Introduction

On 11 June 2013, the Full Court of the New South Wales Court of Appeal handed down its decision in Chubb Insurance Company of Australia v Moore [2013] NSWCA 212, holding that a charge over insurance moneys under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the NSW Act) does not take priority to directors’ and officers’ entitlements to defence costs. The judgment can be accessed here.

This is consistent with the New Zealand Court of Appeal decision in Bridgecorp (on which we have previously reported), which overturned the first instance decision which held that payment of a director’s defence costs could not be permitted to reduce the pool of funds that would otherwise be available to meet claims to which a charge applied (reported here).

Background

On 18 May 2011, the agribusiness investment group, Great Southern, collapsed and went into receivership owing 47,000 investors over $1.8 billion. Since then, a number of actions have been brought by investors against the directors of Great Southern in Victoria and Western Australia for failing to disclose relevant matters in contravention of provisions of the Corporations Act, the ASIC Act or Victorian or Western Australian Fair Trading Acts.

Each of the directors have the benefit of policies of insurance (D&O Policies), in respect of which substantial defence costs have already been paid out and will continue to be incurred. In the meantime, the investors have written to the D&O Insurers claiming a charge over insurance monies under the D&O Policies pursuant to section 6 of the NSW Act.

The position with respect to advancement of defence costs going to erode the limit of liability of D&O Policies the subject of a charge under section 6 of the NSW Act has been uncertain since the first instance Bridgecorp decision.
Section 6 of the NSW Act provides generally that:

  1. If the insureds have entered into a contract of insurance which indemnifies them against liability to pay any damages or compensation, their liability shall on the happening of the event giving rise to the claim for damages or compensation be a charge on all insurance moneys that are or may become payable in respect of that liability
  2. Every charge created by this section shall have priority over all other charges affecting insurance moneys
  3. Every such charge shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insureds
  4. Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall be a valid discharge to the insurer

The complete text of section 6 can be found here.

The D&O Insurers filed a summons seeking a declaration that section 6 does not afford priority to the investors of insurance moneys that may be payable under the D&O Policies, including priority over legal expenses paid out as defence costs to the directors and officers insured under the D&O Policies.

Decision of the Court of Appeal

The Full Court was asked by the D&O Insurers to determine the following questions:

  1. Does section 6 create a charge on insurance moneys that are or may become payable under the policies only where there is sufficient nexus with NSW?
  2. Does section 6 apply to claims made policies?
  3. In the event that section 6 does apply to claims made policies, does it also apply where the alleged conduct of the insured giving rise to the claim for damages or compensation happened before the policies incepted?
  4. To the extent that section 6 imposes a charge on insurance moneys, do those insurance moneys include defence costs which are paid in accordance with the policy before judgment is entered or a settlement agreed?
  5. To the extent that section 6 imposes a charge on insurance moneys, will any payment made by the D&O Insurers under the policies by way of an indemnity for an Insured’s liability to pay damages or compensation (excluding defence costs etc) be valid if the payment is made before judgment is entered or a settlement agreed?
  6. What constitutes notice of a charge under section 6?

We consider the Full Court’s response to each of the questions in turn below.

Extra territorial application of section 6 (question 1)

The Court held that section 6 will only create a charge over insurance moneys in respect of claims brought in a court of NSW. As none of the Great Southern litigation had been brought in a NSW court, section 6 had no application and there was no basis for the assertion of the investors’ purported charges.

The Court clarified that the application of section 6 was not construed as being limited to contracts that are governed by NSW law, which means that insurers will not evade the application of section 6 by stipulating the governing law as being a non NSW jurisdiction. Further, the place where the event occurred that gave rise to the insured’s liability or the law of the claim for damages or compensation under which the claim is being made are not determinative factors.

Although the Court did not have to consider the other issues in light of its conclusion that section 6 did not apply, it did so to resolve uncertainty in the area.

Does section 6 apply to claims made policies? (question 2)

The Court held that Section 6 applies to both claims made and occurrence based insurance policies, even though the liability of an insurer is triggered at different times under each of the contracts.

How does the charge operate in the context of a claims made policy if the conduct giving rise to the claim occurs prior to inception? (question 3)

The Court held that Section 6 does not apply where the conduct of the insured giving rise to the claim happened before the relevant insurance policy incepted. In doing so, the Court followed the reasoning of the Court of Appeal in Walter Construction3, which found that the words “the happening of the event which gives rise to the claim for damages” refers to the moment when the liability arises, rather than to a later time when the claim based on that liability is made. That is, the charge comes into existence on the happening of the event that gives rise to the liability to pay damages or compensation, not when the claim for damages or compensation is made. The moneys will be payable at a later time pursuant to the contract of insurance by which the insured is already indemnified.

Do insurance moneys include Defence Costs? (question 4)

The Court held that, while section 6 extends a charge over insurance moneys payable, it does not extend in respect of defence costs, legal representation expenses or costs and expenses that are paid by the insurers in defending the claim. The Court reasoned that to prevent insurance moneys from being paid by insurers to discharge other obligations that an insurer may have to an insured under a contract of insurance would drastically alter the contractual rights between them, with the result that the insured would have to take action against the insurer for the monies payable under the contract of insurance. Further, it would place the claimant in a more favourable position that the insured in respect to the contractual right of indemnity under the contract of insurance. The Court adopted this position notwithstanding the acknowledgement that it would result in an erosion of the pool of potential moneys which would available to the claimant should the insurer be liable.

What is the status of other payments made under the Policy if the insurance moneys are charged? (question 5)

The Court held that any payment made by an insurer by way of indemnity for the liability of an insured to pay damages or compensation will constitute a valid discharge of the insurer’s obligation under the policy if such payment was made before judgment or settlement in relation to the claims of other claimants competing for the same limits. This was underpinned by the rationale that an insured should not have to await the determination of some other claim before enforcing its contractual right to indemnity under a policy.

What constitutes actual notice of a charge? (question 6)

The Court held simply that for the purposes of section 6(6), an insurer must have actual notice of the circumstances that give rise to the charge. The D&O Insurers were sent letters notifying them of the imposition of a charge under section 6, and therefore had the requisite actual notice in this case.

Implications of decision

The decision provides clarity to the Australian insurance industry regarding competing claims to insurance monies. Importantly, it confirms that insurers are not prevented from advancing defence costs (and in fact have a contractual obligation to do so), provided that such payment is made before judgment is entered or settlement is agreed in respect of any charge made on insurance moneys