Where an insurer has denied liability, a party who has brought proceedings against an insured may apply to join the insurer to the proceedings and seek a declaration that the insurer is required to indemnify the insured.  This has been considered in two recent Australian cases.

In Lois Nominees Pty Ltd v Hill [2011] WASC 53, the plaintiffs brought proceedings against a solicitor, Hill, for breach of trust and failure of consideration.  Hill, who was declared bankrupt, made a claim on a professional indemnity insurance policy issued by a syndicate of insurers.  The insurers denied liability.  Hill’s trustees in bankruptcy asserted that they did not have funds to join the insurers as third parties.

The plaintiffs sought leave to join the insurers and to claim a declaration that the insurers were liable to indemnify Hill against his liability to the plaintiffs.

The court concluded that the Rules of the Supreme Court (WA) regarding joinder did not permit new defendants to be joined to an existing action.  However, Beech J went on to consider whether, had joinder been possible, he would have exercised his discretion to join the insurers as defendants to the proceedings.

On the issue of discretion, the insurers had argued that a declaration could not have any “foreseeable consequences” for the plaintiffs because it would not enable them to bring recovery proceedings.  It would be necessary for Hill’s trustees to bring a new action against the insurers to claim indemnity, and the insurers would not be bound by the declaration in any such action, so they would not be precluded from defending any such action.

Beech J considered a number of cases where similar joinder applications had been made.  Earlier cases tended to refuse applications of this kind, on the basis that the grant of a declaration in favour of a third party would not preclude the insurer from later disputing its liability to the insured.  However, more recent decisions have recognised that third parties may have a real interest in establishing an insurer’s liability to indemnify an insured, so that the joinder of an insurer could have practical utility:  see eg Ashmere Cove Pty Ltd v Beekink (No 2) [2007] FCA 1421; (2007) 244 ALR 534 (affirmed Employers Reinsurance Corporation v Ashmere Cove Pty Ltd [2008] FCAFC 28; (2008) FCR 398).  Beech J concluded that there was arguably a sufficient prospect that, if a declaration was made, it would be an abuse of process for the insurers to defend a later action by the trustees in bankruptcy.  In other words, it was arguable that any declaration would have “foreseeable consequences” for the plaintiffs.

In CGU Insurance Ltd v Bazem Pty Ltd [2010] NSWSC 978, Bazem sued its architecture firm in contract and for negligence in the supply of services. The architect was covered under a civil liability professional indemnity insurance policy issued by CGU Insurance Ltd. Initially, CGU ran the firm’s defence, but ceased to do so after becoming aware that a director in the firm had entered into a personal insolvency agreement. Bazem then sought leave to join CGU as a second defendant to the proceedings so as to obtain a declaration that CGU was obliged to indemnify the firm. 

Bazem was successful at first instance (Bazem Pty Ltd v Bureau of Urban Architecture [2010] NSWSC 978) and the NSW Court of Appeal refused CGU’s application for leave to appeal (CGU Insurance Ltd v Bazem Pty Ltd [2011] NSWCA 81), but in considering the application for leave, the court also heard the appeal that would follow if leave were granted.

As in Lois Nominees Pty Ltd v Hill, the decision in Bazem turned on an interpretation of the court’s power to order joinder of parties rather than on whether the court should have permitted a declaration to be sought in proceedings between an insured and a third party.  Gzell J concluded (and the Court of Appeal agreed) that the alternative tests of “common question of law or fact” and “same transaction or series of transactions” that govern joinder in the Uniform Civil Procedure Rules (UCPR) were satisfied, but that in any event the UCPR also gave the court an unqualified discretion to permit joinder. 

However, Gzell J went on to express the view that “joinder is available against an insurer of a defendant that has a utility and avoids multiplicity of proceedings”:  [2010] NSWSC 978 at [31].

Neither Lois Nominees Pty Ltd v Hill nor CGU Insurance Ltd v Bazem Pty Ltd turned on whether the court should exercise its discretion to join insurers to proceedings between a third party and an insured.  However, both judgments indicate that, provided court rules permit joinder in the particular circumstances of the case, there are no real obstacles to a third party making an insurer a party to proceedings with the aim of obtaining a declaration that the insurer is required to indemnify an insured.