In QBE Insurance (Aust) Ltd v Lois Nominees Pty Ltd [2012] WASCA 186, a third party’s application for a declaration that an insurer was required to indemnify an insured (third party declaration) was permitted to proceed to hearing.

Proceedings of this type are somewhat unorthodox, as they involve a third party litigating about a contract to which they are neither a party nor a beneficiary, in circumstances where they will not be able to enforce any order that the court makes. The third party might be said to be fighting the insured’s battle for them.

Lois Nominees concerned only whether an application for a third party declaration should be allowed to proceed, and not whether the declaration should actually be made. The Court of Appeal of Western Australia concluded that the application should proceed to hearing. Whether any declaration will be made remains to be seen.

Facts and earlier litigation

Hill was a lawyer who was sued by a number of his clients in connection with his directorship of Firepower Holdings Ltd. Hill filed a defence in the proceedings, but was subsequently declared bankrupt. His insurers denied liability.

The Bankruptcy Act 1966 (Cth) provides that where a bankrupt has a right to indemnity under a contract of third party liability insurance, any amount received under that contract will vest in the bankruptcy trustee(s) to be applied in satisfaction of any outstanding third party liability. The problem facing Hill’s clients (plaintiffs) was that, owing to a lack of funds, neither Hill nor his trustees in bankruptcy were challenging the insurers’ denial of liability.

The plaintiffs attempted to join the insurers to the proceedings for the purposes of seeking a third party declaration. This was unsuccessful because court rules in Western Australia do not allow new defendants to be joined to existing actions: Lois Nominees Pty Ltd v Hill [2011] WASC 53 (see our earlier article on this judgment here).

The plaintiffs then commenced separate proceedings against Hill and the insurers (but not the trustees) for a third party declaration (declaration proceedings). The insurers applied to have the declaratory proceedings summarily disposed of, arguing that they were an abuse of process. They were unsuccessful, and the court ordered that the declaratory proceedings were to be heard together with original (liability) proceedings: Lois Nominees Pty Ltd v QBE Insurance (Aust) Ltd [2011] WASC 208; (2011) 42 WAR 75.

The appeal

The insurers appealed against the trial judge’s refusal to dispose of the declaration proceedings. They argued that:

  1. the plaintiffs had no standing to seek a declaration because they were not parties to the insurance contract and it conferred no benefit on them;
  2. a declaration would have no utility as it would not bind the trustees in any subsequent indemnity proceedings against the insurers; and
  3. permitting indemnity to be considered in the declaration proceedings would put the insurers at a procedural and forensic disadvantage.

The majority judgment

The only issue to be decided on appeal was whether the declaration proceedings should be allowed to continue. Newnes and Murphy JJA (McLure P dissenting) decided that they should. The plaintiffs had an arguable claim, and it would be premature to bring the proceedings to an end without a hearing. In reaching this conclusion, Newnes and Murphy JJA considered the following questions.

Was it possible for the plaintiffs to obtain a declaration that the insurers were obliged to indemnify Hill?

Yes. The plaintiffs had standing and the declaration would have utility. The plaintiffs had standing because the declaration was of practical interest to them. Although any right to indemnity was vested in the trustees, the plaintiffs had a sufficient interest in the matter because the Bankruptcy Act provided for the amount of any indemnity to be paid to them. The declaration would have utility because it could impact on the insurers’ ability to defend later indemnity proceedings (discussed below).

Would a declaration impact on any later proceedings brought by the trustees seeking indemnity?

While it would not give rise to res judicata or an estoppel, a declaration could mean that any attempt by the insurers to defend indemnity proceedings might be stayed as an abuse of process.

Upon his bankruptcy, Hill’s right to seek indemnity vested in his trustees. However, the trustees had not been made a party to the declaration proceedings, and so they would not be bound by any declaration made. It followed that no res judicata or estoppel could arise to prevent the trustees from proceeding against the insurers.

Despite this, any attempt by the insurers to defend later indemnity proceedings brought by the trustees might still be stayed as an abuse of process. Abuse of process is a wider concept than either estoppel or res judicata. It can be established where later proceedings are unjustifiably vexatious and oppressive because they seek to relitigate something that has already been decided.

In concluding that a declaration could have consequences for any future proceedings brought by the trustees against the insurers, Newnes JA endorsed the decision of French J in Ashmere Cove Pty Ltd v Beekink (No 2) [2007] FCA 1421 (affirmed Employers Reinsurance Corporation v Ashmere Cove Pty Ltd [2008] FCAFC 28; (2008) FCR 398) and did not follow Interchase Corporation Ltd (in liq) v FAI General Insurance Co Ltd [1998] QCA 180. Murphy JA pointed out that the declaratory proceedings had not been properly constituted. If the trustees had been made a party to the proceedings they would be bound by the outcome, even if they played no active role in them.

Did it matter that the plaintiffs could have taken an assignment of the insurance policy or funded the trustees to proceed against the insurers?

Not necessarily. The plaintiffs’ application were not oppressive or vexatious merely because the plaintiffs could have adopted an alternative course. Parties are usually entitled to proceed in any cause of action available to them.

Would the insurers suffer any procedural, evidentiary or forensic disadvantages by having indemnity decided in proceedings brought by a third party, rather than the insured?

This was a matter to be assessed by the trial judge. Newnes and Murphy JJA also noted that any assessment of detriment would need to be assessed having regard to whether at least some of the detriment could be overcome by the trustees being joined to the proceedings.

Conclusion

This decision, and the two first instance decisions that preceded it, have been complicated by procedural problems involving who should and should not be made party to litigation, and the inability (in WA) to join defendants to existing proceedings. Nonetheless, the decision confirms that there may be some value for a third party, in obtaining a declaration that an insurer is obliged to indemnify an insured. If a declaration is made, this may hamper an insurer’s ability to challenge a later claim for indemnity from an insured (or, in this case, their trustee in bankruptcy). Even though res judicata or estoppel may not apply, the doctrine of abuse of process may prevent the insurer from relitigating the issue of indemnity. At the very least, third party declarations may require insurers to review their approach to litigation.

What remains uncertain is the willingness of courts to permit third parties to bring declaratory proceedings. Judging from this decision and cases such as Bazem Pty Ltd v Bureau of Urban Architecture [2010] NSWSC 978, Ashmere Cove and The Owners - Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 (as well as the cases cited in Mestrez), it seems that courts are becoming more receptive to applications of this kind. However, declaratory relief is always discretionary. As the dissenting judgment of McLure P suggests, the fact that a third party may have an interest in a declaration does not necessarily make them the most appropriate person to bring declaratory proceedings. It will not always be appropriate to let a third party fight an insured’s battle for them.