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

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