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High Court confirms direct right against third party's insurer

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4 March 2016

INTRODUCTION

The High Court of Australia has unanimously held that third party claimants can join the insurer of an insolvent insured defendant to proceedings, to seek a declaration that the insurer is liable to indemnify the defendant.
 
In September 2015, we highlighted the emergence of declaratory relief as 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 decision in CGU v Blakeley1 now confirms that courts have jurisdiction to grant declaratory relief in favour of a third party to the contract of insurance, where the insurer has refused to indemnify an insolvent insured.
 
The decision marks a departure from the general principle of privity of contract and guarantees greater rights for third parties in the context of insurance litigation.

Background to the lower court decisions

In April 2013 the liquidators of Akron Roads commenced proceedings against its former directors for insolvent trading. 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. The liquidators claimed that Akron Roads had a real interest in the determination of CGU's liability to indemnify the insureds. That real interest was established by s 562 Corporations Act, which would afford priority to the liquidators in respect of any insurance proceeds payable by the insurer to Crewe or Crewe Sharp.
 
Akron Roads was not a party to the insurance contract, and no insured had sought to join CGU to the proceedings. Nonetheless, Judd J allowed the joinder of CGU, noting that the claimants satisfied the three elements required to enable declaratory relief:

  • that there was a justiciable controversy over which the court could adjudicate;
  • that the third party could demonstrate a real interest in the matter; and
  • that there was utility in the court granting the relief.

CGU appealed to the Victorian Court of Appeal on the basis that the court lacked jurisdiction to grant relief in favour of a third party which was not a party to the contract of insurance. The appeal was dismissed and special leave was subsequently granted to appeal to the High Court.

The High Court's Decision

CGU argued that s 562 did not create an entitlement for third parties to seek a declaration in respect of a contract to which they were not a party. The insurer submitted that "courts have no jurisdiction at the suit of a stranger to grant declaratory relief as to the meaning of and effect of a private contract between parties who will not pursue any claim relating to rights or duties under that contract"2.
 
In a joint judgment, French CJ, Kiefel, Bell and Keane JJ dismissed CGU's argument and affirmed that there was a justiciable controversy over which the court could adjudicate. The majority acknowledged that if it was established that CGU was liable to indemnify the insureds, and if the liquidators were successful in their claims against Crewe Sharp and Crewe, the insurance moneys would have been payable to the liquidators under s 562. It was held that:

  • the liquidators' claim for relief under s 52 was within the subject matter of federal jurisdiction, and the Supreme Court had federal jurisdiction to grant the relief sought: and
  • the liquidators had established a 'real interest' on behalf of the third party claimant.

In a separate judgment, Nettle J also dismissed the appeal. His Honour noted that the liquidators of Akron Roads could not be considered 'outsiders' to the contract in any real sense, given that they would be the beneficiaries of any insurance moneys under the policy.

Conclusion

The decision in CGU v Blakeley highlights the increased exposure of insurers to third parties in the context of insolvency and insurance litigation. It demonstrates that insurers may be held directly accountable to third party claimants and cannot rely upon the doctrine of privity to resist being joined to proceedings.

1 [2016] HCA 2
2 [2016] HCA 2 at [59]

Craig Ensor

Partner

61 425 320 419

61 2 9947 6445

craig.ensor@hdy.com.au

Mark Hilton

Partner

61 409 372 610

61 2 9947 6305

mark.hilton@hdy.com.au

Claudine Salameh

Partner

61 402 451 770

61 2 9947 6489

claudine.salameh@hdy.com.au

Angela Tan

Special Counsel

61 2 9947 6099

angela.tan@hdy.com.au

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