On 19 December 2016, the New South Wales Law Reform Commission report titled "Report 143 - Third party claims on insurance money" (Report) was released by the Hon. Gabrielle Upton MP. The Report considered section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Act), which, in general terms, permits a plaintiff to recover damages or compensation directly from a defendant's insurance proceeds.
The Report recommended that:
- the objective and goal of section 6 of the Act remains valid. However, as it currently stands, the provision is replete with uncertainty;
- section 6 of the Act ought be replaced with a provision that clarifies areas of uncertainty and makes necessary reforms. Specifically, this will resolve issues regarding the payment of defence costs by insurers and whether these payments are subject to the statutory charge imposed by section 6 of the Act, which arose in Chubb Insurance Company of Australia Ltd v Moore  NSWCA 212 (Moore). This could have resulted in directors and officers being unable to access insurance funds for defence costs (see below); and
- the maximum liability of an insurer should not be modified under the proposed amendments - with liability capped at what the insurer would have otherwise been liable for under the insurance contract.
Section 6 of the Act allows a plaintiff to obtain access to insurance proceeds in circumstances where proceedings against an insured defendant are not possible or would be pointless (for example, the defendant is missing or insolvent). It does this by attaching a "charge" to "all insurance moneys that are or may become payable in respect of [a] liability" that the insurer would otherwise be required to pay to the defendant pursuant to the contract of insurance. This charge is created "on the happening of the event giving rise to the claim for damages or compensation" against the insured party.
The provision was introduced in 1946, based upon New Zealand legislation. It is not a prime example of plain English drafting. Its stated purpose, as identified in the second reading speech, was to prevent conspiracy between a defendant and an insurance company, who could otherwise frustrate a plaintiff's legitimate attempts at recovery.
Concerns have been raised in recent years about whether the charge imposed by the section specifically applies to insurance payments made to directors and officers in respect of legal costs incurred in defending a claim made against them. The provision as it stands refers to a charge over "all insurance moneys that are or may become payable", which on one view could capture any and all payments made pursuant to a contract of insurance, including legal defence costs. The NSW Court of Appeal in Moore confirmed that section 6 does not impede an insurer's ability to provide defence costs under a policy and that the charge does not attach to such amounts. Prior to this decision, there were significant concerns that directors and officers would not be permitted to access insurance moneys to fund their defence if these amounts were subject to the charge. Consequently, directors and officers would need to personally fund their defence costs.
Notwithstanding the NSW position, the New Zealand Supreme Court (in considering similarly worded legislation) determined that the provision was sufficiently broad to capture all moneys that were made available under an insurance policy. Without clear authority from the High Court of Australia, uncertainty remains as to the scope of the provision.
Section 6 has been subject to much criticism. The New South Wales judiciary has described it as "undoubtedly opaque and ambiguous" and called for the provision to be "completely redrafted in an intelligible form".
Most of the difficulties associated with section 6 of the Act arise from the nature and scope of the "charge" that the section imposes. The Report canvassed a number of issues with the provision (in addition to the question of defence costs), including:
- the applicability of the section to claims made and notified policies of insurance;
- the operation of the section in the context of claims for pure economic loss – claims which only arise upon damage occurring (as opposed to the earlier act or omission). The Report noted that the very nature of such claims "make it difficult to determine when the rights conferred by section 6 arise
- whether the section applies in respect of contracts of reinsurance; and
- the lack of a clearly prescribed limitation period for claims brought under section 6.
The above list is not exhaustive – the Report considers a number of issues at length. As noted above, some of the ambiguity has been resolved by the Court. However, clarity of legislation is preferable (as opposed to reliance upon the Court for interpretation) – mandating the need for reform.
In light of the above issues, the Report made a number of recommendations. Guiding this was the view that a provision which achieves the aims of section 6 remains necessary. While the preference for reform was at the Commonwealth level, the Report considered that in the absence of such reform, amendment to the NSW legislation was the optimal outcome. Some of the key recommendations are set out below:
- A right for plaintiffs to directly recover from the insurer, without the need to resort to a "charge" over the insurance proceeds. The amendments also limit recovery to the amount the insurer would have paid in respect of the defendant's liability to the plaintiff – avoiding the possibility that defence costs will be caught within the scope of the section.
- A new provision should be inserted, such that an insurer's obligations under the proposed section are not discharged unless and to the extent any payment made to the defendant is subsequently paid to the plaintiff.
- Clarifying the application of limitation periods. The draft bill accords with NSW Court of Appeal authority, providing that proceedings to recover an amount from an insurer under the section must be commenced within the same limitation period that applies to the claimant's cause of action against the insured person.
- Specifically disclaiming the applicability of the provision to contracts of re-insurance.
In some cases, the current provisions of section 6 are maintained in the draft bill.
The proposed changes will be of substantial interest to both insurers and insured entities. The Report's recommendations, if implemented, should resolve the inherent uncertainty currently present in the section.
Directors and officers will benefit from the proposed changes, as they will categorically answer the question of whether defence costs are subject to the current section 6 "charge". Although the Court of Appeal has ruled on the issue, it will not be conclusively resolved until the High Court determines the application of section 6. The proposed amendments will ameliorate any residual concern that directors or officers will not be able to access insurance money to fund their defence, and that they would otherwise be required to personally provide these funds.
The NSW Government is presently considering the Report. If you have any questions about the proposed changes, or how to minimise the risks posed by the current Act, please contact us.