The Third Party (Rights Against Insurers) Ordinance Cap 273 (TPRAI) in Hong Kong allows third parties to claim against the wrongdoer's liability insurer in the event of insolvency. The Supreme Court of New Zealand (the country's highest court) found in BFSL 2007 Ltd (in liquidation) v. Steigrad  NZSC 156 (known as the Bridgecorp case) that under the equivalent statutory provision in New Zealand, payment of defence costs do not reduce the limit of indemnity. This means that even if the limit of indemnity is inclusive of defence costs, insurers may need to pay third parties up to the limit and defence costs in addition to the limit. What implications does this have for TPRAI in Hong Kong?
Under common law, a third party cannot directly claim against a wrongdoer's liability insurer. If the wrongdoer becomes insolvent, the third party is an unsecured creditor and is entitled to a pro-rata share of the wrongdoer's assets, including the insurance monies. The TPRAI mitigates the harshness of the common law position by allowing third parties to claim against the wrongdoer's liability insurers directly for any liability incurred by the wrongdoer in certain situations.
The Bridgecorp case considered the New Zealand statutory equivalent of TPRAI, being Section 9 of the Law Reform Act 1936 (LRA). Section 9 LRA operates as follows:
- It creates a statutory charge over "all insurance money that is or may become payable in respect of [the insured's] liability".
- The charge arises upon "the event giving rise to the claim for damages or compensation" even if "the amount of such liability may not then have been determined".
- A third party claimant may enforce the charge against the insurer as if claiming against the wrongdoer insured but the insurer will not be liable above any limit specified in the contract of insurance.
Bridgecorp involved two appeal proceedings:
- Bridgecorp proceedings: directors of the failed Bridgecorp group of companies were sued for over NZ$340 million for breach of duties. The directors had Directors and Officers Liability Insurance with a limit of NZ$20 million inclusive of defence costs. Feltex proceedings:
- Feltex went public in 2004 and was liquidated in 2006. Shareholders who bought shares in the initial public offering sought damages for NZ$180 million. Feltex had a Prospectus Liability Insurance Policy with a limit of NZ$50 million inclusive of costs.
In both appeals, the amount claimed far exceeded the policy limit. The issue in both appeals was the same: whether the insurer's payments for defence costs reduced the insurance monies available to third party claimants.
The majority (three of five judges) found that payments of defence costs could not reduce the available insurance monies. The majority held:
- The purpose of Section 9 was to avoid insurance monies falling into the general pool of creditors and thereby prejudice the third party claimant. The legislative history of Section 9 LRA and its predecessors was aimed at personal injury or death claims and the aim was to protect claimants with regard to the insurance monies. It would be contrary to this policy aim to allow defence costs to reduce the money available.
- The statutory charge secured the full amount of the insured's liability to the third party and arises immediately on the "event giving rise to liability" even though the amount of liability has not been determined. This means all of the insurance monies are charged in favour of the Plaintiffs upon the event giving rise to liability and the insurers cannot freely make payments for defence costs once they are aware of the charge.
- To allow payment of defence costs to reduce the available insurance monies would effectively allow third party claimants to fund the insured's unsuccessful defence. If the defence is successful, the insurer can pay or reimburse defence costs under the policy (provided no other claims subject to Section 9 charge).
In conclusion, the majority held that Section 9 LRA put the risk on the insurer in paying defence costs where the insured's liability may potentially exceed the policy limit. The insurer's payments for defence costs will not reduce the insurance monies available for third party claimants and therefore any payments of defence costs could be in addition to the policy limit.
The minority was of the view that Section 9 LRA did not interfere with the contractual rights of the insured and insurer under the insurance contract. The minority agreed with the New South Wales of Australia Court of Appeal decision in Chubb Insurance Co of Australia Ltd v. Moore (2013) 302 ALR 101 and held that:
- Section 9 LRA created a charge on insurance money payable. The insurance money payable is governed by the terms of the insurance policy. The insurer's liability to indemnify the insured is limited by the policy limit as well as other relevant terms in the insurance policy.
- The charge is only operational upon judgment establishing the insured's liability and not upon an alleged claim.
- The purpose of Section 9 is to provide a mechanism so that insurance money which otherwise would be paid to creditors upon the insured's insolvency, would instead be paid to the claimants. It does not provide wider protection and intrude on the contractual rights of the insurer and the insured under the policy.
Implications for TPRAI in Hong Kong
In Hong Kong, the TPRAI operates by transferring the insured's rights against the insurer under the policy to the third party claimant upon the insured's liquidation or bankruptcy. However, the third party cannot enforce the rights until it has obtained judgment or established liability against the insured. TPRAI therefore operates differently to Section 9 LRA in that it does not create a statutory charge, but instead transfers the rights of the insured to the third party claimant. Section 4 of TPRAI protects third parties by invalidating any payments by the insurer after the insured has commenced liquidation or bankruptcy proceedings.
The third party has no better rights than the insured under the policy as against the insurer. Therefore, if the insurer is entitled under the policy to reduce its limit of liability by the defence costs paid, the third party should only be able to claim against the insurer for the insurance monies less defence costs paid.
Since TPRAI operates differently to the New Zealand LRA, it is likely a Hong Kong court will not reach the same result as in Bridgecorp. However, there are no Hong Kong cases dealing with TPRAI after Bridgecorp and whether TPRAI is capable of providing wider protection for third party claimants. Insurers, particularly D&O insurers, and insured directors can breathe easy.
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