In brief - Chubb Insurance v Moore judgment brings welcome clarity
The judgment in Chubb Insurance Company of Australia v Moore is helpful for insurers, insureds and claimants alike. The clarity it brings to what has been a complex and confused area of law will be welcome across the wider insurance industry.
When may charges be asserted over insurance moneys?
On 11 July 2013, the Court of Appeal of the Supreme Court of NSW delivered a much anticipated judgment concerning the operation of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Act). In Chubb Insurance Company of Australia v Moore  NSWCA 212 (Judgment), a five judge bench has provided much-needed clarity regarding the proper construction of section 6 of the Act, and the circumstances in which charges may, and may not, be asserted over insurance moneys in reliance on the Act.
Implications for D&O and professional indemnity contracts of insurance
The Judgment is of great importance to insurers faced with competing claims to insurance money, particularly funds available under directors and officers, and professional indemnity, contracts of insurance. The findings of the Court of Appeal are also consistent with the recent decision delivered by the New Zealand Court of Appeal in Steigrad v BFSL 2007 Ltd & Ors COA CA674/2011 [20 December 2012] (Please see our earlier article New Zealand Court of Appeal overturns Bridgecorp decision.)
Failure of Great Southern agribusiness managed investment scheme
The proceedings underlying the Judgment (Declaratory Proceedings) arose in the greater context of wide-reaching litigation concerning the collapse in 2009 of Australia’s largest agribusiness managed investments scheme, operated by Great Southern Limited and its various subsidiaries (together, Great Southern).
The failure of Great Southern gave rise to large-scale proceedings in the Supreme Courts of Victoria and Western Australia, including claims against the directors of the companies. Collectively, those proceedings (Great Southern litigation) which remain on foot, involve 24 separate proceedings and over 25,000 claimants.
Dispute over entitlement to insurance money
In the course of the Great Southern litigation, an issue arose as to entitlement to insurance money which may become payable under contracts of insurance (Policies) between the plaintiffs in the Declaratory Proceedings (Insurers) and the directors who were defendants to the Great Southern Litigation (Defendants).
Though they were not parties to the Policies, the claimants in the Great Southern litigation (Claimants) asserted that they had an entitlement to the proceeds of the Policies, which covered the liability of the Defendants as well as legal expenses incurred by the Defendants in defending the Great Southern litigation.
Section 6 of the Law Reform (Miscellaneous Provisions) Act
In pressing for the proceeds of the Policies to be quarantined and be available to them if successful in the Great Southern Litigation, the Claimants asserted a charge on the insurance money payable under the Policies pursuant to section 6 of the Act.
Section 6 provides that the amount of any liability to pay damages or compensation, of a person who has entered into a contract of insurance by which that person is indemnified against such a liability, is, on the happening of the event that gives rise to that liability, to be a charge on all insurance moneys that may become payable in respect of that liability under that contract of insurance.
Put more simply, section 6 will in certain circumstances create a charge over insurance monies in favour of third party claimants "on the happening of an event" which gives rise to the relevant claim.
Section 6, described in the Judgment as "enigmatic", has been the subject of competing arguments and much judicial criticism since its enactment in 1946. In fact, the courts have recognised in the past that the section’s "ambiguity may be its only clear feature". The issues raised by the parties in the Declaratory Proceedings were considered of sufficient importance to require removal directly to a five judge bench of the Court of Appeal for the determination of a number of separate questions based on a statement of agreed facts filed by the parties.
Judgment clarifies application of section 6
The Judgment held that it was not open to the Claimants to assert charges pursuant to section 6 of the Act in the circumstances of this case. This was primarily because "the preferable approach" is to treat section 6 as only applying to claims brought in a court of New South Wales.
As none of the Great Southern Litigation had been brought in a New South Wales court, section 6 had no application to any of the claims being prosecuted in the Great Southern Litigation. There was therefore no basis for the assertion of the Claimants’ purported charges.
Notwithstanding the Court's finding that the Act had no application on these facts, the Court went on to make the following helpful observations:
• Section 6 is not limited in its application to occurrence based insurance policies, but also applies to claims made and notified policies of insurance.
• Section 6 does not apply where the alleged conduct of the insured giving rise to the claim for damages or compensation by the third party claimant happened before the inception of the relevant insurance policy.
• A charge under section 6 would not extend to insurance moneys payable in respect of defence costs, legal representation expenses or costs and expenses that are paid by the relevant insurer in accordance with the Policies. The Court recognised that section 6 does not alter the contractual relationships between insurers and insureds. The insurer remains bound to fulfill its contractual promise to pay defence costs irrespective of the existence of a charge.
• Any payment made by an insurer by way of indemnity for the liability of an insured to pay damages or compensation would (if there was a charge under section 6) constitute a valid discharge of the Insurers' obligations under the Policy if made before a Judgment or settlement in relation to the claims of other Claimants competing for the same limits. This gives Insurers the ability in such circumstances to settle claims on a rolling basis when faced with multiple Claimants without having to wait for all claims to be resolved before assessing which claims should be paid first.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.