JOINING INSURERS TO PROCEEDINGS IN NEW SOUTH WALES

Updated: Sep 5, 2019

Rushleigh Services Pty Limited v Forge Group Limited (in liquidation) (Receivers and Managers Appointed) [2018] FCA 26 (31 January 2018)

Introduction

Do you remember Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946(NSW)? - that tricky piece of legislation, with limited national application, which imposed charges upon insurance policies and gave claimants the right to enforce those charges against insurers directly in certain circumstances. You may even remember some of the cases that tried to explain how Section 6 worked, some more successfully than others.

Things changed in New South Wales in 2017. The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (“The Act”) commenced on 1 June 2017 heralding the repeal of Section 6.

On 31 January 2018, the Federal Court of Australia handed down its decision in Rushleigh Services Pty Limited v Forge Group Limited (in liquidation) (Receivers and Managers Appointed) [2018] FCA 26.

This decision stands as one of the first to consider the Act, particularly the role discretion plays in determining whether leave should be given to bring or continue proceedings against an insurer.

Facts

Rushleigh Services Pty Limited (“Rushleigh”) commenced representative proceedings in the Federal Court of Australia under Part IVA of the Federal Court of Australia Act 1976against Forge Group Limited (In Liquidation) (Receivers and Managers Appointed) (“Forge”). A profit write-down on shares in Forge prompted these representative proceedings.

Rushleigh subsequently obtained leave to join to the proceedings two of Forge’s directors, Messrs Hutchinson and Simpson.

Rushleigh made an application under the Corporations Act to proceed against Forge and transfer the proceedings to the New South Wales Supreme Court. The Federal Court rejected that application and, in so doing, prevented Rushleigh from prosecuting its claim against Forge.  

In the face of that set back, Rushleigh made a fresh application seeking leave to bring or continue proceedings against Forge’s D&O insurers. Those insurers unsuccessfully resisted that application.

The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW)

The Act commenced on 1 June 2017. Upon its commencement the Act’s predecessor, Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW)(“Section 6”)was repealed.

The Act and Section 6 are both about giving claimants direct access to insurers where appropriate.

The now repealed Section 6 involved the imposition of a charge upon the relevant policy that the claimant, in due course, might seek to enforce against the insurer. The Act does not involve the imposition of any charge. It simply permits the claimant to bring proceedings to recover the insured amount from the insurer in certain circumstances. Section 4(1) provides as follows:-

If an insured person has an insured liability to a person ("the claimant"), the claimant may, subject to this Act, recover the amount of the insured liability from the insurer in proceedings before a court.

But it has to be appropriate. So both the Act and Section 6 require the claimant to obtain a court's leave to proceed to ensure that the direct access to insurers is limited to appropriate matters. Most of the debate concerning the application of this legislation has turned upon what makes a matter appropriate.

Matters where the insurers are entitled to deny indemnity are clearly inappropriate. But beyond that the line in the sand is less obvious.

In the context of Section 6, the authorities establish that the approach to determining whether a matter is appropriate involves the claimant establishing to a court's satisfaction that there is an arguable case against the insured, an arguable case that the relevant policy responds and a real possibility the insured cannot meet any judgment obtained against it. 

But those same authorities say that something more is required. The claimant must also persuade a court to exercise its discretion to permit the claimant to pursue the insurer directly.

Should courts approach the Act in the same way?

Rushleigh

Introduction

The parties agreed that the Federal Court should adopt the same course under the Act as courts have adopted to Section 6.

The parties also agreed that the preliminary issues outlined above were satisfied - there was an arguable case against the insured, there was an arguable case that the policy responded and there was a real possibility the insured could not meet any judgment obtained against it.  

So whether Rushleigh would be permitted to bring proceedings against Forge’s D&O insurers came down to a question of how the Court should exercise its discretion.

Discretion

The insurers argued that the Court should exercise its discretion in their favour.

The first ground was prejudice.

Firstly, the insurers pointed to the additional costs which they would incur in the proceedings as evidence of prejudice. The Court disagreed. It was not satisfied that there would be any significant additional costs bearing in mind the insured’s duty to assist. Nor was the Court satisfied that if there were any additional costs, those costs would be different from the costs to which insurers might be exposed in proceedings brought against them. In any event, if an insurer could simply point to such costs as constituting prejudice, that would defeat the purpose of the Act because every insurer could point to such costs.

Secondly, the insurers pointed to a forensic disadvantage in preparing their case bearing mind that they are strangers to the events and circumstances underpinning the claim. The Court disagreed again. All insurers will be strangers. The Court saw this prejudice as being unremarkable and, again, having the potential to defeat the purpose of the Act.

The second ground involved casting doubt over the utility of joining the insurers to the proceedings.

The Insurers had agreed to grant indemnity to Forge and its directors. So what was the point in bringing the insurers into the proceedings?

Firstly, the Court had already refused Rushleigh leave to proceed against Forge. The fact that the insurers had granted Forge indemnity did not benefit Rushleigh.

Secondly it could not be predicted on a preliminary basis how the claims against Forge and its directors might be determined. It was therefore possible that the outcomes might be different benefiting the.

These reasons dispelled the argument that there was no utility in joining the insurers.

The third and final ground reflects the history of these proceedings.

The insurers argued that granting Rushleigh leave to proceed would circumvent the Court’s earlier decision in these proceedings. That decision prevented Rushleigh from proceeding against Forge, considered the proof of debt procedure the more suitable path for Rushleigh to follow against Forge and was not the subject of any appeal.

The Court acknowledged that the earlier decision presented a procedural bar to Rushleigh’s claim against Forge but then observed that that is the very sort of factor which favours the Court exercising its discretion in Rushleigh’s favour. After all the imposition of the bar did not mean that Forge had no liability to Rushleigh. It just meant that Rushleigh could not pursue that liability through the courts.

The Court rejected this argument also.

Conclusion

So what do we get out of this decision?

Firstly, as is self evident from the judgment itself, consideration of the application of the Actis not limited to the courts of New South Wales. It extends to courts exercising federal jurisdiction in New South Wales as the Federal Court was doing in this particular instance.

Secondly, the Act reflects an easier process to pursue insurers directly.

Thirdly, a dispute between an insurer and insured will still thwart the Act’s application.

Fourthly, a court’s consideration of the application of the Act will, like the Act’spredecessor, require that court to address the same preliminary issues (there is an arguable case against the insured, there is an arguable case that the relevant policy responds and there is a real possibility the insured cannot meet any judgment obtained against it ) and the proper exercise of its discretion. 

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