In this case the New South Wales Court of Appeal has found, in the context of an application to join QBE to the proceeding, that section 54 of the Insurance Contracts Act ('ICA') applied to claims to enforce the statutory charge on insurance moneys under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ('Reform Act') and suggested that it would also apply to claims against insurers by third parties, under sections 48 and 51 of the ICA. QBE successfully resisted the application for joinder, however, on the basis that the claim was statute barred.
The appellant had obtained default judgment against QBE's insured, Osmo, which was impecunious and unable to meet any award of damages. The appellant sought to join QBE to the proceeding under section 6 of the Reform Act which, subject to certain conditions, creates a charge on insurance monies in favour of a person to whom the insured has a liability which that person may enforce against the insurer.
Section 6 of the Reform Act contains a proviso in subsection (4) in the following terms:
Section 54 applies where the effect of a contract of insurance would be that, but for the section, the insurer may refuse to pay a claim either in whole or in part 'by reason of some act of the insured or some other person, being an act that occurred after the contract was entered into'.
The section provides that, in those circumstances, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by an amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of the act.
The QBE policy was a claims made and notified liability policy with a "deeming" provision, whereby claims arising out of circumstances notified during the policy period (or within 28 days after expiry) were deemed to be made within the policy period.
The judgment at first instance
The judge at first instance dismissed the application to join QBE on the basis that QBE was entitled to disclaim liability because there was no evidence that Osmo's alleged breaches of duty occurred within the period of policy cover and because the claim by the appellant on Osmo was made outside the period of policy cover.
The judge accepted that section 54 of the ICA may be taken into account in the exercise of the court's discretion whether or not to grant leave pursuant to section 6 of the Reform Act but found that the section did not apply in the present circumstances because the claim was simply outside the scope of policy cover.
Decision of the Court of Appeal
The Court of Appeal upheld the decision of the judge at first instance but for different reasons from those upon which Her Honour had relied.
It found the judge at first instance had made a number of factual errors, such as the dates of the breach of duty by Osmo.
Further, the Court of Appeal rejected a number of submissions by QBE, to the effect that the reference to 'claims' in section 54(1) of the ICA was confined to a claim made by a party to the insurance contract and did not cover 'claims' by third parties such as persons (like the appellant) claiming under section 6 of the Reform Act. The Court of Appeal considered report number 20 of the Australian Law Reform Commission on Insurance Contracts ('ALCR 20'), the recommendations of which resulted in the enactment of the ICA and other sections of the ICA, which entitled third parties to claim – namely section 48 (persons who are not a party to the contract of insurance but are referred to in it) and section 51 (third parties claiming against the insurer where the insured has died or cannot after reasonable enquiry found).
Tobias JA, who gave the leading judgment of the court stated as follows:
'It is true that the paragraphs in ALCR 20 upon which QBE relies speak in terms of claims by an insured upon his or her insurer, which are unquestionably the principal type of claim with which section 54(1) is concerned. On the other hand there is nothing in those paragraphs which suggests that section 54 was intended to be limited in the manner contended for.
Other parts of ALCR 20 discuss claims by third parties and make recommendations to enable them to be made, such as sections 48 and 51.
The policy behind section 54 is to limit the insurer's remedies so that they reflect the actual loss the insurer has suffered as a consequence of the relevant act or omission. It is difficult to see why that policy does not apply to a claim made by a third party as much as to a claim made by the insured where otherwise the contract of insurance is engaged.
... It would be odd indeed if in such circumstances section 54 could not be availed of by section 48 claimants.
The same comment applies to section 51 ...'
The Court of Appeal rejected the appeal (and upheld the finding of the judge at first instance), however, on the ground that the claim against QBE was statute barred and that the court was thus satisfied that QBE was entitled to disclaim liability on that basis. The claim was statute barred because the appellant's liability to his solicitors for certain legal costs which comprised his loss had been incurred more than six years prior to the issuing of the proceeding and the limitation period commenced to run at that time rather than on the making of subsequent orders for party / party costs, which were relevant only to quantum.
The decision provides a clarification of the relationship between section 54 of the ICA and section 6 of the Reform Act and some useful guidance on the ability of claimants under ss 48 and 51 of the ICA to rely on section 54.
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