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Pynt, Greg --- "When can a third party claim the benefit of another person's liability insurance contract?" [2018] PrecedentAULA 71; (2018) 149 Precedent 32

WHEN CAN A THIRD PARTY CLAIM THE BENEFIT OF ANOTHER PERSON’S LIABILITY INSURANCE CONTRACT?

By Greg Pynt

Any party to an insurance contract can sue on it. In addition, the common law^[1] and various statutory provisions^[2] enable a person who is not a party to an insurance contract to sue on it if they are specified or referred to in the contract (by name or otherwise) as someone entitled to benefit by it (third party beneficiary).

This article^[3] is not about a party or a third party beneficiary claiming on an insurance contract. It is about the right of a person with a claim for damages against an insured (‘claimant’) to the direct benefit of the insured’s liability (third party) insurance contract. This is not a common law right.

The right is a creature of statute and is usually given in one of three ways. The statute may give the claimant a right to:

(a) sue the liability insurer direct;

(b) a charge over the proceeds of the liability insurance contract; or

(c) the proceeds of the liability insurance contract.

A CLAIMANT’S RIGHT TO SUE A LIABILITY INSURER DIRECT

The Insurance Contracts Act 1984 (Cth), s51

Section 51 of the Insurance Contracts Act 1984 (Cth) (IC Act) enables a third party with a claim against an insured or a third party beneficiary (for convenience, ‘insured’ refers to both) who has died or cannot be found, to sue the insured’s liability insurer directly. It is in the following terms:

‘If:

(a) the insured or any third party beneficiary under a contract of liability insurance is liable in damages to another person; and

(b) the contract provides insurance cover in respect of the liability; and

(c) the insured or third party beneficiary has died or cannot, after reasonable enquiry, be found;

then the other person may recover from the insurer an amount equal to the insurer’s liability under the contract in respect of the liability of the insured or third party beneficiary.’

Section 51 creates a new cause of action in a claimant against a liability insurer, not for damages, but for payment of the amount payable by the liability insurer in respect of the insured’s liability to the claimant.^[4]

The effect of s51 is that on being sued by a claimant:

(a) the insurer stands in the insured’s shoes in its defence of the claimant’s claim; and

(b) the claimant stands in the insured’s shoes in relation to its claim on the insurance contract.^[5]

In this sense, the claim is ‘a species of statutory subrogation, in which [the claimant] is entitled to be subrogated to the rights of the [insured] as against its insurer’.^[6]

Accordingly, the insurer can raise any defences that:

(a) the insured could have raised to defeat the claim, including the expiry of a limitation period.^[7] This includes resisting the claimant’s application for an extension of the relevant limitation period;^[8] and

(b) it would have had to a claim by the insured for indemnity under the insurance contract.^[9]

The Corporations Act 2001 (Cth), s601AG

Section 601AG is contained in the Corporations Act 2001 (Cth), ‘Chapter 5A – Deregistration, and transfer of registration, of companies’. It enables a third party with a claim against a deregistered company to sue the company’s liability insurer directly; in other words ‘to put the claimants in the position they would have been in, but for the insured’s deregistration’.^[10]

Section 601AG is in the following terms:

‘A person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract if:

(a) the company had a liability to the person; and

(b) the insurance contract covered that liability immediately before deregistration.’

The purpose of the section:

‘... is to “short-cut” the need to reinstate the company, and to do so by enabling the ultimate recipient of the insurance proceeds to sue the insurer direct where the company has been dissolved, without imposing the additional trouble and expense of first applying to have it reinstated.’^[11]

The alternative to suing the insurer directly is for the claimant to apply to the court pursuant to s601AH(2) to exercise its discretion to reinstate the company,^[12] and then sue the reinstated company,^[13] leaving it to the company to sort out issues with its liability insurer.

A court will not exercise the power to reinstate a deregistered company if s601AG clearly applies to the claimant’s claim.^[14] That is because, in those circumstances, the prospective claimant would not be a ‘person aggrieved by’ the deregistration.^[15]

Section 601AG does not ‘completely obviate any need to seek reinstatement’.^[16] Reinstatement might be granted if it would provide the claimant with the opportunity of obtaining an order that the limitation period for an action against the deregistered company did not run during the period of deregistration.^[17]

Like s51(1) of the IC Act (see above), s601AG is remedial. It creates a new cause of action in the claimant against a liability insurer for payment of the amount payable by the liability insurer in respect of the insured’s liability to the claimant.^[18]

Unlike s51 of the IC Act, s601AG is written in past rather than present tense. Accordingly, it refers to circumstances that existed immediately before the company was deregistered, both as to the liability the company had to the claimant and to the liability the insurer had to the company.^[19]

The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW)

The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (NSW CL (TPCI) Act) came into effect on 1 June 2017.

The Act replaced s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), which granted a third party a statutory charge over insurance monies payable under another person’s liability insurance policy where proceedings by the claimant against the insured were impracticable.

The NSW CL (TPCI) Act follows the approach of s51 of the IC Act and s601AG of the Corporations Act 2001 (Cth) in allowing a claimant to recover directly from a liability insurer,^[20] except that:

(a) the claimant needs the leave of the court to proceed against the insurer; and

(b) it applies to a much wider range of circumstances.

