The New South Wales Parliament is currently considering the Civil Liability (Third Party Claims Against Insurers) Bill 2017 (the Civil Liability Bill). If passed, the new legislation will give effect to the recommendations of the NSW Law Reform Commission. It repeals section 6 (Part 4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRMP Act) and replaces it with a new mechanism to allow third party claimants to recover from insurers in certain circumstances.

The trouble with section 6

Section 6 of the LRMP Act creates a statutory charge over monies that may become payable by an insurer and has been heavily criticised for being outdated, overly complex and inappropriate for claims made policies and claims for pure economic loss.

In 2013, the New South Wales Court of Appeal suggested that section 6 be "…completely redrafted in an intelligible form so as to achieve the objects for which it was enacted". [1]

At the time of its introduction in 1946, two scenarios were contemplated:

(i) before trial, an insured person enters into a collusive agreement with the insurer, accepts a lump sum and spends it all or disappears – even if the plaintiff obtains a verdict, recovery from the insured is not possible;

(ii) after the trial, the insurer pays the amount to the insured and the insured spends it all or disappears so the plaintiff can recover nothing.

However, in practice, section 6 was relied upon by plaintiffs for reasons beyond the contemplated scenarios, including where a plaintiff had a concern that an insurer may seek to deny liability to an insured defendant, or where there were several completing claims made against a policy with potentially insufficient limits.

The application of section 6 to D&O policies which provide cover for defence costs, created discomfort in the Australian insurance market. Whilst the New South Wales Court of Appeal held that a charge under section 6 does not prevent an insurer from advancing defence costs to an insured,[2] the New Zealand Supreme Court came to a different conclusion in relation to the equivalent New Zealand legislation upon which section 6 was modelled. [3]

Time for law reform

In 2016, the NSW Law Reform Commission was asked to review and report on section 6 of the LRMP Act. The NSW Law Reform Commission released its Report 143: Third party claims on insurance money, Review of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 in December 2016.

The key finding of the Commission was that a provision is needed to meet the situations that section 6 aims to address by providing a plaintiff with direct access to the insurer, in appropriate cases. However, this provision should do so without the contrivance of the charge. Instead, the Commission proposed reverting to the "general rule that the earlier claim takes priority".[4]

The Commission criticised the existing Commonwealth legal regime in this area as being "patchy" and not providing the same level of protection to plaintiffs as section 6, thus exacerbating the issue of forum shopping. The preferred option proposed by the Commission was for such law reform to be introduced at the Commonwealth level to avoid disparity between states.

The new paradigm for third party claims

The Civil Liability Bill adopts the recommendations of the NSW Law Reform Commission.

The key features of the new legislation are:

  • a claimant can recover an insured liability amount (owed to the claimant by the insured) from an insurer in court proceedings;

  • the insurer is not liable to the claimant for more than the insurer would have been liable to pay under the insurance contract in respect of the insured person's liability to the claimant;

  • the insurer can rely on the same defences and reductions that the insured could have relied on in a direct action by the claimant; and

  • the regime will not allow a claimant to recover any amount from a re-insurer.

Several procedural aspects of section 6 of the LRMP Act are retained in the new legislation including the requirement to seek leave prior to proceeding against an insurer, and that a claim may only be brought in a court or tribunal of New South Wales.

Where an action has already been brought against insurers under section 6 of the LRMP Act before the commencement of the new legislation, section 6 will continue to apply. However, there is no general preservation of any statutory charges that may have arisen under section 6 of the LRMP Act.

Implications for insurers

These reforms will significantly change the landscape in respect of third party claims against insurers in New South Wales and provide far greater clarity to insurers.

Abandoning the concept of a charge will resolve any uncertainty around whether an insurer is prevented from advancing defence costs where a plaintiff's claim may exhaust all funds under the policy, and eliminate the difficulties with applying the regime to claims made policies and claims for pure economic loss.

Unfortunately "forum shopping" is likely to continue, with plaintiffs likely to elect to bring claims against insurers in the Supreme Court of NSW for the sole purpose of joining an insurer.

Hopefully this reform will also be the catalyst for other states and territories to introduce similar legislation to create a uniform regime, or for the Commonwealth to consider its own law reform in this area.