Third party claims against insurers – the NSW revolution
Civil Liability (Third Party Claims Against Insurers) Act 2017
On 1 June 2017, the Civil Liability (Third Party Claims Against Insurers) Act 2017 (the Act) commenced operation changing the landscape in which third party claimants can proceed directly against insurers in NSW to access insurance monies. The Act repeals section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (LRMP Act) which governed this area of law for nearly 70 years.
The position under section 6
Section 6 of the LRMP Act provided claimants with access to insurance monies where proceeding against the insured defendant was not possible or would be pointless because it was, for example, insolvent. It did this by creating a statutory charge over the insurance monies. The charge was created “on the happening of an event giving rise to the claim for damages or compensation” against the insured.
Although the premise of section 6 was reasonably straightforward, throughout its decades of operation, it came under criticism for its ambiguity, including in relation to:
- when the cause of action accrued, particularly in relation to claims made policies
- whether reinsurance proceeds could be accessed
- whether it applied to pure economic loss claims
- what limitation periods applied
- whether the charge prevented insureds from accessing their defence costs, particularly when the claim exceeded the limit of the policy and defence costs were inclusive of that limit
The new regime
The Act has introduced a new regime for claimants to access insurance proceeds directly from insurers in certain circumstances without creating a charge. There is no doubt the Act’s operation has been simplified, providing more certainty for insurers, insureds and third party claimants.
Under the new Act:
- the claimant can only bring proceedings directly against an insurer with the leave of the Court – which must be refused if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or under any Act or law
- if leave is granted, the claimant may recover from the insurer the amount of the insured’s liability to the claimant, but the amount recoverable is limited to the indemnity (if any) payable under the insured’s policy of insurance
- if the insurer is joined to the proceedings, it stands in the place of the insured as if the proceedings were proceedings to recover damages, compensation or costs from the insured
- an insured includes a person who is not a party to the contract of insurance but is a stated beneficiary under the policy
- there is no legal obstacle to making claims for pure economic loss
- the limitation period is the same as for the underlying cause of action that would have been brought against the insured
- the claimant cannot recover any amount from a reinsurer
Impact for insurers
The NSW Law Reform Commission Report, which recommended and provided the blueprint for the Act, was at pains to say that the Act was not intended to increase the liability of insurers. Instead, the new provisions should ensure that an insurer is not liable for more than the insurer would have been liable to pay under the insurance contract. It should also ensure that the insurer can rely on the same defences that the insured defendant could have relied on in an action brought by the plaintiff.
Furthermore, the requirement that leave be obtained before proceedings are issued against insurers affords insurers with a layer of protection against them being unnecessarily involved in litigation. Those protections should be the same as under the previous section 6 regime.
In this regard, Courts in NSW have held that, to obtain leave to proceed against an insurer under section 6, at least three things had to be established, namely, that there was:
- an arguable case against the insured defendant
- an arguable case that the insurance policy responded to the claim
- a real possibility that the insured defendant would not be able to meet the judgment obtained against it
It was then that a Court could exercise its discretion to grant leave if it was satisfied that there was utility and it was reasonable to join an insurer to the proceeding. We would expect that Courts will have regard to similar considerations under the new Act.
Another welcome development is the additional certainty for D&O insurers (and insureds alike) in relation to the advancement of defence costs. Whereas section 6 of the LRMP Act put defence costs at risk by creating in favour of a claimant a charge on “all insurance moneys that are or may become payable”, under section 4(2) of the Act, the amount payable to the claimant by the insurer is limited to the insurer’s liability under the policy.
However, we fear that the clarity and simplicity of the Act could be a double edged sword for insurers – in that it may be a far simpler law to navigate and easier for claimants to bring proceedings against insurers.
There is also no doubt that forum shopping will continue, with an expected spike in proceedings being commenced in NSW to take advantage of the clearer provisions in the new Act. We expect that the Act will provide a model for other States and Territories or the Commonwealth to adopt.
Date: 27 June 2017