Current legislation in NSW, which is mirrored in the ACT and NT, allows a third party claimant to obtain a statutory charge over the proceeds of a defendant policyholder’s liability insurance policies in respect of the alleged liability before that liability crystallises.
Some cases in recent years dealing with directors’ and officers’ liability insurance have suggested that the imposition of this charge could prevent the D&O insurer advancing to the insured company or individual the costs of defending the underlying allegations of liability, creating uncertainty for insurers and policyholders and diminishing the value of those insurance policies.
In light of this uncertainty, the insurance industry and director representative bodies have, for some time, sought clarification of the law – which the NSW Law Reform Commission has now recommended. Assuming it is implemented in its recommended form, the amended legislation will remove the ability to obtain a statutory charge (while preserving the ability of a claimant to directly access insurance policy proceeds in certain circumstances) and make clear that a D&O liability insurer can advance defence costs to its policyholder even where the claimant has a direct access right.
Over recent years, the insurance industry has been seeking clarification in relation to the operation of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (and its equivalents in the ACT and Northern Territory).
Section 6 provides claimants with a possible avenue to access insurance proceeds directly from insurers by invoking a statutory charge over the proceeds of the insurance.
The operation of section 6 has been much litigated in recent times and there is a lingering question about whether a statutory charge prevents the advancement of defence costs under D&O (and potentially other liability) insurance policies in circumstances where:
- the size of the claim exceeds the D&O policy limit; and
- the insurance policy limit is inclusive of defence costs.
This issue has been canvassed in a series of New Zealand decisions and by the NSW Court of Appeal in Chubb v Moore1 – further detail around those decisions is available here.
To respond to individual and corporate policyholder concerns arising from this uncertainty, the insurance industry offered separate defence costs policies, or policies with separate cover and limits for defence costs and for liability arising from claims (some of which activate automatically in the event a third party asserts a statutory charge over the proceeds of the D&O policy).
In parallel with this, insurers lobbied for a legislative solution, particularly in light of ongoing judicial comment in Australia casting doubt on the reasoning in Chubb v Moore.2
Clarity on the horizon
In December 2016 the NSW Law Reform Commission released a report3 which recommended a redraft of this provision to contain the following elements:
- to remove the concept of a statutory charge, and to provide for a direct right by claimants against insurers once certain preconditions have been met, for example:
- the insured having a liability to a claimant;
- the policy covers the liability;
- the insurer being able to invoke the same defences that the insured/defendant could have invoked in response to a claim made against it by the claimant.
- the claimant can recover from the insurer the amount that the insurer would have paid under the policy to the insured/defendant in respect of the defendant’s liability to the claimant. This confirms that the provision is not intended to impact on the insurer’s ability to meet the cost of defending the claim and in this way picks up the current law in NSW, as expressed in Chubb v Moore, that the statutory charge is concerned with the money payable in respect of the defendants’ liability for damages and is not intended to capture all money that may be payable under the contract of insurance.
- the claimant should only be able to sue the insurer with leave of the Court. This protects insurers from being unnecessarily or inappropriately involved in disputed between claimants and insureds/defendants.
The objective is to create an outcome that might be a model for other States (or the Commonwealth) to adopt in due course.
If the legislation is passed, it will provide much needed clarity for all interested parties, in particular insurers and company directors & officers – indeed, the proposal has already been welcomed by the National Insurance Brokers’ Association.4