Where an insurer has denied indemnity, it is uncontroversial that the insured may seek leave to join the insurer as a third party to the proceeding. However, when a plaintiff seeks to join an insurer as a defendant because the defendant insured is insolvent and therefore has insufficient assets to satisfy a judgment for costs and damages, the only remedy a plaintiff can seek from the courts is declaratory relief to the effect that the insurer is obliged to indemnify the defendant insured. The question arises whether to allow a plaintiff to join the insurer to costly proceedings in which it may never need to participate. This article is a brief overview of the approach of the Courts to this issue in circumstances where the defendant company is insolvent or the individual defendant is bankrupt.

In order to make a claim against another party’s insurer, there must be a bona fide legal controversy between the claimant and the insurer on the issue of the insurer’s indemnity of the insured.15 The authorities are conflicting on the issue of whether absent the suggestion that a defendant insured would actively litigate or challenge the insurer’s declining of indemnity, there is a relevant controversy.

In JN Taylor Holdings Ltd (in liq) v Bond (1993) 59 (SASR 432), three companies sued three of their former directors, alleging breach of their duties as directors. Bond was the only director still in the jurisdiction but was bankrupt. The liquidator sought a declaration that Bond’s directors’ and officers’ liability insurer, which had denied indemnity, indemnify him in the event he was found liable.

At first instance, Debelle J dismissed the application. However, on appeal the Full Court of the South Australian Supreme Court allowed the appeal and ordered joinder of the insurer. In weighing up whether to exercise the discretion, King CJ considered that there were strong arguments in favour of disposing of the issues of the director’s liability to the plaintiffs and the liability of the insurer to indemnify the directors in the one trial. These considerations included the length, complexity and cost of the trial, and the potentially prohibitive cost of a subsequent trial to determine the insurer’s liability, which would necessarily have to cover a substantial part of the ground covered in the trial to determine the director’s liability.

In the more recent decision of Ashmere Cove Pty Ltd v Beekink (No 2) (2007) 244 ALR 534 , joinder was allowed at first instance as the Court considered there was utility in a declaration against an insurer in circumstances where there was an overlap of factual issues in two substantive proceedings. This was affirmed on appeal in Employers Reinsurance Corp v Ashmere Cove Pty Ltd (2008) 166 FCR 398 (Ashmere), in which the Full Court of the Federal Court stated at [73]-[74]:

In substance, the effect of the joinder orders made by the primary judge is no different to the situation involved in the everyday case of an insured joining its insurer as a third party… This enables issues of liability and assessment of damages or compensation, both as between claimant and insured and as between insured and insurer, to be heard and determined in the one proceeding.

So it seems that where Courts have granted the declaratory relief sought, without the need for the insured’s liquidator or trustee in bankruptcy to formally ‘demand’ that the insurer indemnify the claim, reasons of practical utility and case management principles have ultimately won out. However, not all Courts have been persuaded by the arguments of better case management to allow plaintiffs to join insurers as defendants to proceedings.

In Interchase Corporations (in liq) v FAI General Insurance Company Limited (2000) 2 Qd R 301, the insurer had denied liability to indemnify the defendant insured, who had not sought to join the insurer to contest that denial of liability. Interchase sought to join FAI to obtain a declaration that FAI was liable to indemnify the defendants in respect of their liability to Interchase. Neither defendant objected to FAI’s decision. The court at first instance ordered that FAI be joined. The decision was overturned on appeal. McPherson JA was of the view that joinder would serve no useful purpose, given the defendant insured did not intend to pursue indemnity and so would not receive the proceeds under the policy.

There have been two more recent decisions cited by commentators as evidence that Courts are becoming more willing to allow joinder of an insurer alongside their insolvent insureds. The first is a decision of the Western Australian Court of Appeal in QBE Insurance (Aust) v Lois Nominees Pty Ltd [2012] WASCA 186 (Lois), which involved an application for summary judgment by the insurer which the plaintiff was seeking to join to the proceeding. The majority of the Court of Appeal, comprising Newnes and Murphy JJA found that the plaintiff’s joinder application should be allowed to continue on the basis that the plaintiffs had an arguable claim. Newnes JA in particular endorsed the decision in Ashmere, and declined to follow Interchase, noting that the insured in that case was not insolvent, and had not disputed the denial of indemnity.

However, McClure P dissented, giving weight to the procedural disadvantages cited by the insurers stating that in relation to Ashmere “with the greatest respect, it is difficult to see how that is correct. There was no ‘lis’ (in the sense of proceedings) between the insured and the insurers nor was there anything to indicate that the indemnity issues would be actively litigated between co-defendants so as to bind them”. Her Honour’s view is consistent with the reasoning of the majority in Interchase

Not long after Lois the New South Wales Supreme Court delivered its judgment in Owners-Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 (Mestrez). The decision concerned the right of an insurer who is joined as a party to a proceeding, to plead a defence to the plaintiff’s claim on behalf of insolvent defendants while denying liability to indemnify those defendants under their insurance policies. The joinder of the insurer was not contested. Nonetheless the Court stated that reasons of better case management would have applied to, and justified, the joinder in the present case.16

Whilst it is arguable that the cause of insurers resisting third party claims for declarations has been ‘dealt a blow’ in light of Mestrez and Lois, it is submitted that the authorities are still unclear. The Western Australian Court of Appeal in Lois was evenly divided on whether a relevant controversy was required. Murphy J decided the application for leave on the basis of principles governing summary judgment. It was Newnes JA alone who relied on the reasoning in Ashmere, and then only by way of obiter dictum. In Mestrez, the outcome ultimately turned on the wording of the particular insurance policies, whereby the right of the insurer to defend the action on behalf of the insured was not conditional upon it providing indemnity, and His Honour’s findings were to the specific circumstances of the case. It is the writer’s opinion that it is still open to an insurer to argue that, having regard to the majority judgment in Interchase, and McClure P’s dissenting judgment in Lois, where an insured does not challenge the decision by an insurer to decline indemnity, there is no relevant “controversy” and a Court may not in those circumstances order a joinder of a claim by a third party seeking declaratory relief.