Third party claims against insurers: A new frontier after the repeal of the controversial Section 6

On 1 June 2017, the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the Act) received royal assent with immediate effect.  The Act reforms the law relating to third party claims on insurance monies. 

The Act repeals and replaces the controversial Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Section 6), which provided a person (claimant) with the right to enforce a statutory charge over insurance monies payable under an insurance policy, to which it is a third party, where proceedings against an insured were impracticable. The Section 6 charge was created irrespective of whether the claimant had made a claim against the insured. 

It is currently unclear whether the ACT and Northern Territory, which have equivalent provisions to Section 6, will follow suit.

Background

Section 6 had been subject to criticism and litigation due to uncertainties with its practical operation. For example, it was not clear at what point a cause of action under Section 6 accrued and therefore when the statutory limitation would expire.  Further, the language of Section 6 suggested that claims for pure economic loss may not be covered by the statutory charge; and that the scope of the statutory charge was so wide that it might attach to all insurance monies under the policy.  For insureds under policies with aggregate limits, which are costs inclusive (such as, directors' and officers' liability (D&O) policies), Section 6 created a risk of the charge preventing an insured accessing the policy limit to fund defence costs, where that limit was potentially insufficient to meet both the ultimate liability to the claimant and defence costs.  This risk has led many insureds effecting additional 'defence costs only' insurance policies which were not subject to a charge under Section 6 as the limit was not potentially available to meet any ultimate liability to the claimant.

The new regime

For insurers, the consequence of the new regime is that the Act allows a direct and easy path for a claimant to recover the amount of the insured liability from the insurer in proceedings before a court (Section 4(1) of the Act).  The practical implication is that where a claimant has a claim against an insured entity, and the claimant is aware that there is a third party loss insurance policy, the claimant is entitled to proceed against the relevant insurer directly, if it can be shown that the insurer was on risk under the relevant liability policy (Section 4(2) of the Act).  Whilst leave of the court is still required (Section 5 of the Act) (similar to the process under Section 6), the Act significantly increases insurers' exposure to further losses.

For example, it is now clear that a claimant can seek to recover their loss by virtue of the rights held by not only policy holders, but third party beneficiaries.  The Act also clarifies that a court judgment against an insured is not a bar to third party proceedings against an insurer. This means that a claimant who is unable to enforce a judgment against an insured may have an additional avenue against the defendant's insurer.

Despite this new direct path to insurance monies, the important safeguards under Section 6 are replicated under the Act.  For example, an insurer faced with a claim under the Act will continue to inherit all the defences available against the insured, and assume no more liability than what is covered by the applicable policy.  Additionally, claimants will not be entitled to commence proceedings for indemnity under the policy until first granted leave by the court. 

The Act now clarifies that a claimant's right to indemnity under the policy will only attach to monies owed by the insured to the claimant, rather than all monies under the policy.  This means that policy limits are no longer at risk of being the subject of a charge, before a liability to the claimant has arisen.  This means that the limit is available for defence costs.  Accordingly, the current practice of effecting an additional 'defence costs only' policy is no longer warranted, unless there is a risk of the statutory charge being brought under the equivalent provisions in the ACT or the Northern Territory.  

The Act also makes clear that a third party will not be able to rely on the new regime to recover monies from a re-insurer (Section 4(4) of the Act). 

In accordance with Section 12 of the Act, Section 6 will continue to apply to actions brought against insurers under Section 6 before 1 June 2017.  In the recent decision of DSHE Holdings Ltd [receivers & managers appointed] [in liq] v Abboud; National Australia Bank Ltd v Abboud [2017] NSWSC 579, Justice Stevenson did not consider the effect of the Bill (as it then was) as it was not law.  It remains to be seen if the court's approach to Section 6 proceedings will change now that the Act is in force. 

The Act provides clarification in respect to the scope of a third party's right to recover insurance monies from the insured's insurer. The risk to be insured under a 'defence costs only' is now significantly reduced, although not eliminated while equivalent provisions in the ACT or the Northern Territory remain.  For insureds with liability exposures in New Zealand, the risk remains as New Zealand has an equivalent provision to Section 6.

Authors: Rehana Box, Partner; Marie Vlassis, Lawyer; Josh Sukkar, Graduate.