Direct action against an insurer, s 6 February 28, 2017
- Section 6 of the Act provides as follows:
6 Amount of liability to be charge on insurance moneys payable against that liability
(1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person’s liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.
(2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up.
(3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves.
(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured:
Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken.
(5) Such an action may be brought although judgment has been already recovered against the insured for damages or compensation in respect of the same matter.
(6) Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall to the extent of that payment be a valid discharge to the insurer, notwithstanding anything in this Part contained.
(7) No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between the insurer and the insured.
- In the present case, there was no suggestion that the proviso was applicable since no proceedings have been brought to establish the insurer’s entitlement to disclaim liability. However, as made clear in the judgment of McHugh and Gummow JJ in Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399 at 448;  HCA 28 at  (Bailey v NSW Medical):
This provision is not directing the court that leave be denied only in a case where it is satisfied both of entitlement to disclaim liability and that necessary steps have been taken to establish entitlement to do so. Leave may be refused in other cases but must be refused in these cases.
- In Energize Fitness Pty Ltd v Vero Insurance Ltd  NSWCA 213 at  Campbell JA explained the purpose of s 6(4) as being “to provide a filter against insurers being unjustifiably made parties in litigation that, apart from the grant of leave, they would be free to stay out of” and noted that the standard for when it is justifiable to bring an insurer in was “fairly low”.
- Earlier, in Oswald v Bailey (1987) 11 NSWLR 715, Kirby P had pointed (at 717-718) to the uniqueness of the statutory provision and had referred to the beneficial object lying behind it, saying that:
… The insured may disappear, die or, if a company, be wound up. Such events could, in the past, stultify the claimant’s prospects of practical recovery. Out of recognition of the modern reality of insurance, the need to protect those with claims for damages or compensation, and the ready ability, normally, to trace insurers entering into contracts of insurance, provision has been made for a direct action against the insurer. The claimant must bring himself within the terms of s 6 of the Act. But if the claimant does, the benefit is secured of a charge on all insurance moneys that are or may become payable in respect of the insured’s liability.
- At 726, Kirby P referred to one of the major purposes of the Act as being to provide ease of access by claimants for damages and compensation to a fund which it would otherwise be difficult for them to access and said:
The discretion to grant or refuse leave under s 6(4) should not be exercised in such a way as to require persons such as the appellants to commence a number of actions to recover what they could recover in one action under s 6 of the Act, enforcing the charge for which the Act provides.
- Priestley JA, at 734, said:
A principal test which the court applies in deciding whether or not to grant leave pursuant to s 6 of the LR(MP) Act is whether the applicant has shown: “an arguable case of liability against the insured, being a liability against which the insured is indemnified by a contract of insurance in force at the time of the happening of the event said to give rise to the claim” (AFG Insurances Ltd v Andjelkovic (1981) 54 FLR 398 at 400) or, more simply “has the (applicant) presented a case which is at least arguable” (ibid).
At 742, his Honour accepted that a requirement for leave was that there be a real possibility that if judgment were obtained on the claim the insured would be unable to meet it in full.
- Thus, it has been accepted that for an application for leave to proceed against an insurer under s 6(4) of the Act it is necessary for the applicant to establish, among other things, an arguable case that there is a policy which responds to indemnify the insured in respect of the alleged liability and an arguable case that there was a statutory charge under s 6(1) (Guild Insurance Ltd v Hepburn  NSWCA 400 per Meagher JA at ; and see the authorities there cited). As adverted to above, those other things that an applicant must establish include that there is a real possibility that if judgment is obtained the insured will not be able to meet it.