The report states that the Commission was asked to review and report on section 6 of that Act, which provides a mechanism enabling third parties to assert and enforce a statutory charge over insurance moneys payable to an insured person in circumstances where the insured's solvency is in question. The Commission was to consider whether the section should be repealed or amended, and in this context consider whether the policy objectives remain valid and, if so, whether those objectives could be better achieved. In undertaking the review, it was to have regard to:
1 All relevant issues relating to the uncertain practical application of section 6.
2 The impact or potential impact of relevant case law and developments in law, policy and practice by the Commonwealth, in other States and Territories of Australia and overseas.
3 The impact of any repeal of section 6 on protections for third party claimants seeking to recover the proceeds of a liability insurance policy to which they are entitled.
4 Whether any repeal or amendment of section 6 should apply to contracts already in force.
5 Any other matters the NSW Law Reform Commission considers relevant to the Terms of Reference.The report explains
Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) allows a plaintiff to access proceeds of insurance where proceedings against an insured defendant are not possible or would be pointless because, for example, the defendant is missing or insolvent.
It achieves this by a special “charge” that attaches to the money that the insurer would be required to pay under the insurance contract. The charge attaches “on the happening of the event giving rise to the claim for damages or compensation”.
The charge has caused many conceptual problems in applying s 6, particularly in relation to claims made policies and claims for pure economic loss, but also in cases where the insurance contract allows for money to be paid, for example, to fund the defence of directors and officers of defendant companies.
The section has been generally criticised for its obscure drafting and the problems it presents for interpretation. Changes to the insurance market since it was enacted 70 years ago have also made its effect unclear. There are many areas of uncertainty and inadequacy in its application.
Existing Commonwealth provisions that seek to achieve the same ends do not cover all the situations that s 6 covers and, in some cases, require additional proceedings.The Commission comments
We believe a provision is needed to meet the situations that s 6 aims to address. However, this provision should do so without the contrivance of the charge – by providing a plaintiff with direct access to the insurer, in appropriate cases.
Ideally, the Commonwealth should enact a general provision that covers all possible scenarios. This would ensure complete coverage and eliminate “forum shopping”. However, pending such an outcome, we consider that NSW should legislate to provide a clearer, more effective provision than the current s 6. The new provision could provide a model for other States and Territories, or the Commonwealth, to adopt.
We, therefore, propose a new provision to replace the current s 6 that clarifies areas of uncertainty and makes reforms where necessary. The new provision will resolve the issue of payment of defence costs dealt with in the key case, Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212, while ensuring that a plaintiff can recover from an insurer in appropriate cases. Where reform is not required, our recommendations seek to achieve the same effect as the existing provisions. In some cases we have clarified the existing law with words which adopt a preferred interpretation.
Our recommendations do not increase the liability of insurers. Like the current s 6, the new provision should ensure that an insurer is not liable for more than the insurer would have been liable to pay under the insurance contract. It should also ensure that the insurer can rely on the same defences that the insured defendant could have relied on in an action brought by the plaintiff.The Commission's Draft Bill is to give effect to recommendations
1: Plaintiff’s right to recover against the defendant’s insurer (page 33)
If a defendant (being a natural person or a corporation): (a) has a liability to a plaintiff to pay any damages or compensation (b) was insured (directly or as a third party) by an insurance contract that would have covered that liability, and (c) has for any reason failed or is unable to meet the liability in whole or in part then the plaintiff should be able to recover from the insurer the amount the insurer would have paid to the defendant under the insurance contract in respect of the defendant’s liability to the plaintiff.
2: Proceedings against the insurer – leave to proceed
(1) Whether or not the circumstances in Recommendation 1(a)-(c) have yet been established, the plaintiff should only be able to sue the insurer with the leave of the court. (2) Leave may be sought and granted before or after the commencement of proceedings against the insurer. (3) Leave may not be granted if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or any relevant law.
3: The insurer stands in the place of the defendant
The insurer should stand in the place of the defendant in proceedings brought by the plaintiff as if the action were an action to recover damages or compensation from the insured, so that the parties shall have the same rights and liabilities, and the court shall have the same powers, as if the action were against the defendant.
4: Judgment against defendant no bar to proceedings against insurer
The plaintiff should be able to proceed against the insurer even though judgment has already been obtained against the defendant for damages or compensation in respect of the same matter, except to the extent that any judgment against the defendant has been satisfied.
5: Limits on insurer’s liability to the defendant preserved
(1) The insurer should not be liable for any greater sum than the insurer is liable to pay the defendant under the relevant insurance contract. (2) The insurer may raise against the plaintiff any matter in answer to or in reduction of its liability that it could have raised against the defendant.
6: Discharge of insurer’s obligations
Any payment by the insurer to the plaintiff, to the extent of the payment, should discharge any obligation the insurer has to the defendant under the insurance contract.
7: Preventing collusion between the parties
Any payment the insurer makes to the defendant, or any compromise agreed between the insurer and the defendant in respect to a liability referred to in Recommendation 1, does not discharge the insurer’s liability to the plaintiff under this provision, unless and to the extent that the defendant pays the money to the plaintiff.
8: Discovery to find the defendant’s insurer
The provision should not prevent plaintiffs obtaining information about the identity and whereabouts of a defendant’s insurer under r 5.2 of the Uniform Civil Procedure Rules 2005 (NSW).
9: Limitation periods
For the bringing of proceedings against an insurer under this provision, time should: (a) commence running against the plaintiff at the same time as the cause of action accrues to the plaintiff against the defendant, and (b) stop running against a plaintiff when the plaintiff commences proceedings against the defendant or the insurer, whichever is earlier.
10: Effect on workers compensation and other provisions
The new provision should: (a) not affect the operation of any of the provisions of workers compensation or any other legislation to the extent that they allow plaintiffs to access insurance money, and (b) be in addition to rights conferred under workers compensation or any other legislation.
11: Territorial application
The new provision should apply to an action that a plaintiff brings in a New South Wales court.
12: Reinsurance
The new provision should expressly not extend to reinsurers under contracts of reinsurance.
13: Transitional provisions
Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) should continue to apply to and in respect of proceedings commenced against insurers before the commencement of the new provisions.
