Third Party Rights to Insurance Monies − The New Generation
For the last 70 years third party claimants and insurers in NSW have had to wrestle with what the Court of Appeal has described an "undoubtedly opaque and ambiguous"1 legislative framework intended to provide protection against insureds "running away" 2 with insurance monies. From 1 June 2017 a new direct right of recovery has been created and comes into effect in order to meet the needs of third parties seeking to access modern and increasingly complex insurance arrangements.
This means that businesses which have claims against defendant companies insured against third party liabilities, but which then disappear (into external administration), will now have a more stream-lined ability to proceed against the relevant insurer directly if it can be shown that the insurer was on risk under the relevant liability policy. Whilst leave of the Supreme Court is still required to pursue such claims directly against insurers, under the previous legislative regime the path to recovery was less clear and often convoluted.
The Civil Liability (Third Party Claims Against Insurers) Act (2017) (the Act) was assented to on 1 June 2017 and came into force immediately. It repeals section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRMP) which for the last 70 years has struggled to deal with the issue of protection of third party claimants. Indeed, the NSW Court of Appeal’s criticism of section 6 has been continued and unrestrained. President Kirby has said that its interpretation had been "problematical" and that "ambiguity may be its only clear future". 3 In the 2013 decision of Chubb Insurance Company of Australia Ltd. v Moore,4 the Court of Appeal made further criticism stating
section 6 should be repealed altogether or redrafted in an intelligible form..."
Following this decision, the Government referred the issue to the NSW Law Reform Commission. The Act is the product of the Commission’s ultimate report and recommendations.
Previously, section 6 of the LRMP Act provided that at the time of an insured "event" took place, a statutory charge was created over the insurance money that was or would become payable in respect of that liability. The charge was created regardless of whether a claim had been made against the insured. The statutory charge remained in existence notwithstanding the liquidation of the insured.
The effect of the statutory charge under section 6 LRMP was the source of considerable legal debate and litigation. For instance, section 6 contained no limitation of time provisions, creating uncertainty for both claimants and defendants alike as to when a cause of action accrued or expired, particularly in relation to "claims made" policies of insurance. Additionally, section 6(1), arguably did not extend to claims for pure economic loss because its language only referred to "damage" and "compensation".
Another area of frequent uncertainty under section 6 LRMP was due to the fact that it did not expressly exclude from the statutory charge, that part of the insurance moneys required to pay for an insured's defence of the claim. So, where the alleged claim was so large that it exceeded the indemnity limit under the relevant insurance policy, third party claimants were forced to take action to assert the charge prior to judgment in order to prevent the insurance moneys being consumed by defence costs. This was the issue in the Chubb litigation and has now been addressed by the Act.
The key features of the Act are as follows.
- The insurer stands in the place of the insured person
- The right to proceed against the insurer is subject to leave being granted by the court. Leave must be refused if the insurer can prove that it is entitled to deny liability under the contract of insurance – the discretion previously exercised by the court to grant leave has been removed.
- The liability of the insurer is limited to the amount that the insurer would have to have paid under the policy of insurance.
- The limitation period applying to rights under the Act is the same limitation period that applies to the claimant third party's cause of action against the insured person.
- The leave maybe sought in respect of any type of claim that the insured would have been entitled to be indemnified by the insurer, including a claim for pure economic loss of the third party.
- These direct rights do not apply against a re-insurer.
- The leave to proceed against the insurer may be sought irrespective of whether the insured company is being wound up.
- The right to proceed is against persons who may be specified or referred to in the policy, whether by name or otherwise (bringing this right in line with the provisions relating to these persons under section 48 of the Insurance Contracts Act 1984).
- The leave of the Court may be sought before or after commencement of proceedings against the insured person (or the third party beneficiaries).
- The insurer's liability to the claimant is capped by the limit of indemnity under the insurance policy and confined to the amount in respect of the insured person's liability to the claimant.
The third party claimant's path to insurance proceeds in New South Wales is easier than it previously was, and much easier than it still is in any other state or territory of Australia. The difficulty for a third party claimant that remains is the practical one of how a third party claimant can prove that the insured company’s policy responds when it does not have possession of the policy. This is a practical impediment that can cost in money and delay. This could be resolved if parties to a contract specify that the wording and schedule be provided prior to closing. To the extent a global policy or confidentiality is involved, the schedule to the policy with the sum insured and irrelevant private information can be redacted and, if that cannot be obtained, at least ensure the names of the insurers are stated on the coverage summary for their respective proportions so that the lead insurer may be identified for the purposes of pre-action discovery.
NSW is the only state that has by legislation, embedded the right to proceed and increased the ease of access to the insurance moneys. NSW continues to be the only State that recognises what is otherwise an artificial barrier to the speedy resolution of disputes. Consequently NSW will continue to be the State that attracts more Court filings because of the "hedge" against litigation risk that this Act provides.
1. Kirby P in NSW Medical Defence Union v Crawford (1993) 31 NSWLR 469 at p479
2. Second reading speech
3. Kirby P in McMillan and Manix (1993) 31 NSWLR 538 at p 542.
4. 2013 302 ALR 101 at p113 per Emmett JA and Ball J.