On 1 June 2017 a new law came into effect in New South Wales relevant to liquidators’ rights to directly pursue the insurer of a proposed defendant, taking away significant uncertainty which existed previously because of antiquated provisions in a 1946 act relating to charges over and priorities to those insurance monies.

The new law now provides greater certainty for liquidators in deciding whether to bring proceedings directly against the insurers of directors and officers or indeed of other third parties against whom the liquidators may have claims.

The Old Act

Previously, section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Old Act) created the concept of what was called a “statutory charge” over insurance monies, which in theory could be enforced by a third party / liquidator taking action directly against the insurer of a proposed defendant. There were difficult concepts in the Old Act which generated much litigation including as to when the “statutory charge” came into existence, when it “descended” upon the insurance monies, how that timing was to be worked out and then critically who had priority to those insurance monies when there were competing claims.

There were a number of decisions in Australia which considered the Old Act, most recently in the New South Wales Court of Appeal in Chubb Insurance. The New South Wales courts took a different view to that which was adopted by the New Zealand courts about exactly the same legislation. This created confusion for both liquidators and insurers especially in terms of priorities to the insurance monies.

Indeed, the liquidators / receivers of Dick Smith recently lost an application to join 11 insurers to their claims against certain directors because of uncertainty surrounding the operation of the Old Act and the priorities possibly created by virtue of the ”statutory charge”.

The New Act

This has all now been clarified by the passing of the Civil Liability (Third Party Claims Against Insurers) Act 2017(NSW) (New Act).

Many of the concepts in the New Act are the same but the statutory charge has been abandoned and so much of the confusion and uncertainty removed.

The New Act allows a claimant / liquidator to bring proceedings to recover damages directly against the insurer of a proposed defendant (instead of or in addition to that claim). This is most useful if the insured or proposed defendant is bankrupt or in liquidation but that is not a necessary requirement.

The relevant elements are that:

  • The proposed defendant or the insured party must have an insured liability to the claimant / liquidator
  • The insured liability is the amount of the indemnity available under the policy, if any, covering the proposed defendant or insured party’s liability to the claimant / liquidator
  • In any proceedings brought by the claimant / liquidator directly against an insurer, the insurer stands in the place of the insured person or proposed defendant as if the proceedings were proceedings to recover damages, compensation or costs from the proposed defendant and the parties have the same rights and liabilities and the courts have the same powers as if the proceedings were brought directly against the proposed defendant or insured party. Practically, this means the insurer is entitled to rely on any defences or any other matters available to both the insurer under the insurance contract (i.e. to deny cover or limit liability) and any defences that would have been available to the proposed defendant or insured party against the claim made by the claimant / liquidator.
  • The New Act does not entitle a claimant / liquidator to recover any amount from a reinsurer.
  • Critically, proceedings may not be brought or continued against an insurer except by leave of the Court. Any application for leave may be made before or after proceedings have been commenced. The Court may grant or refuse the claimant’s application for leave and this is generally understood to mean that the Court will balance up the strength of the claim, the likelihood of success and matters relevant to whether or not there is coverage under the policy or a dispute about coverage.
  • The New Act specifically provides that leave “must” be refused if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or under any act or law.
  • Any proceedings against the insurer must be commenced within the same limitation period that applies to the claim of the claimant / liquidator against the proposed defendant or insured party.
  • A judgment against the proposed defendant does not prevent the claimant / liquidator from recovering an amount against the insurer directly except to the extent that any judgment has been satisfied, that is, there cannot be double recovery or recovery of more than the losses suffered.
  • Importantly, any payment made by the insurer to the claimant under the New Act discharges the liability of the insurer to make any payment to the insured party under the contract of insurance. This means that insurers can continue to pay defence costs in reduction of the policy limit and insurers can settle claims made against the insured without any issues of priority arising. In effect, priority is then a practical matter which is governed by whenever a claimant’s claim is resolved by settlement or judgment and so the obligation of the insurer under the policy to pay the insured arises.

Key Takeaway

The result of these amendments will permit liquidators to more confidently make decisions about whether or not to pursue insurers directly without the worry of speculating as to whether there are other competing claims (including unknown claims) that may have priority to the insurance monies. The only matters a liquidator now has to consider in this regard are what amount of the policy limit is left and to be wary of the resolution by settlement or judgment of other known claims that may occur before resolution of the liquidator’s claim. It becomes simply a race to settlement or judgement, not an analysis about when the priority ”charge” under the Old Act arose or descended.