"... ambiguity may be its only clear feature..."
– Kirby P of the NSW Court of Appeal (as he then was) in McMillan v Mannix (1993) 31 NSWLR 538.
24 years later, the ambiguity plaguing Section 6 of Law Reform (Miscellaneous Provisions) Act 1946 (NSW) remains as ambiguous as ever.
Section 6 was described as "at best opaque" by the NSW Court of Appeal in Chubb Insurance Co of Australia Ltd v Moore [2013] NSWCA 212 (Chubb v Moore). The Court of Appeal called for section 6 to be repealed altogether or completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted.
But all this is possibly about to change. On 19 December 2016, the Attorney General released Report 143 – Third party claims on Insurance Money: Review of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (Report 143) in which the NSW Law Reform Commission proposed legislative changes to section 6 which would set reform in motion.
What is Section 6 about?
Section 6 essentially allows a plaintiff to obtain access to insurance proceeds in circumstances where proceedings against an insured defendant are not possible or pointless (e.g. the defendant is missing or insolvent). It was based upon the similarly worded section 9 of the Law Reform Act 1936 (NZ).
It does this by creating a "charge" over "all insurance moneys that are or may become payable in respect of [a] liability" that the insurer would otherwise be required to pay to the insured defendant pursuant to the contract of insurance. This charge is created "on the happening of the event giving rise to the claim for damages or compensation" against the insured party.
Section 6 and Defence Costs
One concern with section 6 has been its effect in cases where the defence costs of officers of a company are funded from the same pool of insurance monies available to meet the company's liability to plaintiffs. The issue is whether the charge created by section 6 prevents insurers paying defence costs where the policy limit might be exhausted by the funds required to meet the liability to the plaintiffs.
Until the High Court of Australia considers this, the current position in NSW is that an insurer is not prevented by section 6 from advancing defence costs: Chubb v Moore.
The position in New Zealand is the opposite. The New Zealand Supreme Court in BFSL 2007 Limited & Ors v Steigrad [2013] NZSC 156 (the Bridgecorp case) held that the charge attaches to defence costs such that insurance monies cannot be accessed to fund the defence.
The Bridgecorp case led to the proliferation of "Side A only – defence costs" policies providing coverage only for the defence costs for officers. Since the decision of Chubb v Moore, the need for such cover has arguably diminished, but some demand remains given the continuing uncertainty over section 6.
Proposed legislative reform
Report 143 reaffirmed that the objective and goal of section 6 remains valid but that it needs to be replaced with a provision that clarifies the uncertainties. The key recommendations include:
- section 6 is to be redrafted to avoid the use of any form of charge;
- the proposed changes should still ensure plaintiffs can recover from the insurer up to the amount of any available insurance;
- the amendments will limit recovery to the amount the insurer would have paid in respect of the defendant's liability to the plaintiff to pay compensation. This is intended to address the current uncertainty over whether the charge attaches to defence costs;
- the maximum liability of an insurer should not be increased under the proposed amendments;
- the amendments should also ensure that the insurer can rely on the same defences that the insured defendant could have relied on in an action brought by the plaintiff; and
- to prevent collusion between the insurer and the insured defendant, a new provision should be inserted so that an insurer's liability to the plaintiff is not discharged unless and to the extent any payment made by the insurer to the defendant, is subsequently paid to the plaintiff.
- Report 143 also addressed other complexities plaguing section 6, most notably in relation to claims made policies where the event giving rise to the claim for damages and compensation may occur before the policy under which the insurance claim is made existed. The proposed changes seek to eliminate these conceptual difficulties.
Other recommendations include a new provision to clarify the application of limitation periods and a provision to specifically state that it does not apply to reinsurance contracts.
Implications
Directors and officers will benefit from the proposed changes as they will provide comfort regarding access to insurance monies to fund a defence. Insurers will also benefit from the certainty that their liability is not increased.
All stakeholders will benefit from the removal of longstanding difficulties in understanding and applying section 6.
The NSW Government is presently considering these recommendations. Unless and until the High Court conclusively resolves the uncertainties surrounding section 6, legislative reform is the only way forward.