Section 51 applies only where an insured or third party beneficiary has died or cannot, after reasonable inquiry, be found; s601AG applies only where an insured is deregistered. On the other hand, the NSW CL (TPCI) Act applies to any circumstances in which there is ‘a real possibility that if judgment is obtained [the insured] would not be able to meet it’.^[21]

In Murphy, McCarthy & Associates Pty Ltd v Zurich Australian Insurance Ltd^[22], Hammerschlag J briefly explained how the NSW CL (TPCI) Act works:

‘17. The requirement for leave under s5(4) of the Act is one imposed to insulate insurers from exposure to untenable claims. The discretion to give leave to bring such a claim is to be exercised with this in mind.

18. [the claimant] must have an arguable case against [the insured], there must be an arguable case that the Policy responds to it and there must be a real possibility that if judgment is obtained [the insured] would not be able to meet it... A residual discretion to refuse leave remains even if these requirements are met...’^[23]

The NSW CL (TPCI) Act defines an ‘insured liability’ as ‘a liability in respect of which an insured person is entitled to be indemnified by the insurer’. The definition confirms that an insurer’s liability to a claimant is limited to an amount that the insured would have been liable to pay in damages to the claimant. This does not include defence costs, which means that an insured no longer needs to take out a separate ‘defence costs’ policy.

Compulsory workers’ compensation and motor vehicle third party personal injury insurance

Some workers’ compensation schemes around Australia give a worker the right to sue their employer’s indemnity insurer directly; for example, the Workers Compensation Act 1987 (NSW), s159(2).

It is a feature of some compulsory motor vehicle third party personal injury schemes around Australia that an injured person can sue the motor vehicle owner’s or driver’s insurer directly in certain circumstances; for example, the Motor Vehicle (Third Party Insurance) Act 1943 (WA), s7(2) and (3) (where the driver is dead or cannot be served with process, or the identity of the vehicle cannot be identified) and s7(1) (where the claimant has obtained a judgment against an insured person and the judgment is unsatisfied).

A CLAIMANT’S RIGHT TO A CHARGE OVER THE PROCEEDS OF A LIABILITY INSURANCE CONTRACT

The NSW CL (TPCI) Act repealed and replaced s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), which granted a claimant a statutory charge over insurance monies payable under another person’s liability insurance policy where proceedings by the claimant against the insured were impracticable.

Section 26 of the Law Reform (Miscellaneous Provisions) Act 1956 (NT) and the combination of ss206 and 207 of the Civil Law (Wrongs) Act 2002 (ACT) are similar in effect to the repealed s6. Whether they will also be repealed and replaced by legislation similar to the NSW CL (TPCI) Act remains to be seen.

A CLAIMANT’S RIGHT TO THE PROCEEDS OF A LIABILITY INSURANCE CONTRACT

The Bankruptcy Act 1966 (Cth)

Sections 108 and 117 of the Bankruptcy Act 1966 (Cth) appear in Pt VI Div 2. Unless the Act otherwise provides, s108 ranks ‘all debts proved in a bankruptcy’ equally and provides that ‘if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately’.

Section 117 ‘otherwise provides’. In general terms, it:

(a) vests an insured bankrupt’s right to indemnity under a liability insurance contract in the Official Trustee in Bankruptcy; and

(b) requires the Official Trustee in Bankruptcy to hold the proceeds of an insured bankrupt’s liability insurance contract for the benefit of a person to whom the insured bankrupt is liable.

A person cannot contract out of the provisions of the Act, either before or after becoming bankrupt.^[24]

The Corporations Act 2001 (Cth)

Sections 555, 562 and 562A of the Corporations Act 2001 (Cth)^[25] appear in the Act in Pt 5.6 Div 6 Subdiv D. Among other things, Subdiv D addresses ranking of claims in a winding-up.

Unless the Act otherwise provides, s555 ranks ‘all debts and claims proved in a winding up’ equally and provides that ‘if the property of the company is insufficient to meet them in full, they must be paid proportionately’.

Section 562 ‘otherwise provides’. In general terms, it requires a liquidator to hold the proceeds of an insolvent company’s liability insurance contract for the benefit of a person to whom the insolvent company is liable.

Section 562A:

‘...confers on all creditors of an insurance company with insurance and reinsurance claims priority over all other creditors in respect of reinsurance, including retrocession, recoveries...

Section 562A has no territorial limits. Its application is mandatory so far as Australian liquidators are concerned.’^[26]

A company cannot contract out of the provisions of the Act.^[27]

‘Garnisheeing’ the amount of an insurer’s liability to a judgment debtor

All Western Australian state court civil judgments are enforced under the Civil Judgments Enforcement Act 2004 (WA) (CJE Act).

On the application of a judgment creditor, a court ‘may’ make a ‘debt appropriation order’ against a person who owes or will or may owe an ‘available debt’ to a judgment debtor to pay all or part of the debt to the judgment creditor rather than the judgment debtor: CJE Act s49(1).

