Background
For some time section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 gave plaintiffs "direct access" to insurance funds, usually in cases of an insolvent defendant. The effect of the section, as explained in Bailey v New South Wales Medical Defence Union Ltd (1995) 183 CLR 399, is to create:
In Owners-Strata Plan 50530 v Walter Construction [2007] NSWCA 124, the NSW Court of Appeal held that the section is ineffective if the subject cause of action was complete before the relevant contract of insurance was made or engaged. The popular perception since Walter Construction has been that section 6 usually has little application to "claims made" policies.
The decision of Sciacca v ACE Insurance Limited [2011] NSWSC 798 discloses a tendency by the courts to provide assistance to plaintiffs to avoid the restrictive effects of Walter Construction.
Facts
In 2005, the plaintiffs invested money through Primrose on security of a second registered mortgage over a property. There was a default by the borrowers and, in 2006, the first mortgagee took steps to auction the property. The court held that there was in 2006, a "distinct possibility ... that if the property was sold, the first mortgagee [and, therefore, the plaintiffs] would not be paid out." However, the borrowers restructured their finance, temporarily averting a loss.
In April 2008, the borrowers defaulted again. The property was auctioned by the first mortgagee and was sold without the plaintiffs receiving any payment.
In October 2007, the plaintiffs informed Primrose at a meeting with its officers that they intended to sue for the loss that at that time they expected to suffer. Primrose acknowledged this threat in writing. The plaintiffs' threat to sue was repeated at a further meeting in December 2007 which threat was also acknowledged by Primrose in writing.
Insurance policy
Primrose held a professional indemnity insurance policy (Policy) which commenced in September 2007. The Policy, like most professional indemnity policies, responded to a claim made against Primrose in the Period of Insurance.
Following Primrose's liquidation, the plaintiffs sought leave to sue Primrose's insurer (Insurer) under section 6.
In resisting the application to be joined, the Insurer contended that oral threats made by the plaintiffs to sue Primrose were not a Claim which was defined in the Policy to mean:
The plaintiffs submitted that their threats to sue made in meetings in October and December 2007 were an assertion of a right to civil compensation or civil damages and that such an assertion was not required to be in writing.
The Insurer responded that only a written assertion of a right made by a claimant fell within the definition of Claim. The Insurer submitted that, having regard to the commercial purpose of the clause, it would be unusual for the Insurer to require two things to be in writing in order for a Claim to be made, but for an oral assertion of a right to civil compensation or civil damages to be sufficient.
The Insurer also argued that the plaintiffs first suffered loss, and therefore the relevant event for the purposes of section 6 occurred, in June 2006 when the possibility arose that the plaintiffs might not recover their loan. The plaintiffs argued that they first suffered loss in June 2008 (in the Period of Insurance) when it became apparent that recoupment of their loan would be impossible.
Outcome
In considering whether a Claim had been made, Justice Schmidt applied the principle that policies of insurance must be construed to be given their natural meaning. Her Honour also considered whether it would be appropriate in this case to resort to the contra proferentum rule, noting that it is a "rule of last resort". In concluding that the rule might be applied in this case, her Honour thought it significant that the Insurer, in subsequent policy years, had drafted the definition of Claim to remove any potential ambiguity.
Her Honour accepted that it was arguable that oral assertions of a right constituted a Claim in view of:
In considering when the relevant event for section 6 occurred, Justice Schmidt looked to authorities addressing limitation arguments in economic loss cases. In particular, her Honour referred to Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 and held that "at common law a plaintiff can only recover compensation for actual loss or damage incurred, not potential or likely damage."
On this basis, her Honour accepted that the plaintiffs had an arguable case that the relevant event occurred in June 2008 and that a charge under section 6 descended on the 2007/08 Policy.
Comment
This case involved an application for leave and, to succeed, the plaintiff only needed to demonstrate an arguable case that the Policy responded, a relatively low hurdle. Nevertheless, this decision indicates a trend at the judicial level to assist plaintiffs to find ways around the restrictive consequences of Walter Construction.
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