One year on – Australian Third Party Claims Against Insurers Act reviewed
On 1 June 2017 the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the Act) commenced operation. The Act replaced the long standing and often maligned s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the LRMPA), which had traditionally been the gateway for third party claimants to recover damages directly against insurers. Direct claims against insurers have been commonplace in New South Wales for many years. A year after implementation, it can be seen that the new legislation arguably makes it even easier to claim.
The death of the charge
The Act has done away with the uncertainties that plagued the practical operation of the LRMPA. In particular, the Act abolishes the previous regime which entitled a claimant to enforce a statutory charge over the entirety of the insurance monies payable under a policy.
The new regime
The purpose of the Act is to streamline the method by which third party claimants can recover against insurers directly. Section 4(1) of the Act requires that if a claimant wishes to recover from an insurer it must establish that:
- The relevant insurer exists
- The insurer issued a policy of insurance to an insured person
- The insured person has a liability to the claimant
- The policy covers that liability.
The key features of the Act are:
- The amount that insurers will be liable for is limited to the amount (if any) that would be payable under the policy in respect of the insured person’s liability to the claimant (s4(2)).
- The insurer “stands in the shoes” of an insured person in defending a claim. This means that an insurer will be entitled to rely on any defence to the insured’s liability that would otherwise be available to its insured (s4(3)).
- The Act does not entitle a claimant to recover from a reinsurer under a contract of reinsurance (s4(4)).
- A claimant will be entitled to recover an amount under s4 against an insurer even if the damages, compensation or costs that comprise that amount have been the subject of a judgment in favour of the claimant against the insured (but only to the extent such judgment has not been satisfied) (s8).
- Perhaps most significantly the new regime deliberately attempts to preserve the rights of third parties when an insurer settles a policy claim with its insured. Section 10 prevents an insurer from relying upon any payment it has made to its insured as a defence, except to the extent that the payment was made as a true reflection of the insured’s liability to the third party.
Safeguards for insurers
The new regime carries across the safeguards from frivolous actions previously found under the LRMPA.
Section 5 of the Act provides that proceedings may not be commenced or continued against an insurer under s4, except by leave of the court. Importantly, leave must be refused if an insurer can establish that it is entitled to disclaim liability under the relevant contract (s5(4)).
The authorities concerning leave under the LRMPA remain relevant to the application of s5 of the new Act. If leave is to be granted, a claimant must first establish three things:
- There is an arguable case against the insured
- There is an arguable case that the policy responds
- There is a real possibility that, if judgment is obtained, the insured will be unable to meet it.
Establishing those matters does not mean a leave application will automatically be successful. The court will still be entitled to exercise its discretion to ensure that insurers are not unnecessarily exposed to claims. Some examples where leave is likely to be declined include:
- Where it is plain that the cause of action against the insured is statute barred
- Where the insurer is able to demonstrate irreparable prejudice by its joinder
- Irreparable prejudice will not, however, extend to the costs of defending the proceedings, or the forensic disadvantage that insurers may suffer as strangers to the litigation.
The Act has undoubtedly made it easier for third party claimants to pursue claims for damages directly against insurers. While it has yet to be subject to sustained application, some cases have been brought under its terms already and the scope and impact will continued to be tested as the claims increase. Insurers should take comfort that the safeguards under the LRMPA continue to exist to ensure that they are not unnecessarily exposed to unwarranted claims. However, we anticipate that as a result of this Act NSW will – where permitted – increasingly be the forum of choice for claimants and, therefore, insurers in this jurisdiction can expect more direct action claims against them in the future.