A plaintiff bringing proceedings against an insured does not have a right to join the insurer to the proceedings; joinder is by discretion, and is based on the facts of the case. An important consideration is whether the insurer will be at a procedural disadvantage by being joined by the plaintiff, as opposed to being the subject of a cross-claim by the insured.
The Owners - Strata Plan 62658 v Mestrez Pty Ltd  NSWSC 1259 (Mestrez) considered some of the “procedural ramifications” of joining an insurer and what that insurer was, and was not, entitled to plead in its defence.
Facts and issue in dispute
Proceedings were commenced against a number of defendants in connection with the design and installation of fire control and drainage systems in a strata building. Two of the defendant companies (insureds) were insolvent. The plaintiff joined their insurer (AXIS) to the proceedings to obtain a declaration that AXIS was liable to indemnify the insureds and an order under Corporations Act 2001 (Cth) s 562 (which would give the plaintiff priority to any insurance money received by the insureds’ liquidators from AXIS).
AXIS filed a response to the plaintiff’s claim denying that it was liable to indemnify the insureds. It then sought leave to amend its response so as to claim that the proportionate liability scheme provided for under the Civil Liability Act 2002 (NSW) applied, and that certain other defendants and strangers to the proceedings were “concurrent wrongdoers”. At the same time, however, AXIS continued to deny that it was liable to indemnify the insureds.
It was not in dispute that:
- the plaintiff was entitled to seek a declaration as to AXIS’ liability to indemnify the insureds;
- AXIS had been joined as a party in its own right;
- if the proportionate liability scheme applied to the proceedings, the insureds would be “concurrent wrongdoers”; and
- AXIS was not itself a “concurrent wrongdoer”.
The issue in this interlocutory application was whether AXIS, having been joined to the proceedings in its own right, could both plead a denial of indemnity and reliance on the proportionate liability scheme.
AXIS claimed that it was subrogated to the rights of the insureds and so was entitled to the “benefit” of pleading proportionate liability in the same way as the insureds would have been entitled to do. Given that AXIS had not indemnified the insureds, or even accepted any liability to indemnify the insureds, could it still invoke the proportionate liability scheme? Or was it unfairly inconsistent for AXIS to deny indemnity but claim that there were other “concurrent wrongdoers” whose liability fell to be considered alongside that of the insureds?
The Court held that AXIS was not, at this stage of the proceedings, confronted with a choice between inconsistent rights. If the insureds had brought proceedings against AXIS seeking indemnity, AXIS would be entitled to defend itself by denying liability. Having made AXIS a party to the proceedings, the plaintiff was not entitled to deny AXIS this opportunity.
The solution was to permit AXIS to file responses in the names of the insureds claiming that other persons were concurrent wrongdoers and invoking the proportionate liability scheme. This would allow them to continue to deny indemnity.
Mestrez contains a detailed examination of the (equitable) doctrine of subrogation and the (common law) doctrine of election between inconsistent rights, as well as the joinder of insurers to proceedings brought against insureds. However, central to the outcome of the application was AXIS’ contractual right (under the policy’s “litigation clause”) to defend the proceedings in the name of the insureds. This is not, strictly speaking, a form of subrogation, and this judgment illustrates the importance of distinguishing between the contractual right to assume the conduct of a claim against an insured and the doctrine of subrogation. The ability of an insurer to be subrogated to the rights of the insured (or to stand in the shoes of the insured) against a third party arises upon the insurer indemnifying the insured. The contractual right of the insurer to take over the conduct of the proceedings does not depend on it having indemnified the insured.