Five ways plaintiffs can join defendants' insurers to existing litigationMar 2021 | Insurance
The past few years have seen an increase in plaintiffs joining defendants’ insurers to existing litigation where the insured defendant is suffering financial difficulty. This article outlines the various ways insurers can be joined to proceedings by a party outside the insurance contract.
Three key questions have emerged in the case law as being central to deciding whether an insurer should be joined by a claimant:
- does joining the insurer avoid a multiplicity of proceedings;
- is the defendant likely to be found liable to the plaintiff; and
- does the policy respond, or is there a genuine dispute about the scope of cover.
This article considers the application of these factors in some leading cases.
1. Insured company in liquidation – s 562 Corporations Act
The most common circumstance in which defendants’ insurers are joined by plaintiffs is where the defendant is a company in, or likely to go into, liquidation. The Corporations Act 2001 (Cth) (Corporations Act) contains a number of avenues for plaintiffs to join other parties’ insurers, one of them via s 562 which provides that amounts paid under a liability policy to a liquidator must be paid to the third party to whom the liability relates.
In Godden v State of Queensland & Ors,1 the plaintiff was injured in a motor vehicle accident. He claimed the accident was caused by dust or debris which had been deposited onto the road by trucks and machinery engaged at a nearby building site.
The plaintiff commenced proceedings against numerous defendants, including the construction company responsible for the earthworks and civil works at the nearby building site. The construction company’s insurer denied indemnity under its insurance policy, and this was not challenged by the construction company.
The construction company had deregistered prior to the proceedings. After the proceedings were commenced, the plaintiff obtained an order requiring the reinstatement of the construction company, but there was no evidence that it had any assets available to satisfy a judgment against it.
The plaintiff then sought leave to join the insurer of the construction company relying upon s 562 of the Corporations Act to seek payment of the policy proceeds, and to overcome the difficulty that he was not a party to the contract of insurance.
The insurer argued that as the construction company was not in liquidation, the plaintiff could not rely on s 562 to join the insurer to the proceedings. The Court disagreed and held that although the construction company was not in liquidation at that time, s 562 may have future application if the company does enter liquidation and incur a liability (such as a judgment debt), and an amount in respect of that liability is received by it, or its liquidator. In applying the principles from Port of Melbourne Authority v Anshun Pty Ltd2 (which gave rise to what is now known as Anshun estoppel) the Court noted that given the possibility of s 562 applying, joining the insurer would avoid a multiplicity of proceedings, and finally determine the matters of controversy between the parties, in this case being the application of the insurance policy.
By applying criteria proposed in The Owners-Strata Plan 62658 v Mestrez Pty Ltd3 the Court identified the following relevant facts:
- The insurer had denied liability to indemnify the insured against the plaintiff’s claim;
- There was a genuine dispute as to the entitlement of the insurer to deny liability;
- There was a substantial impediment standing in the way of the insured defendant joining the insurer. In the present case, the impediment was the construction company’s refusal to challenge indemnity;
- There was a true legal controversy between the plaintiff and the insurer. In this case, the legal controversy between the plaintiff and the insurer existed because there was a realistic prospect of s 562 of the Corporations Act having scope for operation. If the plaintiff obtained judgment against the construction company, the most likely consequence would be that the construction company would be placed into liquidation. Therefore, there was a real prospect of s 562 having effect; and
- As discussed above, joinder of the insurer as a co-defendant with its insured avoided a multiplicity of proceedings and enabled all matters in controversy to be completely and finally determined.
Ultimately, despite the defendant company not being in liquidation at the time of the application, the Court granted the plaintiff leave to join the insurer because of the likelihood of entering liquidation, and the genuine dispute as to cover which the insured defendant was not challenging.
2. Deregistered defendant – s 601AG Corporations Act
In the case of deregistered defendants, s 601AG of the Corporations Act can assists plaintiffs. It provides that:
‘A person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract if:
- the company had a liability to the person; and
- the insurance contract covered that liability immediately before deregistration.’
In the decision of Nicholas v Astute Hire Pty Ltd,4 the applicant in a personal injury claim applied to join to the proceedings the public liability insurer of a deregistered respondent company. The application was brought under s 601AG of the Corporations Act. The insurer opposed the joinder on the basis that its insured did not have the requisite liability and denied that the policy covered any such liability immediately before deregistration. The applicant argued that joining the insurer would negate the need for the insured to re-register, thereby minimising delays and unnecessary costs.
