On 1 June 2017, the Civil Liability (Third Party Claims Against Insurers) Act 2017 (the Act) received Royal Assent and entered into force in New South Wales. The Act repealed section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (the LRMP Act) and replaced it with a new regime to allow a third party claimant to recover the amount of an insured liability by proceeding directly against an insurer.

Under section 5(3) of the Act, the courts of NSW have discretion whether to grant or refuse leave to bring or continue proceedings against an insurer. A recent decision of the NSW Supreme Court concerning section 6 of the LRMP Act is instructive as to how the courts of New South Wales will likely exercise the discretion under section 5(3) of the Act.

Background

In DSHE Holdings Ltd (receivers and managers appointed)(in liq) v Abboud; National Australia Bank Limited v Abboud [1], the plaintiffs commenced proceedings against former directors and officers of DSHE Holdings Ltd (DSHE). The plaintiffs also sought leave under section 6(4) of the LRMP Act to commence proceedings against eleven director and officer insurers which provided primary and excess layers of insurance cover to those former directors and officers.

The plaintiffs alleged that they suffered economic losses by reason of the wrongful conduct of the former directors and officers of DSHE. The amount of the plaintiffs' claims significantly exceeded the combined limits of the insurance policies, being AUD150 million.

It was common ground that the conditions for granting leave under section 6(4) of the LRMP were satisfied, being that there was:

  • an arguable case against the former directors and officers;
  • an arguable case that the policies responded to the claims; and
  • a real possibility that, if judgment was obtained, the former directors and officers would not be able to meet it.

It did not follow that leave should be granted as the court had discretion to refuse leave if it was not reasonable to join the insurers to the proceedings.

No utility in joining the insurers

Justice Stevenson concluded that there was no utility in granting leave as each of the insurers had confirmed coverage for the former directors and officers in respect of the plaintiffs' claims, subject to reservations, including a reservation with respect to the possible operation of a Dishonest or Improper Conduct Exclusion.

His Honour rejected the plaintiffs' submission that leave should be granted to avoid the possibility of separate proceedings by the former directors and officers against the insurers, if they later disputed indemnity. There was presently no reason to conclude that the insurers would do so and it was not appropriate to grant leave just in case an insurance dispute arose.

Justice Stevenson also rejected the plaintiffs' submission that an independent reason to grant leave was to secure the priority of any entitlement that the plaintiffs might have to access the insurance policies. The joinder of the insurers to the proceedings would not improve the position of the plaintiffs in the event that there were also claims on the policies by shareholders in DSHE because the first party to have its claim determined (whether by judgment, award or settlement) would prevail.[2]

Implications for insurers

Section 6 of the LRMP Act was repealed by the Act. Notwithstanding this, under the new regime that allows a third party claimant to recover directly from an insurer, the courts of NSW will likely continue to exercise discretion to refuse leave to join an insurer to proceedings if there is no utility in doing so.

Like Section 6 of the LRMP Act, the courts of NSW must continue to refuse such leave if the insurer can establish that it is entitled to disclaim liability.[3]

It follows that under the Act, insurers will continue to have grounds to oppose being joined to proceedings in some circumstances.