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Focus: Bad news for insurers – increased litigation risk

2 May 2011

In brief: The NSW Court of Appeal has upheld a decision in which a plaintiff was granted leave to join the defendant's insurer as an additional party to proceedings. This is potentially beneficial for plaintiffs and problematic for insurers. Partner Michael Quinlan (view CV) and Lawyer Andrew Lazzaro report.

How does it affect you?

  • This case1 may be seen as part of a continuing trend by courts to make it easier for insurers to be joined to proceedings between a third-party claimant and a defendant that is (arguably) insured.
  • In this case, the court's power under the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR) was used to join a defendant's insurer to litigation originally commenced against the insured defendant.
  • The court's power to grant an application to join additional parties to proceedings is expressed in unqualified terms. In particular, there is no requirement that any particular set of facts or circumstances arise in order for the court to exercise such power.
  • In a nutshell, this case is good news for plaintiffs (and plaintiffs' law firms) and bad news for insurers.


Background

Bazem Pty Ltd (the claimant) was a property development business, which retained an architect. Unhappy with the work that was done, the claimant sued the architect for breach of contract and negligence. The architect was a named insured under a civil liability professional indemnity insurance policy, which allowed the insurer to run the architect's defence and, initially, it did so. The insurer then learned that the architect had not disclosed that its director had entered into a personal insolvency agreement under the Bankruptcy Act 1966 (Cth). As a result, the insurer denied indemnity, on the grounds of non-disclosure, and stopped running the architect's defence. On learning of the insurer's denial of indemnity, the claimant sought leave to join the insurer as a party to the proceedings it had begun against the architect and to seek a declaration against the insurer that it was obliged to indemnify the architect. At first instance,2 the primary judge granted the claimant leave to join the insurer, under rule 6.19 of the UCPR.

The insurer sought leave to appeal that decision.

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The decision

The NSW Court of Appeal dismissed the insurer's application for leave to appeal, finding that the primary judge did have the power to join the insurer as a defendant in the proceedings.
In reaching that decision, the court considered the application of rule 6.19(1) of the UCPR. The rule provides that two or more persons may be joined in proceedings if:

(a) separate proceedings by or against each of them would give rise to a common question of law or fact; and

(b) all rights of relief claimed in the originating process are in respect of, or arise out of, the same transaction or series of transactions,

or if the court gives leave for them to be joined.

  

The insurer argued that the conditions in subparagraphs (a) and (b) of the rule had not been satisfied because:

  • if the client claimed separately against the architect and the insurer, there would have been no 'common question of law or fact' in the two sets of proceedings; and
  • the rights of relief the client claimed against the architect and the insurer respectively were not for, and did not arise out of, 'the same transaction or series of transactions'.

The insurer also argued that, in order for the court to have the power to grant leave according to the final words of the rule (ie 'or if the court gives leave for them to be joined'), it was necessary for it to find there were particular facts or circumstances that made the issue of the insurer's (disputed) liability to indemnify its insured not solely a matter of concern to the insurer and the insured. The insurer said that the type of facts or circumstances the court would need to find in this regard included matters such as:

  • a probability that the insured (in this case, the architect) would be financially unable to satisfy the claim for damages brought against it by the claimant; or
  • the possibility of section 562 of the Corporations Act 2001 (Cth) applying. This section applies where the defendant is in liquidation, and entitles a claimant to the insurance proceeds a defendant (or its liquidator) receives in relation to the claim in question in priority to other unsecured creditors.

The NSW Court of Appeal rejected the insurer's submissions. The court noted that the words 'or if the court gives leave for them to be joined' were expressed in unqualified terms and, therefore, found that the power of the court to grant leave to join the insurer did not depend on:

  • the conditions in subparagraphs (a) and (b) of the rule being satisfied; and
  • the existence of any other particular facts or circumstances, such as those the insurer put forward.

Although it was ultimately unnecessary in dismissing the insurer's application for leave to appeal, the court also found on the facts that the 'common question of law or fact' and 'same transaction or series of transactions' conditions in subparagraphs (a) and (b) of the rule were satisfied.

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Comment

This case may be seen as part of a continuing trend by courts to make it easier for insurers to be joined to proceedings between a third-party claimant and a defendant that is (arguably) insured. The court's finding that its power to grant an application for joinder is expressed in unqualified terms, and does not depend on the existence of any particular facts or circumstances, means that insurers could potentially be joined to proceedings in a wide range of situations. In particular, as this case demonstrates, it is possible for a third-party claimant to join the defendant's insurer to proceedings even if the claimant asserts no legal right or any cause of action against the insurer directly, but is instead seeking a declaration that the insurer is obliged to indemnify the defendant. 

Footnotes
  1. CGU Insurance Ltd v Bazem Pty Ltd [2011] NSWCA 81.
  2. Bazem Pty Ltd v Bureau of Urban Architecture Pty Ltd; Bureau of Urban Architecture Pty Ltd v Bazem Pty Ltd [2010] NSWSC 978.

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