The Court examined the factual evidence and the insurance policy, and allowed the insurer to be joined. In doing so, the Court emphasised that the liability must exist immediately before deregistration. Without making a final determination on liability and coverage (which was not required to satisfy the liability requirement of s 601AG), the Court held that:
- there was considerable evidence which, if accepted at trial, could establish that the insured had some liability for the injured worker’ injuries; and
- at a ‘prima facie level’, the insurance policy appeared to cover the insured’s potential liability to the worker, with the policy being held at the relevant time, that is, immediately before deregistration.
3. New South Wales - insured company in liquidation - Civil Liability Act (NSW)
In New South Wales, ss 4 and 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Civil Liability Act) can give plaintiffs direct access to insurers of defendants where the liability is covered by the policy. No financial difficulty is required. Section 4 relevantly provides that:
(1) If an insured person has an insured liability to a person (the "claimant" ), the claimant may, subject to this Act, recover the amount of the insured liability from the insurer in proceedings before a court.
(2) The amount of the insured liability is the amount of indemnity (if any) payable pursuant to the terms of the contract of insurance in respect of the insured person's liability to the claimant.
(3) In proceedings brought by a claimant against an insurer under this section, the insurer stand in the place of the insured person…
Section 5 provides that proceedings cannot be brought against an insurer without leave of the court, and that leave must be refused if the insurer can establish that it is entitled to disclaim liability.
In Rushleigh Services Pty Ltd v Forge Group Limited (In Liquidation) (Receivers and Managers Appointed)5 (Rushleigh No 2), the Federal Court dismissed the insurers’ arguments as to why they should not be joined to the proceedings.
Forge Group Limited (in liquidation) (Forge) was a mining services company which was placed into liquidation in 2014 as a result of the mining downturn. A group of shareholders, represented by Rushleigh, commenced proceedings against Forge and two of its directors for losses arising out of the reporting of Forge’s financial position. Leave was required to proceed against Forge because it was in liquidation. In Rushleigh No 1,6 Rushleigh was denied leave to proceed against Forge, so in July 2017, in Rushleigh No 2, Rushleigh applied for leave to proceed directly against Forge’s insurers under the Civil Liability Act.
The Court granted Rushleigh leave to proceed directly against the insurers, and in doing so found that:
- Insurers would not suffer irreparable prejudice by virtue of their lack of familiarity with the factual matrix or relevant documents as Forge. The Court held that it must always be the case that an insurer will know less than the insured about the underlying facts, matters and circumstances giving rise to a claim. An insurer will therefore always be a ’stranger’ to a proceeding when joined under the Act. On that basis, the insurers’ potentially significant legal costs were not relevantly prejudicial to their interests.
- There was utility in joining the insurers because they had already substantially agreed to indemnify Forge. The Court held that there was utility in granting leave given that Rushleigh could not proceed against Forge in light of the decision in Rushleigh No 1 which meant that Rushleigh could not sue Forge directly.
- The joinder of insurers to overcome the consequences of Rushleigh No 1 was a proper basis for the exercise of the discretion. In Rushleigh No 1, Rushleigh was denied leave to proceed against Forge in liquidation. Insurers in Rushleigh No 2 argued that if leave were granted to proceed under the Act, then in effect they would be permitted to proceed with their claim against Forge, even though that leave had been refused in Rushleigh No 1. Her Honour dismissed this argument and said that exhaustion of a party’s rights under the Corporations Act did not preclude an application to join Forge’s insurers under the Civil Liability Act.
In contrast, in Reed Constructions Australia Pty Ltd (in Liquidation) – Walley v Chubb Insurance Australia Ltd,7 the plaintiff was denied leave to join the insurer. In that case, the court emphasised that the question is a matter of discretion, and there must be some utility in joining the insurer. The Court cited cases where leave has been denied because there was no insurance controversy, such as where indemnity had been granted, but subject to a qualification which preserved the insurer’s right to deny liability if facts emerged during the litigation which engaged an exclusion (and where no such facts had emerged). In the Reed case, the insurer had not irrevocably confirmed cover, and was not in a position to do so. Therefore, no controversy between the insured and the insurer had been demonstrated, so there was no utility in joining the insurer. If a real dispute did develop, the plaintiff could re-apply for leave to join the insurer.
Most recently, the New South Wales Supreme Court denied leave to join the insurer in the decision of Count Financial Limited v Pillay.8 In that case, the plaintiff alleged the defendant, an accountant, was negligent. The defendant’s professional indemnity insurer declined to indemnify the defendant under the policy. The insurer accepted that it was unlikely the defendant would be able to meet any judgment made against him but argued that the policy did not respond to the plaintiff’s claim due to the operation of an exclusion for the provision of advice in ‘respect of any investment’. The insurer argued that the advice in question was provided ‘with respect to accounting and tax aspects’ of certain agribusiness products, and therefore fell within the exclusion.
