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Declarations - Taking direct action against another party's insurer

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17 September 2015

Introduction

Recent decisions have suggested an alternative method for liquidators, companies and individuals to pursue direct action against another party's insurer to secure payment of its claim against that other party.
 
The decisions in Akron Roads v Crewe Sharpe1 are the latest examples of the Court's willingness to use the mechanism of "declaratory relief" to assist a party to access another party's insurance by enabling direct action against the insurer. Akron Roads follows similar decisions in New South Wales over recent years2, and strengthens an emerging line of authority in favour of so-called "third party claimants" - a party who claims against another party with an insurance policy likely to cover its claim.
 
These developments represent an unusual departure from the general principle of privity of contract  - usually it is only a party to a contact (in this case, the insurance contract) who would be able to ask the Court to "declare" what the rights under the contract might be. We will wait to see what the High Court will make of this argument,3 but the current situation is interesting enough to warrant review.

Background

Several legislative provisions protect a third party claimant's ability to access insurance moneys where the insured against whom the third party has a claim has become bankrupt, been deregistered or cannot be found. These include section 117 of the Bankruptcy Act 1966, section 601AG of the Corporations Act 2001 and section 51 of the Insurance Contracts Act 1984.
 
Third parties in NSW have also used section 6 of the Law Reform (Miscellaneous Provisions) Act 1946, which creates a statutory charge over insurance moneys in favour of the third party. However, recent scrutiny of this section has highlighted practical difficulties in the context of claims-made policies as both the occurrence giving rise to the liability and the claim itself need to be made within the same policy period for section 6 to apply4.

The increasing availability of declaratory relief

In recent years, third party claimants have pursued an increasingly successful alternative: joining the insurer directly to an action against the insured by seeking a declaration from the Court that the insurer is liable to indemnify the insured.
 
A declaration is an equitable discretionary remedy. The Court makes a legal determination (a "declaration") that resolves uncertainty regarding the state of the law - in this instance, whether a particular insurance policy responds to the claim made by the third party against the defendant insured.

The decision in Akron Roads

The liquidators of Akron Roads commenced proceedings against its former directors for insolvent trading. On the same basis, they also proceeded against Crewe Sharp Pty Limited (and its director, Trevor Crewe), a management consulting company which the liquidators alleged had acted as a shadow director (Insolvency Proceedings).
 
Crewe Sharp subsequently entered into voluntary liquidation. During the course of public examinations, the liquidators of Akron Roads became aware of policies of insurance, issued by CGU, under which Crewe Sharp (and Trevor Crewe) were insured. However, CGU had denied indemnity for the Insolvency Proceedings.
 
By way of interlocutory process, the liquidators of Akron Roads made an application to join CGU as a defendant to the Insolvency Proceedings. They did so on the basis that Akron Roads had a right to seek a declaration that CGU must indemnify the insured (Crewe Sharp and Trevor Crewe) for their liability to compensate Akron Roads for its claimed loss up to the policy limit of $5m. The liquidators contended that Akron Roads had a right to seek this declaration even though it was not a party to the insurance contract and no insured sought to join CGU. The application was vigorously contested by CGU.
 
The primary Court granted the application, and this decision was upheld on appeal. In granting the application, the Court confirmed that third party claimants need to demonstrate three elements in order to be eligible for grant of declaratory relief.

Justiciable controversy

First of all, there must be a 'justiciable controversy', that is, a dispute over which the Court is able to adjudicate. In Akron Roads, the insurer argued that the only conflict able to be determined by the Court was one arising between the parties to an insurance contract - the insured and the insurer.
 
The Court rejected this proposition and held that in circumstances where:

  1. indemnity had been (or was likely to be5) denied by the insurer;
  2. the third party's case against the insured was not hopeless, or bound to fail; and
  3. there was a substantial impediment to the third party claimant simply proceeding in the usual way against the insured as a defendant (such as the insured's insolvency), then a declaration in favour of the third party, which had the effect of joining the insurer to the action, could be made.

Real interest

Secondly, the third party must demonstrate a "real interest" in the matter. The Court recognised that, while third parties may not have a direct contractual right against an insurer, they can have other recognisable rights over the insurance proceeds (such as priority rights Akron Roads would have to the proceeds of an insurance policy which responds to its claim6). The Court held that this financial stake in the proceeds of the insurance policy was sufficient to endow a third party with a real interest in the outcome of a declaration relating to whether the insurance policy would respond to the third party's claim against the insured.

Utility

Finally, there must be utility in the Court making the declaration. The insurer argued that there would be no utility in a declaration as it would not be directly enforceable by the third party against the insurer. However, the Court accepted that procedural fairness and practicality can satisfy the requirement of utility. Since the insurer would play a key role in the resolution of issues between the third party claimant and the insured, it would be just and convenient that all issues be heard at the same time.
 
Avoiding the time and cost involved in a multiplicity of proceedings can therefore justify a declaration to join an insurer directly to an action. The Court also acknowledged that it could be an abuse of process to allow either the insured or the insurer to litigate the indemnity question in subsequent proceedings, so the current proceedings could be the only time this question could be properly ventilated.

Conclusion

By joining the insurer, the insurer is prevented from walking away from proceedings, particularly in circumstances where the insured is impecunious or otherwise unable to press an argument for indemnity. It is another potential avenue for obtaining direct access to insurance funds. However, this must be weighed against the cost involved in joining an insurer to proceedings and the evidentiary requirements the third party would need to meet to press its claim, in particular, proving that the loss falls within the policy terms.
 
And of course, we now need to wait for the High Court decision to see whether declaratory relief survives as a mechanism for third party claimants to take action directly against another party's insurer.

 

1 [2015] VSC 34; upheld on appeal [2015] VSCA 153.

2 For example: Anjin No 13 Pty Ltd v Allianz Australia Insurance Ltd [2009] VSC 371; Owners - Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259; and Belcastro v Nakhl [2014] NSWSC 1305.

3 Special leave to appeal was granted on 11 September 2015.

4 Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212

5 In the case of Belcastro v Nakhl [2014] NSWSC 1305, declaratory relief joining insurers was granted in circumstances where indemnity had not been formally denied, but was likely to be.

6 Section 562 of the Corporations Act

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