Australia: Courts Nail Down Some Vexing Issues - who defends an insolvent insured?

Insurance Update (Australia)
Last Updated: 15 April 2013
Article by Kristy Cappellotto

Insurers face procedural difficulties when, having denied indemnity to an insolvent insured, it is joined to proceedings by a third party. Who defends the insured? In particular, who raises crucial defences such as proportionate liability? Can the insurer be subrogated to the insured's rights when it has denied indemnity?

In The Owners-Strata Plan 62658 v Mestrez Pty Limited & Ors [2012] NSWSC 1259 (Mestrez), the plaintiff sued numerous defendants in connection with the failure of fire control and drainage systems in an apartment complex. Two of the defendants (insureds) had previously had indemnity denied by their insurer, AXIS. They were also insolvent and did not participate in the proceedings. The plaintiff therefore joined AXIS direct.

This left AXIS in a difficult position. If it lost the indemnity argument, it would have to pick up the liability of the insureds which had not defended themselves, and in particular, not pleaded the other defendants as concurrent wrongdoers.

Having denied indemnity, technically AXIS could not be subrogated to the insureds' rights, the right to subrogate being dependant on the grant of indemnity. AXIS therefore sought leave to amend its own defence to plead proportionate liability. However, as AXIS itself could not be considered a concurrent wrongdoer, it would be a nonsensical pleading. A different solution needed to be found to protect the insurer – in short, his Honour Justice Lindsay concluded that AXIS was permitted to file defences on behalf of the insureds to protect its prospective right to subrogate.

His Honour arrived at that solution after a careful analysis of some of the key principles relating to joinder of insurers to proceedings in the context of an insurer maintaining its denial of indemnity to its co-defendant insureds. Those key principles included the Anjin line of cases, election and subrogation.

In this article, we primarily focus on the court's analysis and findings in terms of subrogation.

His Honour accepted that the equitable right of subrogation is prospective and contingent upon the insurer granting indemnity and making a payment to, or on behalf of, the insured. Therefore, AXIS could not subrogate. The answer to AXIS' dilemma was found in the contractual rights and obligations of the insurer and insured. The insurer's right to take over conduct of proceedings is not dependent on indemnity being granted. Further, AXIS had an equitable right to protect its prospective entitlement to subrogation. His Honour quoted Barwick CJ's judgment in State Government Insurance Office (Queensland) v Brisbane Stevedoring Pty Limited (1969) 123 CLR 228:

"... the right of subrogation is no more than a right to enforce and have the benefit of the insured's rights in relation to the subject matter of the loss which the insurer has paid: it includes, of course, a right to have such rights maintained pending the occurrence of a loss within the policy."

In other words, when insurers retain lawyers to defend proceedings against their insureds, not only are they exercising rights under the policy to conduct the defence, they are also maintaining, or protecting, their right to subrogate.

In Mestrez, the only realistic way to maintain or protect AXIS' rights was to permit AXIS to file defences on behalf of the insureds. His Honour held that the insurer should be no worse off, procedurally, by its joinder in the principal proceedings than it would have been if, having denied liability to indemnify the insureds, it had been sued by them on a cross-claim in the ordinary course. The inactive status of the insureds, particularly in their defence of the proceeding, was a deciding factor.

Mestrez confirms that although an equitable right of subrogation exists from the moment that a contract of insurance is entered into, that right cannot be exercised until indemnity has been granted. However, an insurer has the right to protect that right.

In terms of election, contrary to the plaintiffs' submissions, filing defences in the names of the insureds did not amount to an election by AXIS to abandon its entitlement it might otherwise have to deny indemnity.

Does a builder or developer owe a duty of care to an owners corporation? And is a dwelling which offers a resort lifestyle and holiday accommodation subject to the Home Building Act 1989 (NSW)?

In another case involving an owners corporation, in Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712 the New South Wales Supreme Court held that a builder or developer of a luxury low-rise apartment complex does not owe a duty of care to the owners corporation. A decisive factor in the decision was the fact that the owners corporation, as an immediate successor in title, had the benefit of the statutory warranties set out in sections 18B and 18C the Home Building Act 1989 (NSW) (HBA). This latter finding was largely related to the court's assessment of the nature of the dwelling and its use.

The plaintiff in this case was the owners corporation of a strata title development, known as "Star of the Sea", at Terrigal. The Star of the Sea development was designed and constructed by Brookfield, pursuant to a design and construct contract made with the developer, Hiltan. The owners corporation identified a number of defects in the common property. It issued proceedings against Brookfield and Hiltan, claiming that both Brookfield and Hiltan owed it (and breached) warranties implied by sections 18B and 18C of the HBA, and a common law duty of care.

This case, which arose out of Brookfield and Hiltan filing notices of motion seeking prior determination of questions of law, required the court to answer the following:

  • Is the owners corporation entitled to the benefit of the statutory warranties implied under the HBA as against either Brookfield or Hiltan?
  • Did either of Hiltan or Brookfield owe the owners corporation a common law duty of care?

The first question involved an analysis of the legislative scheme, and as a matter of fact, whether the Star of the Sea was residential building work within the meaning of the HBA (section 6(f) of the HBA specifically excluded a house or unit designed, constructed or adapted for commercial use as a tourist, holiday or overnight accommodation from the definition of "dwelling"). Justice McDougall considered the nature of the development, which comprised 52 residential lots, many of which are advertised and let for holiday accommodation. One issue was the intended use of the development at the time of the design and construct contract (2003), as opposed to the use it ultimately came to have.

His Honour ultimately held that the language of the statutory warranties suggests that application of the section is to be determined when the contract is made, and whether it is a contract to do residential work. On the basis of the contract, plans and specifications in this case, what was to be construed was 52 residential apartments, although exhibiting luxurious features more often found in upmarket holiday resorts. The contract between the builder and the developer was one to do residential building work. Therefore, the owners corporation was entitled to benefit from the statutory warranties implied under the HBA.

As to a duty of care, His Honour referred to the leading authorities on duty of care owed by subsequent owners. In Bryan v Maloney (1995) 182 CLR 609 (Bryan), the High Court upheld the existence of a duty of care owed by a builder of a dwelling to a subsequent purchaser, on the basis that sufficient proximity existed between the builder and the owner. By contrast, in Woolcock Street Investments Pty Limited v CDG Pty Limited (2004) 216 CLR 515 (Woolcock), the High Court held that no such duty was owed to subsequent owners, in circumstances where the premises was a commercial dwelling.

In conclusion, His Honour provided three reasons for finding that a duty was unlikely to exist in this case:

  • The owners corporation had the benefit of the statutory warranties. His Honour did not think it was open to a trial judge to hold that some additional common law duty of care should be imposed.
  • The concept of proximity expounded in Bryan has been discarded as the basis of the imposition of a duty of care (relying on Gleeson CJ, Gummow, Hayne and Heydon JJ in Woolcock).
  • In Bryan, the duty of care depended on the anterior conclusion that Bryan had owed a duty of care to the initial owner. In this case, there was no ground for concluding that Brookfield owed any common law duty of care to Hiltan. They had negotiated, on equal footing, a detailed contract in which each bargained for what it would give as the price for what it would receive. That said, His Honour refrained from making a finding in relation to the owners corporation's alleged vulnerability (although he thought it was questionable).

Builders and developers, and their insurers, should note that while no duty of care was held to exist in this case, His Honour's finding was persuaded by the fact the owners corporation had the benefit of the relevant statutory warranties.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.