The Court accepted this interpretation of the policy and concluded that the insurer had an entitlement to disclaim liability. On that basis, the Court refused leave for the plaintiff to join the accountant’s professional indemnity insurer. The Court also commented that the insurer’s arguments in respect of the exclusion were so strong that, as a matter of discretion, leave should be refused.
4. Insured natural persons - s 117 Bankruptcy Act
In Kaboko Mining Limited v Van Heerden (No2)9 the insured defendants (Defendants) were natural persons who were likely facing bankruptcy if the proceeding against them was successful.
The plaintiff, Kaboko Mining, was a policyholder of a D&O policy, and was subject to a deed of company arrangement. Kaboko had commenced proceedings in the Federal Court against the Defendants, who were its former officers, for various alleged breaches of duty. Relying on the conduct exclusion, the insurer had denied indemnity to the Defendants. Kaboko then applied to join the Defendants’ insurer (which was also Kaboko’s insurer) as a defendant to the proceedings arguing that the insurer was liable to indemnify each of the Defendants.
The Court said that ‘[t]he practical reason for the joinder is to ensure that all relevant controversies – which arise from the same factual substratum – are decided in one case’ and allowed the joinder of the insurer for the following reasons:
- Joinder of the insurer avoided a multiplicity of proceedings and enabled all matters between Kaboko and the insurer to be determined. In this regard:
- the Defendants’ conduct was central to the determination of both the plaintiff’s claim against the Defendants, and the correctness of the insurer’s declinature;
- the likely liability exposure exceeded the value of the Defendants’ assets, and there was a real possibility one or more of them would become bankrupt, which would invoke s117 of the Bankruptcy Act, which would enliven Kaboko’s right under that act to join the insurer;
- The fact that any liability of the insurer was contingent did not mean there was no ‘matter’ to be determined; and
- There was a bona fide dispute as to the validity of the declinature.
5. Plaintiff’s appeal pursuant to s 599 of the Corporations Act
Finally, the Corporations Act provides a general power which arguably may be available to plaintiffs to seek joinder of insurers where a defendant is under administration or in liquidation.
Section 599 of the Corporations Act allows ‘persons aggrieved’ to appeal decisions of persons administering a compromise, arrangement, or scheme, or a controller of a property of a corporation.
While there is not yet case law applying s 599, which was introduced in 2016, cases considering similar provisions can provide some guidance. For example, in the New South Wales Supreme Court decision of Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd,10 the Court considered an equivalent provision in the Companies (New South Wales) Code that was in force at the time. The Court concluded that a ‘person aggrieved’ must be a person who suffered some legal grievance, in the sense a legal right or interest has been affected by the act or decision appealed against, or a legal duty owed has been breached or affected by the act or decision appealed against.11 In that case, the loss of chance to negotiate a contract for the purchase of company assets from a provisional liquidator was not a legal grievance constituting a ‘person aggrieved’. This non-exhaustive definition of ‘person aggrieved’ was approved in the decision of Australian Securities & Investment Commission v Forestview Nominees Pty Ltd (recs and mrgs appted).12
In the insurance context, a plaintiff who has commenced proceedings against a company in liquidation, receivership or under administration may arguably be aggrieved if a liquidator, receiver or administrator refuses to notify the relevant insurer where the claim is likely covered by the policy. Arguably, notification of a claim where cover is likely constitutes a legal interest.
In addition to s 599 of the Corporations Act, the Court has broad powers under div 90 of the Insolvency Practice Schedule (Corporations).13 In particular, div 90-15 provides that a Court has power to make such orders as it thinks fit in relation to external administration. This includes the power to give directions to a liquidator.14
Being joined to litigation increases insurers’ financial and reputational risks. It is therefore critical for insurers to remain aware of the various ways they can be joined to proceedings by plaintiffs when considering the risk profile of an insured who is experiencing financial distress. This is especially so considering the increased possibility of defendant insureds suffering financial difficulty as a result of COVID-19.
1  QSC 18.
2 (1981) 147 CLR 589.
3  NSWSC 1259.
4  NSWSC 711.
5  FCA 26.
6 Rushleigh Services Pty Ltd v Forge Group Ltd (in liq) (receivers and managers appointed); in the matter of Forge Group Ltd (in liq) (receivers and managers appointed)  FCA 1471.
7  NSWSC 1007.
8  NSWSC 99.
9  FCA 706.
10 (1989) 19 NSWLR 434.
11 See also Ex parte Sidebotham; Re Sidebotham (1880) 14 Ch D 458 at 465.
12 (2006) 236 ALR 652.
13 Contained with Sch 2 of the Corporations Act 2001 (Cth).
14 See Hill v Esplanade Wollongong Pty Ltd CAN 141 133 708 (subject to a deed of company arrangement)  NSWSC 478.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.