a third-party claimant the right to recover moneys from a liability insurer where the relevant insurance contract provides cover in respect of the claim, and the natural person has died or cannot be found after reasonable enquiry, or the company has been deregistered.
Commentators have compared these provisions to a flotilla of life rafts which are inadequate for aggrieved third-party claimants.
Section 6 Section 6 differed significantly from the above provisions.
In general terms, section 6 provided that a statutory charge may attach, in certain instances, to moneys payable under a liability insurance contract, and entitled a claimant to enforce that charge in an action directly against the insurer. It was intended to prevent an insurer and insured from entering into a collusive agreement that would preclude a claimant from recovering damages awarded against an insured at trial, and also to prevent an insured from frittering away an insurance payout.
The difficulties encountered with section 6 were in no small measure due to vagaries of drafting. In Chubb Insurance Company of Australia Ltd v Moore, Emmett JA and Ball J of the NSW Court of Appeal noted that it had been said that “ambiguity may be its only clear feature,” and stated that section 6 “should be repealed altogether or completely redrafted in an intelligible form.”
That said, the difficulties were not only semantic, but also structural. Section 6 was enacted prior to the widespread development of claims-made insurance policies, and its application to those policies was in some respects unclear. Further, it caused great uncertainty in relation to the payment of defence costs.
In Steigrad v BFSL 2007 Ltd, Lang J of the NZ High Court ruled that section 9 of the Law Reform Act 1936 (NZ) (the equivalent provision to section 6) enabled receivers of the collapsed Bridgecorp Group to assert a statutory charge over moneys payable by QBE under a D&O policy with a costs-inclusive limit of indemnity. As a consequence, Bridgecorp Group directors could not access defence costs coverage under that policy to defend claims against them – if QBE advanced those defence costs, it would do so as a volunteer.
This decision caused shockwaves over the Tasman, and it was inevitable that statutory charges would be asserted in Australia regarding costs-inclusive liability policies. In Chubb v Moore, a five-member bench of the NSW Court of Appeal ruled upon alleged charges asserted by claimants in Great Southern class actions issued in the Supreme Courts of Victoria and Western Australia.
The Court of Appeal ruled that section 6 only applies to claims in NSW Courts, effectively dispensing of the matter, although noting that its decision was not without difficulties and doubt. That said, the Court went on to make other findings, including that section 6 would not extend to defence costs paid by the relevant insurers before judgment or settlement. This aspect of its ruling provided considerable comfort to the Australian insurance industry. A different result eventuated in New Zealand, however, when the Bridgecorp decision was appealed. Ultimately, the majority of the NZ Supreme Court agreed with the reasoning of Lang J, thus taking a different approach from that of the NSW Court of Appeal in Chubb v Moore.
It should be noted that section 6 will continue to apply to proceedings issued against insurers before the commencement of the new Act on 1 June 2017.
The new regime The Civil Liability (Third Party Claims against Insurers) Act 2017 (NSW) is intended to address the mischief that section 6 was intended to avoid, but does so with a different legal mechanism. Importantly, it does not make provision for any statutory charge: clearly, the NSW Law Reform Commission wished to avoid the difficulties encountered in Bridgecorp and Chubb v Moore. It remains to be seen whether an enterprising plaintiff lawyer may devise new arguments to prevent an insured from obtaining defence costs coverage under an insurance policy with a costs-inclusive limit of indemnity.
Set out below are certain issues raised by the new legislation. There are too many issues to address them all in this article.
When can a claimant sue a liability insurer? The central provision of the new Act is section 4. This enables a claimant to issue proceedings against a liability insurer to recover the amount payable under an insurance policy in respect of an insured’s liability to that claimant. In those proceedings, the insurer is taken to stand in the place of the insured: in other words, as if the claimant were to recover damages, compensation or costs from the insured.
Section 5 provides that such proceedings may not be brought, or continued, against an insurer except by the leave of the court. (Curiously, the Act enables a claimant to issue the proceedings first and then seek leave later.)
The legislature has attempted to avoid the ambiguity resulting from the excessive verbiage of section 6. That said, although the new Act is easier to read, it may have been preferable for it to include certain further details. For instance, section 5 does not set out any mandatory or even discretionary criteria for a court to adopt in determining whether to grant a claimant leave to proceed against an insurer. Rather, it merely states that leave must be refused if the insurer can establish that it is entitled to deny liability.
To determine the circumstances in which leave ought to be granted, a court will presumably have reference to NSW Law Reform Commission Report 143, which states that it was intended that the court’s discretion should continue to be exercised in the same way that it was exercised under section 6. In general terms, under section 6, courts required a plaintiff to demonstrate an arguable case of liability against a defendant, an arguable case that the insurance policy responded, and that there was reason to believe that if the plaintiff obtained judgment against the defendant, the defendant would not be able to meet that judgment. The hurdles for joining a liability insurer under section 6 have been described as fairly low. It remains to be seen, however, precisely the manner in which courts approach the issue of granting leave under the new Act.
It should be noted that the new Act extends to claims against third party beneficiaries under insurance contracts, whereas section 6 was limited to claims against insureds who were party to the relevant contracts of insurance.
Jurisdictional issues The new regime applies only to proceedings in a court or tribunal of NSW, which is comparable to the territorial reach of section 6 adopted in Chubb v Moore. Although this is practical, it is not without its own difficulties, as it may lead to forum shopping. Some simple examples serve to demonstrate the potential complexities. For instance, could a claimant obtain leave in a NSW court where the relevant contract of insurance states that it is governed by NSW law, but the claimant and the insured reside elsewhere? Would it be sufficient for any one of the insurer, the insured or the claimant to reside in NSW, where the contract of insurance is not governed by NSW law? And what about a class action in a different state, where some of the claimants are based in NSW?
The potential variables are endless. Unfortunately, NSW Law Reform Commission Report 143 does not contain guidance on this issue.
The effect of insurance payments Section 9 of the new Act provides that a payment by an insurer to a third-party claimant under the Act discharges the insurer’s liability to the insured, to the extent of that payment. So much is uncontroversial.
Section 10, however, may be problematic. This provides that an insurer’s liability to a claimant under the Act is not reduced or discharged by any compromise or settlement with the insured, or any payment to the insured, unless and to the extent that the insured has paid that money to the claimant. Among other things, this provision is intended to prevent collusion between an insurer and insured, for instance where an insured settles an indemnity claim for undervalue. That said, the broad terms in which section 10 is drafted may have unintended consequences. For instance, if a liability insurer settles a disputed claim for indemnity by an insured on reasonable terms, even though the settlement moneys are paid to the claimant, the settlement may not preclude the claimant from pursuing additional moneys from the insurer.
Conclusion The NSW Law Reform Commission has recommended that the Commonwealth should enact a general, overarching, provision providing plaintiffs direct access to liability insurers, in appropriate cases. In the meantime, it has stated that the new Act may serve as a model that other states and territories, or the Commonwealth, may adopt. It remains to be seen whether other legislatures will take up that invitation.