Insurers not faring well under new legislation enabling insurers to be joined
The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the Act) took effect on 1 June 2017. Since then, two court judgments have been handed down that were adverse to the insurers’ positions1. A third decision in February 2018 however demonstrates that applications will not be granted willy-nilly. As further applications for the joinder of insurers under the new Act will be made to the courts, insurers2 will need to consider whether additional safeguards are required, in particular when issuing policies to corporations.
Judgment 1: Zaki v Better Buildings Constructions (NSW Supreme Court)
On 10 November 2017, Justice Campbell of the Supreme Court of New South Wales handed down the first NSW Supreme Court judgment to apply the Act in the matter of Zaki v Better Buildings Constructions Pty Limited3. Two key issues relating to this new statutory right to join an insurer were addressed.
Firstly, s 6(1) of the Act says proceedings under s 4 must be commenced within the same limitation period applicable to the plaintiff’s cause of action against the insured. Justice Campbell rejected the insurer’s contention that the “emphatic language” of s 6(1) suggested that compliance with s 6 was a “condition of the grant of leave”. If that submission succeeded, the application would have been filed too late (being over 3 years since the subject accident). His Honour found the use of the word “must” did not attach a limitation period to the statutory right created by s 4.
The court found s 6 referred to the time within which the proceedings must be brought but says nothing about when the leave application must be brought. This meant that any limitation issue did not have to be determined at the time of the application. However, this did not disentitle the insurer from raising a limitations defence in the proceeding (being a defence which would have been available to its insured) to be determined at the final hearing in the usual way.
Secondly, Justice Campbell confirmed that the “well settled criteria”, which was relevant to the repealed s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and referred to in the New South Wales Law Reform Commission’s report4 upon which the new legislation was based, still applied. We outline that criteria below.
This meant that His Honour was unwilling to accept that the “disadvantage” the insurer found itself in with regard to knowing when the cause of action was discoverable by the plaintiff meant the plaintiff carried the onus under s 6. Instead, Justice Campbell held that the enactment of s 6 “does not alter the settled law”; that a defendant bears the onus of proof of raising a limitation defence.
However, in saying that, the court conceded that in “clear cases” where denial of cover or that the claim is brought out of time is “beyond argument”, leave must be refused. In other words, where there is no arguable case of liability against the insured person. But Justice Campbell warned that “such clear cases are likely to be rare”.
Judgment 2: Rushleigh Services v Forge Group (Federal Court of Australia)
The Federal Court of Australia also found against the insurers in a recent application for leave under the Act by the shareholders of a company in liquidation. On 31 January 2018, in the decision of Rushleigh Services Pty Ltd v Forge Group Limited (In Liquidation)(Receivers and Managers Appointed)5, leave was granted to join the insurers to the proceedings even though an application to join Forge, the insured insolvent company, had been refused6.
There was no dispute the claimants had met the three criteria relevant to seeking leave, namely that:
- There was an arguable case against Forge;
- There was an arguable case that the insurance policies responded to the claim against Forge; and
- There was a real possibility that if judgment was obtained then Forge would not be able to meet it7.
However, the insurers submitted that leave should not be granted on the basis that:
- The insurers would suffer irreparable prejudice, due to the costs they would incur to defend the proceedings (estimated at $5.7million), and their forensic disadvantage from being strangers to Forge;
- There was no utility in joining the insurers as parties as the insurers had agreed to indemnify the former directors of Forge; and
- The joinder of the insurers would overcome the court’s decision to refuse leave to join Forge, which was not a proper basis for the exercise of the court’s discretion.
Justice Markovic did not accept any of the insurers’ arguments. As part of the court’s reasons, Her Honour held that significant weight should not be given to the additional costs which would be faced by insurers upon being joined to the proceedings, or that they were less equipped to understand and defend the disputes. In particular, it was noted that the former directors of Forge were also defendants to the proceedings and that while they had been granted indemnity by the insurers, the court’s findings in the claims against Forge (who could not be joined) might differ.
Judgment 3: Mrdajl v Southern Cross Constructions (NSW Supreme Court)
It hasn’t all been one-sided. Giving some relief to insurers, Justice Walton of the NSW Supreme Court confirmed on 21 February 2018 that applications made under the Act would not be granted as a matter of course and without proper evidence.
In Mrdajl v Southern Cross Constructions (NSW) Pty Ltd (In Liq)8, the court held that an applicant must first satisfy s 4 of the Act to establish the jurisdictional foundation for the court to grant leave under s 5. Justice Walton identified four elements to s 4, being that there is an insurer in existence; the insurer has issued a policy to the relevant defendant; the policy covers the risk; and the policy was in place at the time of the risk.
Justice Walton held that there was insufficient evidence to establish the existence of an insurance policy that covered the relevant risk and was in place at the time of the risk. The claimant essentially relied on an email chain with the insurer’s general inbox for court processes, that had identified that a policy was located and forwarded to the relevant business area. The court concluded that “a determination as to whether or not the policy covered the risk and was in place at the time of this risk can only be established by reference to the insurance contract or some documentary evidence bearing more closely upon it”. The application was dismissed with costs payable by the applicant.
Preparing for the future
The above decisions demonstrate that parties are having success using the relatively new legislation. However, haphazard applications that do not properly meet s 4 of the Act will not be granted. Insurers can be taking proactive steps now to prepare for the potential greater number of direct claims against them.
An insurer of a company which is subsequently placed in liquidation is often confronted with a third party claim in which there is little to no information available from the insured. While most policies include a requirement of its insured to provide all reasonably necessary assistance to the insurer, in practice, an insurer may face difficulties in locating the former directors and/or employees of an insured, or the company’s books and records may be incomplete. Further, a requirement for an insured to provide all information, assistance and/or co-operation that is reasonably required may not assist the insurer in defending court proceedings if the insured was not keeping proper records in the first instance.
In light of the decisions in Zaki and Rushleigh, it would be prudent for insurers to check policy provisions requiring an insured to co-operate and provide information and assistance to ensure they will practically assist the insurer in defending claims. If there is a valid policy in place but a lack of direct evidence regarding a claim (such as photographs, witness statements, correspondence), an early settlement would likely be more commercial to the insurer, to avoid the costs of litigation.
Given the courts do not appear fazed by potential increased costs exposure to insurers in directly defending legal proceedings (some $5.7 million in Rushleigh), this will be an important issue for insurers to consider particularly when faced with a lack of direct evidence from their insured. The market may also respond in time via premiums, particularly in public liability and D&O policies, but the volume of direct claims is not there yet.
This article was written by Jason Symons, Partner and Sylvia Quang, Special Counsel.
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1 The Act has also been considered in Mohamad Alameddine v Nizar Alameddine t/as On Call Tree Services and Gardening Maintenance  NSWSC 938, Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited  FCA 699, and Lawcover Insurance Pty Ltd v Leonardo Carlo Muriniti and Robert Duane Newell  NSWSC 1557 but no orders were made pursuant to the Act in those proceedings.
2 Note that s 4(4) of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) does not entitle claimants to recover amounts against reinsurers.
3  NSWSC 1522.
4 New South Wales Law Reform Commission, Third party claims on insurance money – Review of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946, Report No 143 (2016).
5  FCA 26.
6 Rushleigh Services Pty Ltd v Forge Group (in liq)(receivers and managers appointed)  FCA1471.
7 Rushleigh Services Pty Ltd v Forge Group (In Liquidation)(Receivers and Managers Appointed)  FCA 26 at .
8  NSWSC 161.
Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.