Our previous alert discussed the NSW Court of Appeal's decision on the operation of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (s 6) in the Great Southern proceedings.1 The Court unanimously held that s 6 did not apply to the claims in those proceedings because they were not instituted in a NSW court. This article considers what the decision may mean for advancement of legal costs on appeal.

The relevant background to the decision can be found in our previous alert.

Section 6 did not create a charge over Defence Costs

The Court held that s 6 creates a charge only in relation to insurance moneys that are, or may become, payable in respect of a liability to pay damages or compensation and not otherwise. The Court found that until a liability to pay damages or compensation has been determined by judgment, award or settlement, there is nothing to which the charge can attach, or on to which it can descend.

If s 6 was construed to include in its scope all the moneys that might be payable under a contract of insurance, then this would alter the contractual rights of the insured to be advanced defence costs. The Court held that there was nothing in s 6 to suggest that it was intended to alter such rights and if this was the intention, then Parliament would have provided so in express terms.

The Court concluded that the charge under s 6 would not extend to money payable under the policies for defence costs and the like before any judgment, award or settlement in favour of one of the claimants.2

What about legal costs of an appeal?

If an insured's liability has been found at first instance in an amount greater than the available limit of the policy, the conclusion above leaves unanswered the question of whether legal costs of an appeal can be advanced so that insurers obtain a valid discharge for such payment. The question was not one that the Court was asked to consider.

Once there is a first instance judgment against the insured, there is a determination that the insured is liable. At that point there are insurance moneys that are or may become payable in respect of "a liability to pay damages or compensation". According to the decision, it is then that there is something to which a charge can attach. The Court concluded that s 6 would not extend to money payable under the policies for defence costs and the like before any judgment, award or settlement in favour of one of the claimants. What happens after any judgment where the insured is found liable?

This question arises where there is no separate limit for legal costs and the judgment liability is greater than the available limit of the policy. In this circumstance the remaining limit of the policy (minus defence costs already advanced) arguably constitutes insurance moneys that are or may become payable "in respect of a liability to pay damages or compensation"upon which a charge may attach. If so, a "net" would effectively be cast over the whole of this remaining sum.

This is best illustrated by way of an example. Say the relevant policy has a limit of $2 million and defence costs of $500k were advanced during the first instance proceeding. Judgment was handed down finding the insured liable for $4million. Thus the remaining $1.5m of the policy is required to meet the insured's liability for $4 million. The remaining sum is "insurance moneys that are, or may become, payable in respect of a liability to pay damages or compensation". If so, would a charge descend upon the remaining sum? Would any advancement of legal costs for an appeal in such circumstances be a valid discharge of the policy or a voluntary payment by the insurer? There are arguments for and against a charge descending in such circumstance.

Take away points

Whilst the decision provides greater certainty towards the operation of s 6, it acknowledges that anomalies may remain.3 The judgment joins other judgments and commentary in calling for a reform of s 6:

"Section 6 should be repealed altogether or completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted".4

Until this occurs, insurers, insureds and third party claimants will continue to grapple with s 6 and similar legislation.

In particular:

  • The conclusion of the Court that s 6 does not apply to defence costs was obiter and therefore non binding. However, given that the judgment is a unanimous decision of 5 judges of the Court of Appeal, it is likely to be persuasive in other court
  • Insurance policies providing cover solely for costs continue to be beneficial in providing a dedicated tower for insureds' legal costs. These policies also offer a solution to the uncertainty around advancement of legal costs for an appeal.