Allens

Insurance & Reinsurance

Focus: NSW Court of Appeal confirms third parties' direct recourse to section 54

19 August 2010

In brief: The New South Wales Court of Appeal has confirmed that third parties who seek to bring direct claims against insurers under the NSW Law Reform (Miscellaneous Provisions) Act 1946 are able to benefit from the remedial provisions under section 54 of the Insurance Contracts Act 1984 (Cth). Partner John Edmond , Senior Associate Philip Hopley and Lawyer Isaac Gibbs report.

How does it affect you?

  • For policies governed by the law of NSW or the Australian Capital Territory, this case confirms that section 54 of the Insurance Contracts Act 1984 (Cth) (the ICA) will apply to a claim brought by a third party under a 'claims made and notified' policy using the statutory right of direct recourse.
  • Insurers will not be able to resist an application by a third party for leave to commence proceedings by relying solely on the act or omission of an insured in circumstances where the insured would have been able to seek relief under s54 of the ICA.

Background

In May 2006, the plaintiff, Mr Gorczynski, commenced proceedings in the NSW District Court against W & FT Osmo Pty Ltd (Osmo), for compensation for losses suffered as a result of building certificates that were issued by Osmo in 1999. Osmo did not defend the claim and the plaintiff obtained a default judgment with damages to be assessed against it.1

Osmo held successive 'claims made and notified' insurance policies with QBE Insurance between 1997 and 2004, which covered it against claims for professional negligence. However, Osmo did not at any time notify QBE that a claim against it had been made by the plaintiff during the periods of cover.

In December 2008, the plaintiff made an application under s6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Law Reform Act), for leave to commence proceedings against QBE to enforce the statutory charge created by the operation of s6(1). The plaintiff sought to join QBE on the basis that Osmo would be unable to meet any judgment awarded against it.

At first instance, the NSW Supreme Court denied the application for leave on the basis that the plaintiff's claim against Osmo did not fall within the scope of the cover. This meant that any question of the plaintiff relying on s54 of the ICA did not arise. The plaintiff appealed.

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The decision

Despite finding that the cover was in fact triggered by the plaintiff's claim, its appeal was dismissed since the NSW Court of Appeal held that QBE would be entitled to disclaim liability under the policy because of the expiry of the relevant limitation period. Of itself, this justified the refusal of leave to bring proceedings against QBE under s6 of the Law Reform Act.

In reaching that decision, however, the NSW Court of Appeal discussed the application of s54 of the ICA and dismissed a number of submissions advanced by QBE that sought to prevent the plaintiff from relying on it. It was submitted by QBE that s54:

  • does not apply where an insured fails to make a claim on the insurer; and
  • requires any claim that is made on an insurer to be made by an insured rather than by a third party.

In rejecting each of these contentions, the NSW Court of Appeal held that:

  • while what constitutes a 'claim' for the purpose of s54 is not properly defined, it should be interpreted widely and more broadly than is typically the case under most insurance policies. As such, the plaintiff's service of his application to seek leave under s6 of the Law Reform Act amounted to the making of a 'claim' against QBE; and
  • the operation of s54 is not confined to claims brought by an insured and may apply to those brought by third parties (which is consistent with the position relating to third-party beneficiaries and third parties in general under ss 48 and 51 of the ICA). As a result, a third-party applicant for leave under s6 of the Law Reform Act is entitled to the same remedies under s54 as an insured.

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Implications

This is not the first time that the NSW Court of Appeal has confirmed that applicants who seek leave under s6 of the Law Reform Act may rely on s54 of the ICA to excuse any act or omission by the insured that might otherwise result in the insurer being able to disclaim liability and leave being refused.2 However, it is a reminder that third parties are entitled to the same protection under s54 of the ICA as insureds.

Footnotes
  1. Gorczynski v W&FT Osmo Pty Ltd [2010] NSWCA 163. 
  2. Tzaidas v Child [2004] NSWCA 252. Go to: p15 of the Allens Annual Review of Insurance & Reinsurance 2004.

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