Section 46(1) defines an ‘available debt’ as:

‘any obligation on the part of a person to pay money to the debtor... which obligation, at the time a debt appropriation order is made:

(a) is current and unconditional, irrespective of whether the money or any part of it is payable at some future time; or

(c) may arise in respect of an existing cause of action; or...’

In other words, in Western Australia at least, in certain circumstances, a judgment creditor can obtain a court order requiring an insurer to pay to the judgment creditor, rather than its insured the judgment debtor, the amount of the insurer’s liability to the judgment debtor. This is the case if the insurer’s liability falls within the statutory description of an ‘available debt’, which is considerably broader than what the common law regards as a ‘debt’.^[28]

The insurer’s liability might be under a first party policy in circumstances unrelated to the claim underlying the judgment. More likely, it will be under a liability insurance contract by which the insurer has agreed to indemnify its insured against its liability for the claim underlying the judgment.^[29]

CONCLUSION

As it stands, we now have two Commonwealth regimes and one state regime that allow a person with a claim for damages against an insured to recover directly from a liability insurer: s51 of the IC Act, s601AG of the Corporations Act 2001 (Cth) and the NSW CL (TPCI) Act. There is no good reason for the substantive differences between them. It is perhaps overly optimistic to expect s51 to be amended to bring it into line with the NSW CL (TPCI) Act or for some or all of the other states and territories to follow the lead of the NSW CL (TPCI) Act; but this would be a sensible way forward.

Greg Pynt is a barrister at Francis Burt Chambers, Perth. PHONE (08) 9220 0584 EMAIL Gpynt@francisburt.com.au.

^[1] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107.

^[2] For example, s48 of the Insurance Contracts Act 1984 (Cth).

^[3] This paper draws in part on Chapter 25 of the author’s text: Australian insurance law: A first reference, 4th ed, LexisNexis, November 2017.

^[4] Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd [2005] NSWCA 19; (2005) 62 NSWLR 148, [19] (Ipp JA) (‘Almario’); Fairwater Pty Ltd v QBE Insurance (Australia Ltd) [2012] WASCA 270, [3] (Pullin J) (‘Fairwater’).

^[5] Allianz Australia Insurance Ltd v Mercer [2014] TASFC 3, [177] (Porter J).

^[6] Murdock v Lipman [2012] NSWSC 983, [46] (McCallum J) (a case on s601AG of the Corporations Act 2001 (Cth)).

^[7] See Almario, above note 4, [35] (Ipp JA).

^[8] See above note 6, [69] (McCallum J).

^[9] See Fairwater, above note 4, [4] (Pullin J).

^[10] Sciacca v Langshaw Valuations Pty Ltd [2013] NSWSC 1285, [27] (Adamson J).

^[11] Pagnon v WorkCover Queensland [2000] QCA 421, [17] (McPherson JA).

^[12] The discretion is a wide one: ACCC v ASIC [2000] NSWSC 316; (2000) 174 ALR 688, [27]-[28] (Austin J).

^[13] See above note 11.

^[14] See above note 6, [82] (McCallum J).

^[15] Stone v ACN 000 337 940 Pty Ltd [2008] NSWSC 1058; (2008) 68 ACSR 242, [18] (Barrett J).

^[16] See above note 5, [164] (Porter J).

^[17] Ibid, [163]-[164] (Porter J).

^[18] See above note 4.

^[19] See Almario, above note 4, [20] (Ipp JA).

^[20] New South Wales Law Reform Commission Report 143 entitled, ‘Third party claims on insurance money: Review of s6 of the Law Reform (Miscellaneous Provisions) Act 1946’, November 2016, [4.12].

^[21] Murphy, McCarthy & Associates Pty Ltd v Zurich Australian Insurance Ltd [2018] NSWSC 627, [18] (Hammerschlag J).

^[22] [2018] NSWSC 627.

^[23] See also, Rushleigh Services Pty Ltd v Forge Group Ltd (In Liquidation) (Receivers and Managers Appointed) [2018] FCA 26, [37]-[48] (Markovic J).

^[24] Bankruptcy Act 1966 (Cth), s301; Folgate London Market Ltd v Chaucer Insurance Plc [2011] EWCA Civ 328 (Rimmer LJ).

^[25] As does related s563 (provisions relating to injury compensation).

^[26] McGrath v Riddell [2008] UKHL 21; [2008] 1 WLR 852, [51] (Lord Scott of Foscote). The appeal to the House of Lords concerned four insolvent HIH group Australian insurance companies in compulsory liquidation in Australia and in provisional liquidation in England. The issue was whether the companies’ English assets should be remitted to the Australian liquidators for distribution in accordance with the Australian insolvency regime, or distributed in accordance with the English insolvency regime.

^[27] Folgate London Market Ltd v Chaucer Insurance Plc [2011] EWCA Civ 328.

^[28] Israelson v Dawson (Port of Manchester Insurance Co Ltd) [1933] 1 KB 301; (1932) 43 Ll L Rep 401, 304 (KB).

^[29] Gibbs v Haoma Mining NL [No 6] [2017] WADC 67 (Staude DCJ).