September 2017


No more section 6 - but what happens next?

by John Tesarsch*

Perhaps nowhere in the common law world (except New Zealand) has the issue of direct claims against liability insurers been more contentious than in NSW, because of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946.

In the 2013 decision of Chubb Insurance Company of Australia v Moore, the NSW Court of Appeal said of s6 that "ambiguity may be its only clear feature" and it "should be repealed altogether or completely redrafted in an intelligible form".

After a detailed review by the NSW Law Reform Commission, s6 has now been replaced by the Civil Liability (Third Party Claims Against Insurers) Act 2017.

Federal legislation gives some claimants direct rights against liability insurers. Eg, s117 of the Bankruptcy Act 1966 and s562 of the Corporations Act 2001 require trustees-in-bankruptcy and liquidators, respectively, to pay third-party claimants any insurance moneys received for liabilities to those third parties, in priority to other creditors.

S51 of the Insurance Contracts Act 1984 and s601AG of the Corporations Act enable third-party claimants to recover moneys from liability insurers where insured natural persons have died or cannot, after reasonable inquiry, be found or insured companies have been deregistered.

Those provisions, however, have only limited operation. S6 was entirely different. It provided that a statutory charge may attach, in certain instances, to moneys payable under a liability insurance contract and entitled a claimant to enforce that charge in an action directly against the insurer. It was intended to prevent an insurer and an insured from entering into a collusive agreement to prevent a claimant from recovering damages at trial and an insured from frittering away an insurance payout.

Among other things, s6 created uncertainty about the advance payment of defence costs. In Steigrad & Ors v BFSL 2007 Ltd & Ors, the NZ High Court's Justice Lang ruled that s9 of the Law Reform Act 1936 (NZ) (the equivalent provision to s6) enabled receivers of the collapsed Bridgecorp Group to assert a statutory charge over moneys payable by QBE under a D&O policy with a costs-inclusive limit of indemnity. Bridgecorp directors therefore could not access defence costs coverage under the policy to defend claims against them, or, if QBE advanced the defence costs, it would do so as a volunteer. Ultimately, the decision was upheld on appeal by the majority of the NZ Supreme Court.

In Chubb v Moore, the NSW Appeal Court ruled on similar statutory charges asserted by claimants in Great Southern class actions issued in the Victoria and WA Supreme Courts. The Appeal Court determined s6 applied only to claims in NSW courts, effectively dispensing with the matter. It also ruled s6 did not extend to defence costs paid before judgement or settlement – a different approach to that adopted in NZ.    

S6 will continue to apply to proceedings issued against insurers before the start of the new Act on 1 June 2017. There are similar provisions in the ACT and the Northern Territory.

The new regime

TheCivil Liability (Third Party Claims against Insurers) Act 2017 does not make provision for any statutory charge. The NSW Law Reform Commission obviously wished to avoid the difficulties encountered in Bridgecorp.

The new Act applies only to proceedings in a NSW court or tribunal, similar to the territorial approach adopted in Chubb v Moore. Although that is practical, it is not without difficulties, as it may lead to forum shopping.

The central provision of the new Act is s4, which allows a claimant to issue proceedings against a liability insurer to recover the amount payable under an insurance policy for an insured's liability to that claimant. S5 provides that such proceedings may not be brought, or continued, against an insurer except with leave of the relevant court or tribunal.

S5 does not set out any criteria for a court to adopt in determining whether to grant a claimant leave to proceed against an insurer, other than to state that leave must be refused if the insurer can establish it is entitled to deny liability. It is likely courts will exercise their discretion in a similar manner to the way it has been exercised under s6.

Importantly, the new Act extends to claims against third-party beneficiaries under insurance contracts, while s6 applied only for claims against insureds who were party to the insurance contracts.  

S10 of the new Act provides that an insurer's liability to a claimant under the Act is not reduced or discharged by any compromise or settlement with the insured, or any payment to the insured, unless and to the extent that the insured has paid that money to the claimant. That is clearly intended to prevent collusion between an insurer and insured, eg, where an insured settles an indemnity claim for undervalue. However, the broad terms in which s10 is drafted may have wider consequences.

The NSW Law Reform Commission has suggested the new Act may serve as a model that other states and territories, or the Commonwealth, may adopt. It remains to be seen whether other legislatures follow that approach.    

*John Tesarsch is a member of the Victorian Bar and a Senior Fellow of the University of Melbourne Law School, where he lectures in liability insurance law.

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