Third party claims against insurers in NSW – “The Quick Take”
Ironbark Litigation Funding’s “Quick Takes” are for time poor people – we do the work distilling the subject matter so you don’t have to.
Until 1 July 2017, third party claimants and insurers in NSW have been forced to grapple with what the Court of Appeal has described as an “undoubtedly opaque and ambiguous” legislative framework intended to provide protection against insureds “running away” with insurance monies. From 1 June 2017 a new direct right of recovery was created to better meet the needs of third parties seeking to access modern and increasingly complex insurance arrangements.
When a claimant is unable to proceed in an action against a wrongdoer for reasons such as death, insolvency, company de-registration etc. but the wrongdoer is an insured under a policy that would otherwise respond to the claim.
The old solution
Typically claimants would rely on Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946, to directly access insurance monies. There are other direct avenues to insurance monies which are beyond the purview of this article and still exist (eg, section 562 of the Corporations Act 2001). The short point is that section 6 (and the other avenues for direct access) had ambiguities and difficulties that made it unwieldy and unattractive.
The new solution
Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Act) which came into force on 1 June 2017. 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 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.
This makes a third party claimant’s path to insurance proceeds in New South Wales easier than it previously was, and much easier than it still is in any other state or territory of Australia.
While this is a welcome development for claimants, there are a couple of difficulties/ambiguities that remain. First, practically speaking, how does a third party claimant prove that the insured company’s policy responds when it does not have possession of the policy? This will likely lead to delay and cost while the claimant goes about getting a copy of the policy, or at least enough information to enable the claimant to be adequately informed, by way of pre-action discovery or similar. Second, it is not clear what happens when there is more than one plaintiff and only a limited indemnity available. The Act is silent on this issue. The NSW Law Reform Commission report takes the matter no further than saying it “see[s] no reason to depart from the general rule that the earlier claim takes priority“. Other than “first in best dressed” it appears there is no solution provided to the potential problem. Further, by “earlier claim“, does it mean the earlier claim to accrue (per section 6 criteria)or earlier claim to be finalised?
As NSW is the only state that has by legislation, embedded the right to proceed and increased the ease of access to the insurance moneys, it will be the forum of choice for claimants who are concerned about the solvency of the defendant.
As a litigation funder, Ironbark welcomes the Act with its improved access to a meaningful result for our funded claimants and the obvious hedge against litigation risk.
Acknowledgment is given to Baker McKenzie’s Linda Hamilton in the authorship of this article.
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